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.