Cash Out My Vested Pension?

Summary

Episode Summary: Cash Out My Vested Pension?

Jill on Money with Jill Schlesinger
Episode Title: Cash Out My Vested Pension?
Release Date: January 28, 2025

In this episode of Jill on Money, host Jill Schlesinger, CFP®, along with co-host Mark T. McGowan, delves into the complex decision of whether to cash out a vested pension or retain it until retirement. The episode features a call from Richard, a 38-year-old former teacher from Colorado, seeking guidance on his pension options following a career transition.

---

Caller Introduction: Richard's Financial Scenario

At [03:01], listeners are introduced to Richard, who recently left his teaching position along with his wife. Richard explains:

"I wasn't able to jump to a job that had the same sort of pension she was. But so now I've got this pension that's just kind of sitting there." ([03:05])

Richard is contemplating whether to take a lump-sum buyout of his pension or to keep it vested until he reaches retirement age.

Detailed Financial Breakdown

Mark T. McGowan begins by gathering essential details about Richard's situation:

• Age: Richard is 38, and his wife is 40. ([03:35], [03:38])
• Pension Vesting: Richard has nearly eight years in his current pension plan, which vests at five years, allowing him to receive a payout starting at age 60. The monthly pension would be $1,200, with a lump sum option of approximately $74,000. ([03:39], [03:58], [04:06])
• Employment and Earnings: Both Richard and his wife earn substantial incomes in their new positions—$85,000 and $80,000 respectively. ([05:21], [05:23])
• Savings and Investments: Together, they have:
  • Pre-tax retirement accounts totaling around $300,000.
  • A rollover IRA of $240,000.
  • Taxable accounts amounting to $115,000.
  • Roth accounts totaling $327,000.
  • An HSA with $40,000. ([06:36]–[07:15])
• Real Estate: They own a home valued at approximately $400,000 with a remaining mortgage principal of $126,000 and about nine and a half years left on the mortgage. ([07:17]–[07:33])
• Spending and Lifestyle: Their annual spending is around $50,000, and they are considering retiring around age 60 but remain open to continuing their careers. ([07:39]–[08:14])

Pension Buyout vs. Retained Pension

Richard's primary concern is whether to take the $74,000 lump sum now or retain his monthly pension payments until retirement. The discussion revolves around several factors:

1. Financial Security:
   Mark suggests preserving the pension to maintain financial security, especially since the lump sum wouldn't significantly impact their overall financial standing:

   "I would not take the money for $74,000. Not going to make or break their financial lives." ([09:02])

2. Future Employment Flexibility:
   Retaining the pension offers the flexibility to return to the pension system if circumstances change, providing an additional safety net.

3. Investment and Growth Potential:
   Considering their substantial savings and investments, the decision may not drastically affect their long-term financial goals. However, Mark leans towards keeping the pension to preserve optionality without significantly hindering their financial progress.

4. Tax Considerations:
   The discussion touches on Roth contributions and tax brackets, with Mark advising maximizing Roth investments to optimize tax efficiency in the future. ([12:51]–[13:32])

Host and Co-Host Recommendations

Both Jill and Mark emphasize the importance of evaluating personal circumstances and future plans before making a decision. They acknowledge that while taking the lump sum is not detrimental, retaining the pension provides added financial security and flexibility.

"It is splitting hairs. It's a nice problem to have." ([12:29])

Mark also highlights the importance of continued savings and wise investment strategies, noting that Richard and his wife are in a strong financial position regardless of the choice made regarding the pension.

Key Takeaways

• Assess Financial Stability: Richard and his wife are in a robust financial position, making the decision less about immediate need and more about long-term planning.
• Preserve Options: Retaining the pension keeps future employment flexibility intact, serving as an additional layer of financial security.
• Maximize Investment Potential: With significant savings and investments already, leveraging tax-advantaged accounts like Roth IRAs can optimize future growth and retirement readiness.
• Personal Preferences Matter: The decision should align with personal comfort levels regarding financial security and investment control.

Conclusion

The episode underscores the nuanced nature of pension decisions, especially for individuals in solid financial positions with diverse investment portfolios. Jill and Mark encourage listeners to carefully weigh their options, consider future uncertainties, and make informed choices that align with their long-term financial goals.

---

For more personalized financial advice or to discuss your own pension dilemmas, listeners are encouraged to reach out through the Jill on Money website.

Transcript

[Jill Schlesinger]

Real estate. It's been a cornerstone of wealth building for generations, but it's also often a major headache for investors. 3:00am Maintenance calls, tenant disputes, property taxes Enter the Fundrise Flagship Real estate fund, a $1.1 billion real estate portfolio built for you. We're Talking more than 4,000 single family homes in thriving Sunbelt communities, 3.3 million square feet of in demand industrial facilities, all professionally managed by an experienced team. With the Flagship Fund, you're tapping into real estate's most attractive qualities. Long term appreciation potential, a hedge against inflation diversification beyond the stock market. Check, check, check. All without complex paperwork, massive down payments or soul sucking landlord duties. Visit fundrise.comjillonmoney to explore the portfolio. Check out historical returns and see just how easy it can be to add real estate to your investing strategy. Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the Fund's [e-mail] Flagship this is a paid advertisement and now a word from our sponsors at Betterment do you want your money to be motivated? Do you want your money to rise and grind? Do you think your money should get up and work? Don't worry, Betterment is here to help. Betterment is the automated investing and savings app that makes your money hustle. Their automated technology is built to help maximize returns, meaning when you invest with Betterment, your money can auto adjust as you get closer to your goal rebalance. If your portfolio gets too far out of line and your dividends are automatically reinvested, that can increase the potential for compound returns. In other words, your money is working like a dog while you can be sleeping like one and storing like one too. You'll never picture your money the same way again. Betterment, the automated investing and savings app that makes your money hustle. Visit betterment.com to get started. Investing involves risk. Performance is not guaranteed.

[Mark T. McGowan]

Welcome to the Jill on Money Show. It's Tuesday, January 28th and we are here trying to help you make better or less bad financial decisions. If you have a question, just go to our website jillonmoney.com, click the contact.

[Jill Schlesinger]

Us button and write us a note.

[Mark T. McGowan]

If you would like to join us live, just check the box and Mark will do everything else. While you're on the website, check out A free weekly newsletter comes out every Friday. Mark does a great job with that and we've got all sorts of content that comes out.

[Jill Schlesinger]

So it's blog, it's videos, it's resources.

[Mark T. McGowan]

Everything right there for [e-mail] okay, let's get to you. So right now let's talk to Richard.

[Jill Schlesinger]

Who joins us from Colorado.

[Mark T. McGowan]

Hello, Richard. What can we do for you?

[Richard]

So I recently left teaching and my wife did, too. And unfortunately, I wasn't able to jump to a job that had the same sort of pension she was. But so now I've got this pension that's just kind of sitting there. And so I'm kind of wondering if whether or not me being such an aggressive saver makes kind of taking a buyout of this a better idea or just taking the vested pension when I do get to retirement age.

[Mark T. McGowan]

Okay, so, Richard, how old are you?

[Richard]

38.

[Mark T. McGowan]

38. And your wife is how old?

[Richard]

40.

[Mark T. McGowan]

And how many years in did you have in this pension?

[Richard]

So I'm just shy of eight years.

[Mark T. McGowan]

So what's vested?

[Richard]

So vested? Once I hit five years, they match everything. And so I can get a payout starting when I'm 60 years old.

[Mark T. McGowan]

And what's that amount?

[Richard]

It would be $1200 a month.

[Mark T. McGowan]

Twelve hundred dollars a month. And what's the. And there's a lump sum payout right now?

[Richard]

Yeah. So that would be about $74,000.

[Mark T. McGowan]

Your wife, she is also now, she retained her pension, right?

[Richard]

Yeah. So she moved to a position where they have the exact same pension thing. And so I guess that's part of the question too, because if I move to a job with the state, I could start up that pension once again, whereas if I took the buyout, I would lose all those years.

[Jill Schlesinger]

Sure.

[Mark T. McGowan]

Well, so let's. So what are you, what's going on right now? Are you looking in the private and public sector or what's happening?

[Richard]

So I just moved to another local government, so I have another pension that I'm gonna, that I've been paying into over there.

[Mark T. McGowan]

Are you asking, hey, Jill, should I be looking to go back into the system? In other words, the previous system? Is that a place where you wanna be? Or you're like, ew, I never wanna go back. You have to be honest with me. Cause you're so young, we're gonna figure out which is better for you. But like, you also, it's a long time.

[Richard]

So I guess that's the question because right now, like, I'm perfectly content in my position. I have no intent to leave. But the state pension is any state job. And so there are a lot of, I guess, avenues available to move back into that in the event that I did leave my current Job sometime down the road.

[Mark T. McGowan]

How much do you earn in the new job?

[Richard]

About 85 right now.

[Mark T. McGowan]

And how much does your wife earn in her new job?

[Richard]

She earns about 80.

[Mark T. McGowan]

And do you guys have kids?

[Richard]

No, definitely not.

[Mark T. McGowan]

Oh, look at that. Definitely not.

[Richard]

Don't be anti parents.

[Mark T. McGowan]

Don't be like anti kids just because they've killed you for the last eight years, you know? Come on. All right, so your wife is in the system. Does she have two extra years on you? Does she have 10 years in?

[Richard]

So I think she's got about 11 now.

[Mark T. McGowan]

Okay, 11 years in. But you think she's going to kind of stick around in her system in that old system?

[Richard]

Oh, definitely, yeah.

[Mark T. McGowan]

Okay, so if that's the case and she stayed in until her age 60, right?

[Richard]

Yep.

[Mark T. McGowan]

What do you think that that pension amount would be? Do you have a guess?

[Richard]

Yeah, right now it said. And so we were looking at the, the full spousal support service. 4,500 bucks.

[Mark T. McGowan]

Okay, $500 a month. Okay, I gotcha. What else do you guys have in terms of like the money you've accumulated? So do you both have deferred comp plans also in addition to the pension?

[Richard]

Correct, yes.

[Mark T. McGowan]

Tell me about those. What's in there?

[Richard]

So in pre tax retirement, we have about 298,000 combined.

[Mark T. McGowan]

Can I call 300? Come on.

[Richard]

Okay.

[Mark T. McGowan]

All right, good. 298. All right, 300.

[Richard]

I've got a rollover IRA. That's 240.

[Mark T. McGowan]

Okay.

[Richard]

We have taxable accounts of 115,000.

[Mark T. McGowan]

Okay.

[Richard]

We have Roth accounts of 327.

[Mark T. McGowan]

Yowza. This is what happens when you don't have kids, I guess you save a lot of money.

[Richard]

Well, and that's why I'm wondering if I just take the buyout and then we have an HSA of about 40,000.

[Mark T. McGowan]

That's great. Do you guys own a home?

[Richard]

Yes.

[Mark T. McGowan]

What do you suspect that house is worth now?

[Richard]

About $400,000.

[Mark T. McGowan]

Do you have a mortgage outstanding?

[Richard]

Yeah, about nine and a half years left.

[Mark T. McGowan]

And how much remains the principal amount?

[Richard]

$126,000.

[Mark T. McGowan]

I mean, you guys are in really good shape. Do you have a sense of your current spending level?

[Richard]

I mean, I'd say tops, 50,000 a year.

[Mark T. McGowan]

That's it?

[Richard]

Yeah.

[Mark T. McGowan]

Let's say 60. It'll be so much more fun when you get. All right, I want you to travel. And what about work? In terms of the retirement age, do you think 60 is about right for you guys?

[Richard]

I mean, it's just, it's a really sustainable position now that we're not teaching, so I don't see any reason why we wouldn't keep working. But I'm not adverse to retire early. I don't. I don't really have an opinion about it right now.

[Jill Schlesinger]

All right.

[Mark T. McGowan]

I don't. Okay, so. But everything is good. You guys have a lot of money saved there, and you continue to save money because you're not spending that much.

[Richard]

So, yeah, we're maxing out everything.

[Mark T. McGowan]

So you're maxing out everything. You're, you know, 38 and 40 years old. You got a bunch of money saved already. 3, 6, 7, 8. You almost. You have a million dollars saved already. And so I would hate. All right, so if you happen to go back into that old system after taking the cash out, will you, like, drive yourself crazy about that? Because I'm willing to just say that, who cares? Take the cash out and there's nothing really to preserve. She has a pension plan. You have plenty of money. I don't know. I'm sort of leaning towards the cash out. What do you think about that?

[Richard]

Well, because I'm going to get a pension in my new position.

[Mark T. McGowan]

That's what I mean.

[Richard]

And it would be roughly what she would get at the old one. So the pension program, that was part of our old job, it doesn't pay into Social Security. So I don't know if she'll get Social Security. I will, but it just seems like.

[Mark T. McGowan]

No, I think that that's, like those are all those variables.

[Jill Schlesinger]

Lean to me towards taking the money.

[Mark T. McGowan]

Although the not paying into Social Security, there may be some changes to that now going forward. But, Mark, do you feel like taking the 74 grand now as opposed to waiting for age 60 at 1200amonth and also preserving the ability to go back into that old system? Do you think it's worth it, or do you think you should take the money now?

[Mark]

I would not take the money for $74,000. Not going to make or break their financial lives. I would preserve the option because just from hearing him talk, it sounds like there's a possibility that maybe he goes back into that system at some point. So for 74 grand, no, I'm not taking it.

[Mark T. McGowan]

I'm going to lean the other way just for fun. The reason why I probably would take it is I. And this is. So this is why, you know, this is a push. It doesn't matter. I don't know. I feel like you're going to stay. You've got a system to. Your current system is a better system. The diversification away from the system. Having, like, both of you in the same system and having one different makes is appealing to me. It isn't going to change your life either way. But I don't know, like, in this case, I'm just sort of sensing you want that money and it doesn't matter too much to you, and you're going to build up your own pension again.

[Jill Schlesinger]

Because at this, at this rate, Richard.

[Mark T. McGowan]

If you were in your new system for 20 years, right, at age 60, what would your pension be in the new system?

[Richard]

So it looks like it might be about like 2500, 3000amonth.

[Mark T. McGowan]

I mean, you're not going to make it. You know what? You're not going to make a mistake. It's like Mark's right that the 74 grand doesn't actually change your life in any way. You've got 115,000 in your taxable account. Is there anything you need to do that you would say, like, I want that 75 grand, I want a new kitchen. Is there something you want to do right this second, or is there something that you feel like you want to just. You want to. You would rather have control of the money, then you let me know. But I mean, you're not going to make a mistake either way. You don't need the money. And yet if you had the money, it would be nice. You just keep building up those assets.

[Jill Schlesinger]

And you'd have more control over it.

[Mark T. McGowan]

And you wouldn't feel. I just wanted you to know that, like, you have to make a determination that if you feel like I really. If I get a job in that old system and I've taken that 74 grand, I'm going to kill myself, then leave it.

[Richard]

Yeah. Yeah. I mean, it just kind of seems like I'm splitting hairs because it is. At the end of the day, we're saving as if none of that actually comes in.

[Mark T. McGowan]

So I don't think it's stupid to consider a payment, and I don't think it's stupid to keep the money there. This may be one of those situations.

[Jill Schlesinger]

I think, where it's a push. It's actually a push.

[Mark T. McGowan]

It just. I mean, I'm sure that Mark's about to, like, prove to me financially how wrong I am, because he's probably doing a current value, present value, future value. But even if that were the case, if we had 20 phenomenal years in the market, okay. And you missed them because you kept that $74,000 where it was, right. Just to preserve the optionality. Right. If you did that, you still had all your other money making money. So if we have a 20 year.

[Jill Schlesinger]

Period where things are phenomenal, then you're.

[Mark T. McGowan]

Going to be like, oh, I'm great either way. So it is true. It is splitting hairs. It's a nice problem to have. You've done a great job in managing the money that you do have. Just one quick question for you. The, the money, that's the deferred retirement stuff in the new plan. Do you have a Roth option or not?

[Richard]

I do, and I'm, I'm contributing a little bit more than 50% to the Roth option. And with each raise, I've just, I'm just upping that percentage.

[Mark T. McGowan]

Yeah, because I think given your tax bracket, your guys are in 22%, right?

[Richard]

Yeah.

[Mark T. McGowan]

I, I would be doing all Roth for you. I, it's going to hurt you a little bit tax wise, but you got a lot of money already. But, you know, between the rollover and the deferred retirement.

[Jill Schlesinger]

Right.

[Mark T. McGowan]

You've got that 540,000 combined, hasn't been taxed yet, and your wife's going to. Does not have a Roth option. So that just means that I'd rather be all Roth right now. I know Mark will agree with me on that one.

[Richard]

Okay, okay. 100%. And so would that, would it be a better idea to. I mean, I don't know anything about the Roth conversions and how that works from the ira, but would you recommend doing that or just.

[Mark T. McGowan]

No, no, not right now. I wouldn't. I mean, if something changes, it's fine, but, like, we'll have plenty of time to get money out of your deferred comp. You know, we'll do that when, you know, between age 60 and 75, you'll have time. I just don't want to compound the problem right now.

[Richard]

Yeah. Yeah.

[Mark T. McGowan]

Okay. Does that make sense? Yep.

[Richard]

Yep.

[Mark T. McGowan]

All right. I'm liking that. Do you guys have your estate documents done?

[Richard]

Of course.

[Mark T. McGowan]

Of course.

[Jill Schlesinger]

I wouldn't call you otherwise, Jill.

[Mark T. McGowan]

And you're managing your own money.

[Richard]

Yeah. Yeah.

[Mark T. McGowan]

All right. Keep doing it, Richard. Good luck to you. Thanks so much for getting in touch with us. Hey, if you've got a question about a pension, or you've got a question about a lump sum, or you're thinking about real estate, or it's tax season, which has just begun and you've got a tax question, give us a Holler. Go to jillonmoney.com, click the contact Us button, write us a note, and if you're shy. You want to maybe put a little bit more in that note because that's the email we receive. And if you're not so shy and you want to come on the air, check the box. Mark will do everything else. Check out all the content that lives on our website. Or maybe just bookmark jillonmoney.com it says upon maybe it's like when I start up my computer, load up jillonmoney.com it's like fun. It's like a nice. It's like you, your older sister coming to you every day saying everything's going to be fine. Don't worry. If not, give us a holler. Okay? You can subscribe to us on the Odyssey app or wherever you find your favorite podcast.

[Jill Schlesinger]

Please leave us a rating and review.

[Mark T. McGowan]

Wherever you listen and do something nice for someone else today. Change your work, Change your wealth, change your life. Thank you for listening and we'll talk to you tomorrow.

[Jill Schlesinger]

Real Estate it's been a cornerstone of wealth building for generations, but it's also often a major headache for investors. 3:00am Maintenance calls, tenant disputes, Property taxes Enter the Fundrise Flagship Real estate fund, a $1.1 billion real estate portfolio built for you. We're Talking more than 4,000 single family homes in thriving Sunbelt communities, 3.3 million square feet of in demand industrial facilities, all professionally managed by an experienced team. With the Flagship Fund, you're tapping into real estate's most attractive qualities. Long term appreciation potential, a hedge against inflation. Diversification beyond the stock market. Check, check, check. All without complex paperwork, massive down payments or soul sucking landlord duties. Visit fundrise.comjillonmoney to explore the portfolio. Check out historical returns and see just how easy it can be to add real estate to your investing strategy. Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the Fund's [e-mail] Flagship this is a paid advertisement.

[Jake Brennan]

Have you heard the Disgraceland Podcast? Do you know about Jerry Lee Lewis wanting to murder Elvis? Or the hip hop star who cannibalized his roommate? What about the murders ACDC was blamed for? Or the suspicious deaths of Brittany Murphy and River Phoenix? These stories and more are told in the award winning Disgraceland Podcast hosted by me, Jake Brennan every Tuesday, where I dive deep into the dark side of entertainment and the connection between music, history and true crime. Lombie's lead singer, Debbie Harry, was shocked when she saw the man's photo in the newspaper. She recognized him. How could she forget. He'd given her a ride years ago, a ride she'd barely escaped from with her life. And now here he was, right there on the front page, accused of kidnapping and killing at least 30 women. And now Debbie Harry finally knew his name. Ted Bundy. Follow and listen to Disgraceland on the free Odyssey app or wherever you get your podcasts.