Monday, May 27, 2019

I Got A Pension Buyout Offer

For my first "real" job, I worked as a programmer/analyst for a large insurance company. They had hired me as an intern during my last year in college and then hired me outright once I had graduated. For just under three years, I worked creating C++ programs and eventually moved towards being their intranet webmaster. The bottom finally fell out after our Y2K conversion work and the company merged with two other similar companies in order to stay afloat. I declined the opportunity to work with the new company, as it would have involved me moving to Rhode Island. As an incentive to stick around for six months to help migrate my programs to the new company, I was offered a generous severance package.

About five years ago, I got a notice from the new company telling me about the health of the company pension system. I found this odd as I had moved at least three times since working for them and they had obviously went through some effort to track down my latest address. I called the company's benefits department to tell them that I didn't need such notifications, as I hadn't worked for them nearly long enough to qualify for a pension. Turns out that, as part of my severance package, I was vested into the new company's pension system. I guess I should have read the fine print. I was told that the monthly payout when I retired would be very small.

Now, several years later, I found myself with a pension buyout offer. The company was offering to pay me a lump sum of money in order to rid themselves of their pension obligation to me. Companies offer pension buyouts for a number of reasons from funding issues to long-term cost savings. I suspect that my own company just wanted to get rid of all pensions and move everyone over to a more modern 401(k) model.

For anyone getting a buyout offer, there's a temptation to take the lump sum payment and put it directly into a trip or a big home improvement project. Problem is, if you take the payout directly, you have to pay taxes on it. Right off the bat, you lose 20% directly to the government. Then, of course, the remaining payout will raise your overall income for the year, possibly putting you into a higher income bracket.

Me, personally, I opted to have the buyout paid to the order of my deferred compensation plan which is separate from my main retirement plan. The thing is, I couldn't just give the account info to my old company and have them wire the money. My old company is going to cut me a check made out to my deferred compensation plan which I will then have to forward to my plan administrator. Pain in the butt, for sure, but that's to make sure that you aren't taking a payment directly.

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