Taking distributions from a defined benefit plan with early retirement

[Guest Karri]

If an employee is offered an early retirement package and is given the option to take a lump sum distribution, if the lump sum is reinvested elsewhere, can that individual take monthly distributions in the amount that the employer was guaranteeing had the plan stayed with the original company? Can they take any monthly distributions without incurring penalties due to the fact that they are not 59 1/2 years of age? Any help would be appreciated.

[AndyH]

The answer to your question is "probably yes". It depends upon how much the invested money will earn and how long the person lives. When the lump sum was determined, (and if it was done this year), it should have been computed using certain standard "tables" assuming an an average life expectancy (amongst health people but mixed 50% male/ 50% female). It was probably computed assuming that the invested funds would earn around 6%-6.25%.

The lump sum is supposed to equal exactly the amount withdrawn monthly and paid for an average lifetime with the principal balance earning the assumed "discount rate", which as indicated above should be around 6%-6.25%.

As a result, if the person lives a normal lifetime, and the invested funds earn 6%+ each year, there will be a $0 or positive balance when the person dies. If the funds earn 8%, there will be $ left. If the money is invested in a money market, it will run out.

The same holds true for life expectancy. If the person lives to be 100, the money may run out. If not, it should be enough. Please note that since the table was probably "blended" male/female, if the person is female, the earnings may need to exceed 6% due to the longer average life expectancy.

The above also assumes the distribution qualifies for rollover treatment and a rollover is done.

With regard to the 10% penalty, if the distribution qualifies for rollover treatment, withdrawal (from the IRA rollover) prior to 59 1/2 results in a 10% penalty except in certain situations. One of the exceptions is for distribution in substantially equal payments over the person's lifetime. To compute this, you may have to obtain IRS' tables, which should not be difficult. My experience is that most people keep it in the IRA till past 59 1/2.

Hope this helps. If I've overlooked something, perhaps the "Board" can supplement my comments.

[This message has been edited by AndyH (edited 04-22-2000).]