AS THEY APPROACH retirement age, workers sometimes get to choose between a monthly pension and a lump-sum payout. It’s a choice I recently made—one I researched carefully. In the end, I made an unusual decision that took a few extra steps.
Let me start at the beginning. In 1984, I began working for American National Insurance Company as an investment analyst. I left the company in 1991, but still qualified for a small pension. Now, at age 62, I was offered three choices. I could receive a monthly pension of approximately $300 starting at 65, or I could take the pension earlier and receive a smaller monthly benefit, or I could take a lump sum of nearly $50,000.
To start, I wanted to know if one offer was considerably more valuable than the others. To compare, I went to a website that provides quotes for immediate annuities. It turns out my company pension would pay more each month than an immediate annuity I could buy for $50,000, but not a lot more.
Still, having an additional stream of monthly income sounded appealing. But there were other considerations. I’m already getting a larger monthly pension payment from another insurance company—Union Central, now part of Ameritas Life—where I worked from 1999 to 2015.
I also plan to take Social Security at age 70, which will give me a healthy stream of inflation-indexed income. Finally, I’ve purchased three deferred-income annuities that will begin paying me income starting at ages 76, 80 and 85, respectively. Should I live until 85, I’ll be receiving guaranteed income from five different sources.
Viewed from this perspective, another payment of less than $300 a month started to seem less significant. Besides, my old employer had announced it’ll be acquired by another company. I didn’t want to monitor a small pension from a company that wasn’t my prior employer.
That’s when I decided to take the lump-sum payment. My planning, however, wasn’t done. Instead of receiving the lump sum directly, I opted to have my old employer deposit a tax-deferred payment into my IRA. Why? I wanted to convert that money to a Roth IRA while I still had time to avoid a potential extra expense.
What extra expense? Like most retirees, I’ll be eligible for Medicare at age 65, which is just over two years away. Medicare Part B and Part D premiums are higher if you have a high taxable income. But Medicare’s income lookback period is two years, which meant that I could convert the $50,000 to a Roth IRA without facing higher Medicare premiums—but only if I was quick about it and did the conversion this year.
There was one further wrinkle. The stock market had recently declined, so I converted $50,000 and immediately put the money in stocks. If the stocks rebound, the gains will be tax-free. How will I pay the tax owed on the Roth conversion? I realized a hefty long-term capital gain. I’ll use that money to pay the conversion tax bill.
James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.