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.
Do you enjoy HumbleDollar? Please support our work with a donation. Want to receive daily email alerts about new articles? Click here. How about getting our twice-weekly newsletter? Sign up now.
