Let's Make A Deal! (With your R&S Pension)
One of the most popular game shows of the 1960s and early 1970s was called “Let’s Make A Deal.” Contestants on "Let's Make a Deal" won prizes or, as was too often the case, zonks based on their intuition, luck and skill. The host, Monty Hall picked contestants at random and they were always dressed in outrageous costumes. Depending on the game being played, Hall would "deal" with a couple or two or three contestants at a time.
In most of the games, contestants had to decide whether to keep a cash amount or trade that cash amount for what was behind doors No. 1, 2 or 3. Sometimes, the prizes behind the doors would be great such as a car or furniture. Sometimes it would be a zonk, which was a worthless nonsense prize including goats, junked cars and televisions or even the announcer dressed as a baby sucking on a bottle!
In this blog, I want to play “Let’s Make A Deal” with your cooperative R&S Pension. Except I’m not going to make you guess what’s behind doors 1,2 and 3. I’m going to tell you exactly what’s behind them. Ready? Let’s make a deal!
Let’s Make A Deal!
Here’s my deal. I’m going to offer you $1 million dollars to keep. The only catch is you have to manage the money yourself or work with a financial advisor to create a retirement plan for that money. You can transfer this money to an Individual Retirement Account also commonly referred to as an IRA and it will be a non-taxable event. You will only pay taxes on the dollar amount you withdraw from the IRA as you need it.
The money is yours forever and you can do whatever you wish with that money. A good advisor can show you how to create an income stream from that money based on your income needs and can help you invest the rest of the money based on your retirement goals. An advisor can help you set up a trust or a beneficiary statement so that money will outlive you and potentially change your beneficiary’s life. With proper planning you will die with the original $1 million dollars and you can pass that on to your beneficiaries or your trust.
That’s the deal I’m willing to offer you. You can take that deal or you may trade it for what’s behind either door 1, door 2 or door 3.
Door Number 1
Behind this door is a Life Only Annuity. With this life only annuity, I will keep your $1 million dollar R&S Pension Lump Sum and I will agree to pay you $4000 per month until you die. When you die, I get to keep the balance of whatever is left of the money. If you manage to live longer than 20 years after you retire, there will be no money left and I will have to keep paying you $4,000 per month until you die. However, if you die one day after you retire, I get to keep all $1 million of your dollars.
Door Number 2
Behind this door is the 50% Joint and Spouse Annuity. With this annuity, I will keep your $1 million dollar R&S Lump Sum and I will agree to pay you $3,800 per month until you die and after you die, I agree to pay your spouse $1,900 per month until he or she dies.
After you both die, I get to keep whatever is left of the $1 million dollars. If either of you manage to live longer than 20 years after you retire, there will be no money left and I will have to keep paying you $3,800 per month until you die or $1,900 per month until your spouse dies. However, if you both die in a car wreck one day after you retire, I get to keep all $1 million of your dollars.
Door Number 3
Behind this door is the 100% Joint and Spouse Annuity. With this annuity, I will keep your $1 million dollar R&S Lump Sum and I will agree to pay you $3,000 per month until you die and after you die, I agree to pay your spouse $3,000 per month until he or she dies.
After you both die, I get to keep whatever is left of the $1 million dollars. If either of you manage to live longer than 20 years after you retire, there will be no money left and I will keep paying you $3,800 per month until you die or $1,900 per month until your spouse dies. However, if you both die in a car wreck one day after you retire, I get to keep all $1 million of your dollars.
What’s Your Decision?
Do you want to take my initial deal or do you want to choose door 1, 2 or 3?
Summary
This is an example of the choices you’ll face when you retire from your cooperative if you are eligible for the R&S Plan. I used simple numbers and hopefully a comedic analogy of the process to help illustrate my point.
When you retire you will be offered either a lump sum option or several other annuity options. I only used three of the options for this example for simplicity’s sake. Your other annuity options explained in plain English can be found here.
What I want you to take from this blog is this: don’t dismiss the lump sum option because you're scared of the "what ifs" of life and you feel the annuity option is the “safe” bet. Talk to an advisor you trust or talk to as many advisors as you can until you find one you trust and walk through all your options and the pros and cons of each. You don’t get a second chance to make this decision. You can’t change your mind later. Once you sign your Benefit Distribution Election Forms, that’s it. Game over.
Complete Disclosure
As you can probably tell, I’m almost always in favor of the lump sum because as an advisor I know what the potential of that money represents. I know what that money can turn into for you and your heirs with proper retirement planning. I’ve helped many cooperative employees just like you make this decision. I’ve also helped and am helping many cooperative retirees manage that lump sum based on their unique retirement goals.
The key word I want you to remember is control. With the lump sum option you have complete control of your money for the rest of your life and possibly your heirs’ lives, too. You control your monthly income, you control your taxes, you control your investments and you control the retirement that you worked so hard to get to.
In life we often worry about many decisions from day to day. Most of those decisions honestly don't matter all that much because if we make the wrong decision we can usually correct it. It might take some money and some work but most bad decisions are fixable.
However, that's not the case in this matter. Once you make the choice, it's final!!! You can't undo this decision. You can't change your mind.
There are cases where the monthly pension offer is the better choice and we can show you how to determine this. In most every situation we see, however, the lump sum is the better offer and it's usually not even close. We would be happy to look at these options with you and determine which option actually helps you achieve the retirement you want.
Let’s Make A Plan!
Instead of playing “Let’s Make A Deal” I propose we play “Let’s Make A Plan!
At 80/20 Financial Services we are retirement planners. We specialize in retirement planning for electric cooperative employees within 5 years of retirement or already retired.
We believe a goal of retiring without a plan is simply a plan to run out of money. Retirement planning is a strategy to maintain and increase that dollar amount over time.
If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and increase your income over time. The consultation is free and without obligation. Contact us to set up a consultation.
Our mission is to increase your time, money and peace of mind by helping you create a retirement income and investment plan that aligns with your retirement goals and then guide you through the completion of that plan year after year.
For more articles about retirement planning and investing, click here.
You may also sign up to receive our weekly blog here.
Join our Facebook Group by clicking here.
Thanks for reading!
Brian Coleman-Owner/Advisor
Are you retirement ready? Click here to find out.
80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). Being independent allows us to work exclusively for YOU. 80/20 Financial Services is the legal name of our Registered Investment Advisory Firm (RIA). Electric Cooperative Retirement Planning is what we do. Our specialty is retirement planning for electric cooperative employees either planning for retirement or already retired
We specialize in helping electric cooperative employees create their retirement income and investment plans. Retirement can last 20-30 years. Let’s make a plan!
Photo by Tim Dolya on Unsplash
