Should I defer at age 65? Deadline coming fast...

[Guest RobertKnox]

I'm 100% vested in a Defined Benefits Plan at a former employer (big US defense firm). I'm a month away from 65 and must decide whether or not to defer taking benefits. Some facts:

I don't need the income now (I expect to keep working at least to 70.5). The plan will only pay about $500/mo even if I start taking 100% Life Only payments now. There is no cost of living adjustment.

My first choice would be to take this old pension as a lump sum, since I can roll that into a current 401(k). However...

The plan is now in restriction. So I cannot get a full lump sum now; only half. If I take that, I have to take the balance as a standard annuity, starting immediately. Once I begin that it's irreversible.

The plan probably will go out of restriction, but that is probably a year and may be several years away. I figure a 50% chance it will still be in restriction two years from now; maybe a 30% chance at three years - all guesswork. And it may or may not even allow lumps when and if it comes out.

The plan has told me that I defer now and start a full annuity at 70.5 (or probably at any time before) the plan will pay me the same amount monthly then as now, and they will also retroactively pay for the months in between.

They also told me that if I defer now and am later able to take a full lump sum they will simply recalculate it then based on interest rates at the time - there will be no retroactive payments.

So - I would like to defer hoping for a full lump sum "soon", and avoiding the tax bite of annuity payments that I don't even need now. But it seems to me that any recalculation of the lump sum in the future will (if interest rates remain the same) have to be lower, simply because I will be older. That seems like a guaranteed loss.

Plus, being in restrictions makes me wonder if the plan is more than usually shaky. Maybe I should get my 50% lump now while I can and let the residual payments start.

I can juggle the info I have, but I will certainly miss something that I don't know or understand right, Any advice will be appreciated. I need to decide in a day or so.

Thanks

[Andy the Actuary]

Given you seem amenable to accepting advice anonymously if it makes sense to you, here's the advice: You will be better served retaining a pension actuary to assist you. If you are unsure how to locate one, contact the American Academy of Actuaries.

[Effen]

Sounds like you have a pretty good handle in things. You are going through the correct thought processes.

A couple questions about what you said.

"The plan has told me that I defer now and start a full annuity at 70.5 (or probably at any time before) the plan will pay me the same amount monthly then as now, and they will also retroactively pay for the months in between." - This is generous on their part and fair.

"They also told me that if I defer now and am later able to take a full lump sum they will simply recalculate it then based on interest rates at the time - there will be no retroactive payments." - I am not sure you understand this correctly, because I don't think what you stated would be legal, but I could be wrong. At the very least, it is inconsistent with how they handle the annuity option. You should ask them again if the lump sum you would receive at your late retirement date would include the value of the payments you did not receive. This is not the same as a retro payment, and is often referred to as an "actuarial increase". I don't believe they can just not give you any value for the missed payments.

You should also think about death benefits. If you die prior to receiving your payment, what would your spouse receive? If you are not married, is anything payable upon your death? Depending upon your health, it may make sense to make an election now, even thought you don't need the money.

Finally, what is a "bug" defense firm? Were you some kind of exterminator or did look for ways to foil others listening devices?

And Andy is right on the money, as always. No one on the board can possibly know your situation well enough to tell you what you should do.

[david rigby]

Agree with above comments, with one more.

I don't agree with your reference, "...it may or may not even allow lumps when and if it comes out". Likely, this is an optional form of payment in the plan which cannot be removed, at least not for existing benefits. (Possible exception: if the lump sum option was added as a temporary feature, it can legitimately "expire".)

[masteff]

I think this statement by Effen bears repeating...

You should also think about death benefits. If you die prior to receiving your payment, what would your spouse receive? If you are not married, is anything payable upon your death? Depending upon your health, it may make sense to make an election now, even thought you don't need the money.

[My 2 cents]

They would have to pay you the back payments with interest. You may wish to inquire how they determine the interest on the back payments.

It is against the law for the plan to treat any of your payments due after normal retirement age as forfeited, especially since you are no longer an employee. So they cannot suspend your benefits and you must be fully compensated for any benefit payments not made after normal retirement age.

[Guest RobertKnox]

@Effen; @David Rigby; @masteff masteff; @davebaker, @My2Cents -

Thank you for your comments, which have been very helpful. I just didn't know the questions to ask, or the answers to expect. Without that there are constant misunderstandings, even with the friendly and well-intentioned staff assisting me.

When queried specifically the plan staff at first denied that there would be an "actuarial increase" on a deferred lump sum. But since (per Effen) I thought otherwise, they looked closer and found that there would be such an increase. In the course of that they reversed their earlier statement on "retroactive payments" if I took a deferred annuity. Pushed on that, they escalated the question and re-reversed, confirming that there would be such payments - though without interest. I let the last point go for now.

To the other points raised: I'm very healthy, but if I do die before taking any benefits (I'm glad I checked per Effen & masteff) my spouse will get my 100% member annuity.

Now that I have a reasonably consistent set of answers I can make my decision. I will probably defer, hoping that a full lump will be available in the future (the Rigby insight helps there). I feel that I should get the money out. However, if I do ultimately have to take the annuity it will, on paper at least, not be a bad thing for me either.