Q. I am 67 years old. I will be retiring in three months after working at the same company for over 40 years. I have the option of taking my pension as a lump sum payment or annual payments for life. I prefer the annual payments, but there is this nagging concern about what happens if my retirement plan is terminated for whatever reason. I know that the Pension Benefit Guaranty Corp. was created to
A. Sometimes it’s good to go straight to the horse’s mouth— I suggest a visit to the PBGC website, www.pbgc.gov. There you will find that 80 percent of all pensions are paid out exactly as they were expected by the formula of the corporate pension. This assumes that you retire at retirement age, when the pension is taken over.
The uncertainty over benefits has two main sources. The first is benefit accrual. Pension benefit accruals stop when the pension goes to the PBGC. As a result, you won’t receive the pension you might have expected, if it had continued to accrue benefits until you retired from the company.
The second is that there is a maximum amount of pension covered by the insurance. A pension up to $54,000 a year for a 65-year-old worker is fully covered. The coverage maximum drops to $42,660 for a 62-year-old and to only $24,300 for a 55-year-old. The important thing to understand here is that the PBGC doesn’t “cut” pensions. You would experience much the same thing if you left a job with a pension and elected to take the pension in monthly payments when you departed— your payout would be less than you would get if you stayed and took the pension after more years of service and at an older age.
Q. We have just been to a “wine tasting” — and learned about life settlements. This investment sounds too good to be true— a 120 percent return for a 3 year investment. Should I turn my IRA over to this? What am I missing?
I have an IRA worth approximately $160, 000. It has done nothing but go down for the past four years. We don’t need this money to live on, as we are both retired and our retirement income is more than our expenses. Also, we have about a million in stocks that is managed for us. My husband is ready to divorce me. Quick, I need answers. — K.R., by email from Austin, TX
A. That could be a very expensive non-vintage wine! Yes, 120 percent over 3 years is “too good to be true.” The return you get from a life settlement depends entirely on how long the insured lives, and no one knows that in advance. Worse, small differences in survival time will cause enormous shifts in your effective return.
It’s also important to realize that this is a “wild west” market. Both regulation and liquidity are limited, and the market-makers (the middlemen) get paid today. You, however, must wait for someone to die in a timely manner.
Virtually every IRA account with a substantial commitment to stocks declined in late 2007 and all of 2008, but your account should have gained in 2009. The average balanced fund (a mixture of 60 percent stocks and 40 percent bonds), for instance, lost 27.9 percent in 2008 but gained 24.2 percent in 2009. The same fund category also showed gains in 2003, 2004, 2005, and 2006. I’m telling you this because casual examination of your investments can lead to broad and careless decisions. Trust me, you can do worse on your investments— and banking on life settlements can give you a big head start on doing just that.
Lots of people say they don’t need money and can take risk— until they lose money. If you want to avoid losing money, you don’t take risk. Taking more risk because you have lost money is like the gambler who throws his last chip on the roulette table without looking.