When faced with a layoff or early retirement, this can be the most difficult decision. We’ve helped hundreds of clients weigh the options, so here are some questions that may be of help to you.
Is my former employer financially stable and is the pension well-funded? When companies have major layoffs, they’re trying to stop bleeding cash. Pensions are rarely completely funded and rely on the continued profitability of the company.
Do I take a reduced benefit to provide for my spouse? Consider your family longevity and personal health habits. If you take the larger amount upfront for the retiree, will you save any of the monthly payments? Women typically live longer and in 25% of couples aged 65, one spouse will live to 95.
How Do I Evaluate the Lump-Sum Option? Many employers offer a Lump-Sum Benefit to “buy-out” their pension obligation. Factors to consider include your personal health status & family longevity, interest rates and inflation, your current situation, the number of years until benefit eligibility, and your feelings about leaving assets to your heirs.
Could I generate more income by investing the money?
Meet Pete and Sandra. They have seen both sons married, purchased their retirement beach home and want to retire soon.
Pete has enjoyed a successful career and built considerable savings and miscellaneous investments to complement his 401(k). They came to us for help to define a sustainable retirement income and professional investment management.
Pete and Sandy elected to work with us because they found comfort in our process, appreciated our Service Model and after firing a brokerage firm, no longer want to make investment decisions. In our first meeting, we discussed how to balance their desire to reduce investment risk while achieving the portfolio growth required for distributions to keep pace with inflation
Integras Analysis
Our answer to this dilemma is our Time Horizon Investment philosophy. We advocate reserving conservative assets for near-term income, which allows longer-term assets to be increasingly oriented to growth. We know that the longer growth investments can stay invested, it becomes more likely for those assets to achieve desirable returns.
Together, we defined anticipated expenses and explored strategies for maximizing Social Security. This enabled us to determine the supplemental cash flows needed from investments. Next, we explored timely investment ideas, long-term care protection and caring for parents. We set a time to share our analysis of current investments, recommendations going forward and visual models of their projected annual situation. We use both comprehensive planning tools and proprietary models to determine how to allocate each client’s resources to our Investment Strategies, providing an increasing income for the first 15 years and ample time for the remainder to pursue long-term growth.
Recommendations
Since Pete is a few years away from retiring there is no need for immediate distributions
Rebalance their investments and established a new account targeted to provide initial income needs and reduce their overall stock exposure
As retirement approaches, migrate to more stable assets to fulfill their earliest income needs
Results
We were able to address their desire to reduce risk, both by educating them on the need to outpace inflation and insulating long-term growth investments with adequate time
They also found value in addressing potential long-term care needs and our Generational Conversation services to facilitate discussing elder parent’s finances, care management, etc.
Our paradigm intentionally avoids the practice of drawing across all investments for income, which can rapidly deplete savings in a down market cycle. For an insightful look at why this is important, review our piece on Why Systematic Distributions are Destined to Fail
