Hi everyone! I thought I would drop a scenario here that I have been mulling for a few months regarding my future pension monies in a state retirement system. I hope I can convey the details well enough for you to follow and I would love to hear your thoughts:
I am still 3.5 years from early retirement for my employer's state retirement system, which means at age 50, my pension will only be $1,100/month. If I make it to full retirement in 2040, my pension is $5452/month.
If I leave now, I can take a refund of my contributions to the pension in lieu of retirement, and after state and federal withholdings and the 10% early withdrawal penalty, I can pay off 75% of my credit card debt with the balance of the remaining pension monies. Without giving too specific of numbers, my calculations say that I can take a 20% - 30% pay cut at a new job (with different pension system) and can come out $2500 - $4000 ahead each month with the reduction in debt from the cashed out pension. I would then use that surplus to pay off the remaining 25% debt in the next 2 - 3 years.
It sure sounds like a no brainer on the surface, right? Can anyone tell me why I SHOULDN'T do this and wait the 3.5 years for the pension instead? My plan is to look for another job that pays less, but is more conducive to my mental health, and has a retirement system that doesn't force me to contribute a percentage (current mandatory contribution for my plan is >12%). I am a 100% disabled veteran that receives max benefits from the VA so I don't need to worry about medical or dental care, for me or my family, but I'm trying to kill off all of my credit card debt, accumulated from the pandemic!
I see my options as:
1. Early retire in 3.5 years and take the small pension, and continue to make minimum payments on current debt.
2. Find a new job, cash out pension and pay off most debt, but no more pension available for a long time, but debt free in 2 years.
3. Normal retirement in 2040 and continue to make minimum payments on current debt.
I would love to hear comments and scenarios from all of you so I can consider my options more carefully. Let me know what other implications I might have missed or if you need more specific information from me.
Starting Score (January 2013): 537
If you can roll the pension payout into an IRA, then you may consider taking out only 50% - 75% and letting the rest stay invested. You'd owe a bit less in taxes and still have something available for retirement.
It's hard for me to give a good answer because you didn't mention what your income vs. debts are... if this is something you can just buckle down and pay off in a year or two I wouldn't be touching the pension personally.
Most pension plans you don't lose it if you just bail, I still have some amount in a pension that I had a decade ago (the one and only one I've ever received) and I still occasionally get mails on the performance of it... I was only there for about 2 years and as such never really stacked up much into it and it's nowhere close to financially meaningful to me but it's still there.
Also are you sure you're going to take a 20-30% paycut especially given most places with pensions aren't exactly the best paying?
Realistically the two things you should do is really get the details of what happens to your pension if you leave as penalties for cashing out are generally not pretty, and float a resume and see what jobs are available and what they might be paying. I'm arguably guilty of leaving companies too quickly (I've worked for some really terrible places objectively but they weren't all bad) but if it's time to go, it's time to go.
My own income vs debts comes out to +$1700 each month with all my liabilities factored in (credit cards minimums, mortgage, household bills, etc). That $1700 goes to monthly living expenses like food, gas, and entertainment. Assuming I take a 20% - 30% pay cut with no retirement deductions (I'm thinking mid-life career change, thus the severe inequality) and paying off 75% of my credit card debt, that $1700 leftover turns into $2500 - $4000 leftover each month (I hate the state mandatory contribution system!).
My pension is almost 11 years full of contributions but the whole reason I would leave now is so i can take it out early. I'm not allowed to borrow on it nor can I use any of it until I leave my employer via retirement or other means.
I just don't think I can make a dent in my debt making only minimum payments for the next 3.5 years, just to get an $1100 pension payment at early retirement.
For simplicity's sake, say I have $100,000 on pension now. If I withdraw it, 25% is automatically withheld for federal (20%) and state (5%) taxes. Plus, 10% of the non-rolled over amount will have be paid at tax time to Uncle Sam as a penalty for early withdrawal before retirement age, leaving approximately $65,000 to pay off 75% of my debt.
I guess the question really is, "Is it worth $35,000 to clear most of my debt and have double the remainder of my income leftover, but give up my $1100 pension?" Simple math says it will take 15 to 43 months to make back the $35,000, but I still forego the small pension.
Does that help with the scenario planning?
Somewhat. I'm not the best person probably in terms of financial planning (hell I've lost a literal nice house in most places in the market over the past few months and the sad part is I was so ready to pull the trigger and just pay the appreciation taxes early November... and then November 18th and onward it's been down huge) so take everything with a grain of salt: this is just my opinion.
If you're planning to continue working for a while even with the career change (I'm looking at similar in 4ish years but I'm in the black now) it may make sense to do so; some factors though probably still need to be considered. This isn't an exhaustive list.
- Expected Social Security: I've worked inconsistently and the only way for me to boost the income from this is you guessed it, keep working. If you've been doing the good citizen thing and paying taxes on income consistently, assuming it's still there for us (I suspect it will be in some form or fashion) that might be enough.
- Home equity: You mentioned a mortgage, if you've had it for a while especially with the appreciation over the last nearly decade in most housing markets, you might be able to get a HELOC or similar and refinance all that debt down to around 4% or so which is a huge cashflow win vs. carrying it on credit cards.
- Auto equity: you didn't mention auto loans so maybe you've owned your car for a while (kudos, seriously) and therefore there's nothing to do, or you have a moderately recent vehicle which you paid cash for or paid down quickly (your cash flow doesn't suck) and a title loan is cheaper than credit card. If auto loans are still part of the burn, then nevermind on this one.
- Family loan: not everyone has this option but my dad did fairly well doing his 30 years at IBM and then just playing the housing market well; the IRS allows sweetheart loans to one another just where people get in trouble is they don't put it in writing or they don't stick to it. Treat it like you would your mortgage and make regular payments and you can come out hugely ahead if you write the term over like 9 years or similar.
- Take a hard look at your budget: if we're talking family then 1700/month isn't extreme necessarily but take a hard look at where the money is going.
The list goes on, this being a credit oriented forum, if you have a decent credit score self-refinancing on 0% balance transfer cards has been a thing for a while and probably still is since we're still in low rate market. Actually I'm seeing personal loans being spammed to me even with a recent credit booboo a few months back for 30-35K around 5% which is fantastic compared to most forms of unsecured debt.
Personally I view dipping into retirement accounts as a last resort and I hate paying a 10% fee on anything though I understand there's reasons to do it.
If you've got nothing to your name other than the pension and you're drowning financially, then yeah even I can get behind doing it to free up cash flow but the big thing there is you're going to have to be ruthlessly optimized and NOT spend that cash flow you freed up... that's really the tradeoff that nearly has to be made, and a lot of folks can't do that.