Institutional

Understanding the Lump Sum / Pension Quandary

By David N. Chazin

Lump-sum Vs Pension

Fewer and fewer companies are offering pension plans these days, which means fewer and fewer people are having to make the decision those of you who elected to freeze your UCRP (TCP2) are facing.

The questions looming in front of you are: First, do I take my UCRP as a monthly income stream or a lump sum cashout? And secondly, when should I take it?

With the monthly income option, you are guaranteed a check from UC every month for the rest of your life. (In most cases, you simply must be over the age of 50 to begin taking the monthly income.) The income amount is determined by a number of factors: primarily your age, the number of years you have worked for the lab/UC, and your highest compensation while with the lab/UC.

If you choose the lump sum cashout option (likewise, you must be over the age of 50), an equivalent lump sum figure is calculated based on those same factors.

You also have to decide if you want to take the monthly income or lump sum cashout now (or if you are younger than 50, when you turn 50) or when you actually retire.

Like with most major decisions, there are pros and cons to both the monthly income and lump sum cashout options and taking the money now or waiting until retirement. Many people at the lab think this is a simple question with a simple answer.

However, in reality, there are a number of important questions to ask yourself to make sure you make the best decision, such as:

1. Is having a monthly income stream important to you?

This is usually the primary reason lab employees choose the monthly income. But what many of them don’t know is that even if you take the lump sum, there are ways to replicate the monthly income stream from the plan.

2. Will your income needs grow during retirement or remain constant?

Many people are concerned about inflation and the fact that there expenses will increase as they grow older.

3. What type of survivor benefits does your spouse need?

You should consider your spouse’s needs if you predecease him/her before choosing which your option.

4. Do you want to leave money for your children or other beneficiaries?

If so, you should protect against your children possibly being left out in the cold if both you and your spouse were to both pass away.

5. What are your health care needs in retirement?

One of the greatest appeals of the monthly income option is that the lab will pay a portion of your and your spouse’s health insurance premiums in retirement if you’ve been there long enough. But if you’re almost 65, Medicare will cover you even if you don’t take the monthly income.

6. Do you want to be able to turn the income stream on and off at will?

This is important to some people, especially in terms of limiting taxes and maximizing investment performance.

7. Is controlling your money important to you?

Some people care more about control, others care more about guarantees.

8. What will your investment strategy be?

Which option you choose and when you take the money will affect your investment strategy for your other assets.

9. When do you need the money?

Even if you’re still working, you may want the money today to use toward paying off debt or other purposes.

10. When is the best time to make this decision?

Is this a decision you should make now? Or are there too many things up in the air that leads you to want to wait before making a decision?
Hopefully all these questions (and there are others) hasn’t made your head spin, because figuring out the answers to most of the aforementioned questions involves a significant amount of introspection and discussion with your spouse. This decision profoundly impacts your retirement outlook, so it’s important to sort through all of the details before making your decision.

Determining the actual numbers is a complex process but should make reaching an emotional decision on what you’re most comfortable with much easier. A financial planner can provide this analysis for you and help you answer questions like, How much income do I need when I retire?, Will I outlive my money?, and When can I retire?

In general, you’re usually best off when you have a solid plan in place early on, and then implementing that plan according to what makes sense timing-wise. You get taxed according to your income tax rate on any money you take, so it’s important to consider what tax charges you will incur. You should also consider your future tax burden, as many experts expect income and capital gains tax rates to rise in the future.

If you take your UCRP as a lump sum, you also need to craft an investment strategy for a significant amount of your retirement assets. When putting your portfolio together, it’s important to take into account factors like proper asset allocation, risk tolerance, time horizon (i.e. when you need the money), investment preferences, and potential tax consequences. If this sounds challenging, it may make sense to enlist the help of a financial professional who’s experienced in the investment arena.

Because I work with many lab employees and retirees, I’m very knowledgeable about the UCRP, UC’s retirement accounts, the lab’s benefit offerings, plus other issues specific to lab employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my lab clients and you can ask them how working with an advisor has helped them.

I’d be happy to sit down with you to help you answer these questions to determine which option is the best for you, answer any other financial questions you have, and discuss a strategy for your retirement and investments.

Please contact us at (800) 318-7848 with specific questions or to schedule a time to meet in either our San Ramon or Livermore office (about a mile from the lab).

To learn more about what Insight Wealth Strategies can do for you or your colleagues, please email us at info@insight2wealth.com or fill out the request information form.

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