Checking Out Early

Annette calls Dave and needs help; she has 2 choices to consider for her retirement savings.

QUESTION: Annette is eligible to draw early retirement. She would then put it towards her Roth. What should she do? Dave gives Annette her best equation.

ANSWER: My first suggestion would be to take it as a lump sum and put it in a mutual fund. Typically, pension plans like this are calculated at a 7% rate. The way they determine the amount to give you is by using the average death age for a female. They look at how many years of service you’ve given and say they are going to pay you a certain number of dollars as a percentage return on the “lump sum” that you have put in there in your name. That’s how they calculate the difference between the payments for a 50-year-old and a 55-year-old. Point being, if you invest at better than 7%, you’ll come out better if you take the money. The second point is that if you die even 10 years later, you’d have gotten 10 years worth of payments into an investment. And 100% of that money is in your name and goes to your estate for your family. If you die, you get nothing. Take it early and often if you’re willing to invest it better than at 7%, because of what happens at death because you can make more on it. If you’re going to spend it, that’s a whole different thing.

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