Can someone help me understand pension option for a new job I am considering. The company offers a pension with terms below which are from the benefits package. I tried getting more details but was referred to the benefits package which has limited info. Any questions or clarifications I should be asking?
Eligibility : 5 years service
Cost: Company pays entire cost
Benefit Amount:15% of eligible career earnings.
Retirement Age: Full benefit at age 62. Reduced benefit available for earlier payment.
Payment option: Lump sum payment, or taken as an equivalent annuity.
Survivor benefit: Lump sum payable to your beneficiaries. Spouse also has the option to elect an annuity.
Thanks in advancejhwkr542ParticipantStatus: PhysicianPosts: 777Joined: 02/15/2016
What are “eligible career earnings”? Are there any in the first 5 years?
For example, 300k x 5 years x15%December 4, 2018 at 5:22 am MST #171570ENT DocParticipantStatus: PhysicianPosts: 2005Joined: 01/14/2017
Is it an average of the highest 3 years or something? Best year? How is the exact calculation done? Is that the amount to be received yearly starting at 62? Indexed for inflation or is it a traditional annuity with fixed payments going to you?
This should be factored into the total compensation you look at when comparing jobs by putting these payments (or lump sum) into a present value format so you can understand what the effective income bump is a year, discounted for risk of bankruptcy.December 4, 2018 at 8:23 am MST #171596jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 6110Joined: 01/09/2016
You need to ask for a copy of the Summary Plan Description (usually referred to as the “SPD”) for the pension. It should explain the calculations and may even give a couple of examples. In particular, you need to have an understanding of how reduced payments are calculated since, chances are that you won’t work there until 62. Also, you’ll want to know what choices you have. iow, can you choose full benefits or must you include survivor bene’s? Most pension plans have about 5 – 6 combinations to choose from.
Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
https://fox-cpas.com/for-doctors-only/December 4, 2018 at 11:10 am MST #171639
Pension is based on 15% total career earnings. For example if I make 300,000 for 10 years, it comes to 15% of $3million = 450K. That amount can be taken as lump sum or annuity at age 62 with reduced benefit if taken earlier
Will ask the employer for SPD as recommended.
Thank you for the information.
Got the SPD and these are the numbers.
The maximum salary which can be used to calculate the benefits is $280,000 as determined by IRS limits which translates to $42,000 per year (15% contribution).
If I work till age 62 the lump sum is going to be about $1 million ($42,000 X 24 years) but it is unlikely that I will work another 24 years! Significant pension benefits only after 10 years of service and retirement after age 50 (40% of total benefits) . For example if I have 12 years of service and retire at age 50, I will receive a lump sum of $201,600 ($42,000 X 12 years X 40%)and goes down from there. The lump sum can be rolled over into an IRA or another qualified plan
Regarding annuity options they have a life annuity and a joint and survivor annuity. Reduced monthly payments for your lifetime, and then your choice of 50%, 75%, or 100% of that amount paid after your death for your Beneficiary’s lifetime.
“If you receive an Annuity form of benefit, the conversion of your Lump Sum to an Annuity will be determined based on interest rates and mortality
assumptions in effect as of your benefit start date.”December 8, 2018 at 2:26 pm MST #172679