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Old 08-06-2014, 11:11 AM
 
1,184 posts, read 1,141,603 times
Reputation: 996

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Apologies in advance for the long-winded post....I am trying to make a decision between 2 options, and was wondering what others would do in this situation.

I just received notification that my former company is going to be offering lump-sum pension buyouts for former employees. I don't have the specific number yet - that will be coming separately via personalized mail sometime next week - but I've made some rough estimates using the info I do have and calculators available online.

I'm 35, the monthly benefit amount is $318.94, and the commencement date is 4/2044. Based on calculators I found, the amount I believe I may be looking at is around $43k. I called the hotline to see if they had any more specific info, and they didn't (they will as of next Friday when it goes live), but the gentleman I spoke with asked what I thought I was going to do - I stated I was planning on taking the lump sum distribution (with full knowledge of the taxes, etc). He suggested rolling it into my current company's 401k, and taking a loan for the amount I need. I have to do a little more research onto my current 401k's loan rules (I don't have enough in there to model it), but it got me started thinking about that option.

Background info: Have had a very rough couple of years financially, with lots of job change. Just now getting back on my feet and have a huge mess to clean up. No money in savings (literally nothing), nothing in 401k (can't afford to start contributing yet), gross $60k (should be increasing to $70-75k at the end of the year), monthly take home approx $3k after all deductions, monthly bills around $1700 (not including debt repayment). I have approx $17.5k in debt, pretty much all with collection agencies. My credit score is destroyed. That debt does not include student loan or car loan, both of which are current and in good standing. These are mostly old credit cards. I'm working on paying things off, but the amount and speed is killing me - I can't cut my budget down any further - I've moved back home, added my cell phone to a family plan, never go shopping, rarely go out....all of my extra money goes to debt repayment. At the rate I'm going, it's going to take a few miserable years to get it all paid off. In the meantime, I am hoping to relocate from NY to Los Angeles sometime next year (would get a job first - am hoping to transfer within my company). In order to do this, I need to have the debt gone, and about $10-15k saved up.

So....my options, assuming the $43k is semi-accurate.

Take Lump Sum Distribution: After taxes/penalties, this would net me $26-30k, using a range of 30-40% on taxes/penalties. This would enable me to pay off ALL old bad debt, put aside a small e-fund, start my moving fund, put a deposit on a secured credit card to start rebuilding my credit that way. Clearing all of that will also free up around $1400 in my budget every month, at current pay, to begin 401k contributions, add aggressively to moving fund, and just have a lot more breathing room in general.

401k Loan: Roll $43k into my current employer's plan, and take a $20k loan (I don't even know if this is possible....if the money will be considered vested, what their rules are, etc). Still pay everything off, but don't have additional monies for savings vehicles (but do have $20k in 401k). Take 2 years for repayment, at $858/month (assuming 4% interest). If I leave the company, have to be on the hook for the balance. (This is where the relocation plan is an important point - I am HOPING to stay with current company, but am realistic that it may not work that way). Not nearly as much room freed up in the budget, but won't have to pay taxes/penalties.

After writing it out, I'm still leaning (very heavily) towards the lump sum distribution. Yes, losing potentially $17k to the govt is a tough pill to swallow. I just want a fresh start, which this will give me, and since I don't consider this money mine at the moment (and was never relying on it for retirement as the amount was so small on a monthly basis), it hurts a little less than if someone took $17k out of my bank account, you know?

What would you do? Please stick to the 2 options presented - I'm well aware of other options available to me, but would like to keep the discussion centered around these 2.
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Old 08-07-2014, 09:51 AM
 
Location: N/A
849 posts, read 1,581,487 times
Reputation: 929
why ask for opinions when you already have your answer in mind?

I think that using this money to take care of debt is silly and you will regret it in 2044 if you do.

I would roll it over to an IRA and forget about it until it's time. This should not be viewed as accessible money.
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Old 08-07-2014, 12:32 PM
 
4,003 posts, read 2,602,979 times
Reputation: 8651
Quote:
Originally Posted by midwestlaxer View Post

I think that using this money to take care of debt is silly and you will regret it in 2044 if you do.

I would roll it over to an IRA and forget about it until it's time. This should not be viewed as accessible money.

This.
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Old 08-07-2014, 12:59 PM
 
Location: Keosauqua, Iowa
9,172 posts, read 16,641,473 times
Reputation: 12321
As someone who did something very similar at about the same age, I would recommend rolling it and forgetting it's there.

I see a couple of things you can possibly do here to attack this without scuttling your meager retirement savings, but I can't really flush them out unless and until you post more details about your car and student loans.
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Old 08-07-2014, 01:47 PM
 
12,705 posts, read 9,964,692 times
Reputation: 9515
Quote:
Originally Posted by LizfromtheBronx View Post
Apologies in advance for the long-winded post....I am trying to make a decision between 2 options, and was wondering what others would do in this situation.

I just received notification that my former company is going to be offering lump-sum pension buyouts for former employees. I don't have the specific number yet - that will be coming separately via personalized mail sometime next week - but I've made some rough estimates using the info I do have and calculators available online.

I'm 35, the monthly benefit amount is $318.94, and the commencement date is 4/2044. Based on calculators I found, the amount I believe I may be looking at is around $43k. I called the hotline to see if they had any more specific info, and they didn't (they will as of next Friday when it goes live), but the gentleman I spoke with asked what I thought I was going to do - I stated I was planning on taking the lump sum distribution (with full knowledge of the taxes, etc). He suggested rolling it into my current company's 401k, and taking a loan for the amount I need. I have to do a little more research onto my current 401k's loan rules (I don't have enough in there to model it), but it got me started thinking about that option.

Background info: Have had a very rough couple of years financially, with lots of job change. Just now getting back on my feet and have a huge mess to clean up. No money in savings (literally nothing), nothing in 401k (can't afford to start contributing yet), gross $60k (should be increasing to $70-75k at the end of the year), monthly take home approx $3k after all deductions, monthly bills around $1700 (not including debt repayment). I have approx $17.5k in debt, pretty much all with collection agencies. My credit score is destroyed. That debt does not include student loan or car loan, both of which are current and in good standing. These are mostly old credit cards. I'm working on paying things off, but the amount and speed is killing me - I can't cut my budget down any further - I've moved back home, added my cell phone to a family plan, never go shopping, rarely go out....all of my extra money goes to debt repayment. At the rate I'm going, it's going to take a few miserable years to get it all paid off. In the meantime, I am hoping to relocate from NY to Los Angeles sometime next year (would get a job first - am hoping to transfer within my company). In order to do this, I need to have the debt gone, and about $10-15k saved up.

So....my options, assuming the $43k is semi-accurate.

Take Lump Sum Distribution: After taxes/penalties, this would net me $26-30k, using a range of 30-40% on taxes/penalties. This would enable me to pay off ALL old bad debt, put aside a small e-fund, start my moving fund, put a deposit on a secured credit card to start rebuilding my credit that way. Clearing all of that will also free up around $1400 in my budget every month, at current pay, to begin 401k contributions, add aggressively to moving fund, and just have a lot more breathing room in general.

401k Loan: Roll $43k into my current employer's plan, and take a $20k loan (I don't even know if this is possible....if the money will be considered vested, what their rules are, etc). Still pay everything off, but don't have additional monies for savings vehicles (but do have $20k in 401k). Take 2 years for repayment, at $858/month (assuming 4% interest). If I leave the company, have to be on the hook for the balance. (This is where the relocation plan is an important point - I am HOPING to stay with current company, but am realistic that it may not work that way). Not nearly as much room freed up in the budget, but won't have to pay taxes/penalties.

After writing it out, I'm still leaning (very heavily) towards the lump sum distribution. Yes, losing potentially $17k to the govt is a tough pill to swallow. I just want a fresh start, which this will give me, and since I don't consider this money mine at the moment (and was never relying on it for retirement as the amount was so small on a monthly basis), it hurts a little less than if someone took $17k out of my bank account, you know?

What would you do? Please stick to the 2 options presented - I'm well aware of other options available to me, but would like to keep the discussion centered around these 2.
You can't afford to start over at age 35 with no savings at all. I know it's painful to live on a tight budget, but don't raid your retirement for current expenses!!! YOU WILL REGRET THIS.
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Old 08-07-2014, 02:10 PM
 
4,649 posts, read 6,479,224 times
Reputation: 5394
That CA cost of living can be a bear. I guess NY isn't a joke either. As for debt $17K isn't really all that bad compared to what I have seen. Here's what you should do. As your 35, find yourself a career woman making a good salary and live happily ever after just stay way from debt as best as possible.

As for your decision a going rule of thumb is at retirement you will need about 20 times your annual income. Try not to mess with retirement funds except in an emergency where you absolutely no other options.
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Old 08-07-2014, 02:22 PM
 
8,822 posts, read 5,121,165 times
Reputation: 10086
Have you crunched the numbers to see if the lump sum is fair compensation for the pension benefits which you will forever forfeit?
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Old 08-07-2014, 02:22 PM
 
Location: Keosauqua, Iowa
9,172 posts, read 16,641,473 times
Reputation: 12321
Quote:
Originally Posted by Caltovegas View Post
.......find yourself a career woman........
Is the OP a lesbian? 'Cause I'm thinking "LizfromtheBronx" is not a guy.
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Old 08-07-2014, 03:40 PM
 
1,184 posts, read 1,141,603 times
Reputation: 996
Quote:
Originally Posted by duster1979 View Post
Is the OP a lesbian? 'Cause I'm thinking "LizfromtheBronx" is not a guy.
Ha...I am hoping there's just a comma missing there...in either case, I don't need to find myself a career woman OR a career, because a. I am decidedly not a lesbian and b. I have a career already, and am working on advancing/increasing income. But thanks..

I know it's not the wisest choice, and that I am conceivably losing a lot of money by doing it this way, both in the initial distribution and via loss of compounding. However, if I DO do it this way, I can immediately begin contributing 10% to my 401k, which I cannot do while I am in debt repayment (which will take several years - several long, unhappy years being a 35 year old living at my mommy's house...)

I was kind of hoping that someone could be objective about the two options presented, even if you don't agree with them. Lesser of two evils type thing.
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Old 08-07-2014, 03:49 PM
 
8,822 posts, read 5,121,165 times
Reputation: 10086
I think the second option is better than the first. Worst case scenario, some of the 20k loan is considered a distribution and subject to taxes and penalties. This is less costly than all of the 43k being a distribution.
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