Turbulence at Boeing
Written by Matthew Boelter
Boeing recently announced that they will start the next round of engineer layoffs in June, and this time they’re not voluntary. While some will brush up their resume and head back to the job market, others will decide it’s time to retire. If you find yourself considering retirement, it’s time to start thinking about how you will take your pension—as monthly payments or a lump-sum buyout—and, if you choose payments, which of the different survivor benefits you should select. Before we examine the lump-sum option, let’s look at the various survivor benefits available if you choose monthly pension payments.
What about my Spouse?
One of your most important considerations is whether you need/desire some sort of spousal benefit after you yourself die. Here are the five options available, four of which include some form of spousal benefit:
- 50% survivor benefit
- 75% survivor benefit
- 100% survivor benefit
- Single-life with 10 Year Certain.
The single-life option, which only pays while the retired employee is alive, provides the largest monthly benefit. That’s because, if/when the employee dies—even if it’s just a month after retiring—no one will get any further payments, so the pension plan can afford to pay more while you’re alive.
The 50%, 75% and 100% options mean that after the employee’s death, the respective percentage of the employee’s initial monthly pension benefit will continue going to the surviving spouse the rest of their life. If we knew exactly when we would die, the choice would be easy. Since we don’t, we must consider your health, as well as your spouse’s, the age difference between you and your spouse, other income and assets to which he/she will have access, and the health/strength of your relationship. Survivor benefits can only be selected at the time of retirement, and the choice is irrevocable; Boeing’s pension does not allow you to change your selection after the fact. For example, if your spouse passes away a year after retirement, and you had elected the 100% survivor benefit, you cannot then change to the single-life benefit. You also cannot add a new spouse if/when you remarry.
The last option, “single-life with 10 year certain,” is like the single-life option, but with a little insurance policy. If you die within 10 years of starting to collect monthly payments, Boeing guarantees that it will continue those monthly payments to anyone that has claim to your estate, spouse or otherwise. In fact, you can leave these payments to whomever you choose, including contingent beneficiaries who would receive payments if the primary beneficiary dies before—or together with—you. However, note that if you (the employee) die after 10 years, there is no remaining survivor benefit.
To Lump or Not to Lump
There are many factors to consider when deciding if the pension buyout is a better deal for you than monthly payments. Everyone’s situation is different, and one size does not fit all.
First you should consider your longevity. The lump-sum buyout offers I have seen range from 10-14 times the annual pension payments. If your life expectancy is less than ten years and you are not married, the buyout may be a very good option. On the other hand, if you retire at 60 and expect that you or your spouse to live to 90 or beyond, you are probably better off taking the monthly pension. If you are offered 12 times the annual pension benefit, you would need to invest the money at a compound rate of return of 8.1% for the lump-sum principal to last 30 years, and that type of return would require taking significant risks. (If you know where to get an 8.1% guaranteed rate of return, please let me know!) On the other hand, if you and your spouse both die before depleting all of the principal, you would be leaving the remainder to your heirs.
So how much can you expect to earn if you were to invest the lump-sum buyout? I have heard many people quote average stock market returns as a justification for choosing the lump-sum and investing it all in the market. However, as the charts below show, the market’s direction immediately following your retirement can make a huge difference. If you experience a severe bear (falling) market in the early years of retirement, there is a good chance that your pension money will run out.
This chart is a buyout scenario simulation I recently ran for one client, and it shows what would have happened if he had taken his buyout in 2000, invested it all in the S&P 500 (with dividends), and then withdrew an annual amount equal to each of the spousal benefit options available to him.
In the above example, he would have used up his entire pension lump-sum money in less than 11 years, regardless of which monthly pension he tried to replicate. In other words, don’t let average historical stock returns fool you. One big dip like those in 2000 or 2008 early in your retirement, and you might not be able to replicate any of the monthly pension payouts without totally depleting your lump-sum buyout principal.
But What If It’s a Bull Market?
On the other hand, if you are lucky and happen to invest your lump-sum just as a major bull (rising) market is taking off, you might be much better off with a lump-sum buyout. (Note: as I write this, the current bull market has already gone on for eight years—making it one of the longest in history.) In the chart below, I did the same analysis as above, but started 10 years earlier, in 1990, a much better time to be heavily invested in stocks.
These two examples show the importance of considering the level and outlook for the stock market at the time you retire. You should also remember that these are extreme examples. Most people who are retiring don’t feel comfortable putting their entire lump-sum pension buyout into the stock market (in general, money you expect to need within 5 years should not be in the stock market), so their results would likely be somewhere in between these two extremes. One of the big benefits of taking the lump-sum buyout option is that it allows you to choose how to invest your money. Many people, even experienced investors, however, say that this is also one of the biggest drawbacks of a lump-sum; it’s hard not to invest emotionally when your retirement nest egg is at stake. One of the worst things you could do would be to invest too much in the stock market and then—the next time it drops 40-50% (as it did once in each of the past two decades)—panic and sell, turning those losses into a permanent depletion of your capital.
How Guaranteed is Guaranteed?
The stock market’s future return, and your likely behavior during bear markets, is not the only consideration. Some engineers worry about Boeing’s ability to actually pay the pension benefits they have promised. I certainly don’t have a crystal ball, and I have no reason to think Boeing as a company will fail in our lifetimes, but nightmare scenarios have unfolded for other companies (remember Enron?), so the concern is a valid one. According to Boeing’s annual report, released in March, Boeing contributed $113 million to its pension plan last year, and the Boeing Pension is now more than 70% funded. Some believe that is too low, but for perspective, keep in mind that Social Security, which most people rely on, is considered to be 100% unfunded. (To be fair, the U.S. government can print money to meet its obligations, whereas Boeing cannot.) Ultimately, you must decide which seems riskier to you—Boeing’s solvency for the remainder of your life, or a stock market that is already 8 years into a bull run.
Can I Create My Own Solutions?
If you are in good health, you might consider a “pension maximization” strategy of buying your own “survivor benefit” in the form of life insurance. For example, you could choose the single-life monthly benefit option, and use its higher monthly payout to purchase a life insurance policy that helps safeguard your spouse after you’re gone. Work with your financial professional to compare all of the different options. Some variation may actually be the best value for you. For example, instead of choosing single-life and a large life insurance policy, you might choose the 50% survivor benefit and a smaller life insurance policy. The 50%, 75%, and 100% survivor benefits rarely have a linear reduction in monthly benefits (compared to the high, single-life amount). For example, the reduction from single-life to 100% survivor isn’t just automatically double the reduction of single-life to 50% survivor amounts.
What About Taxes?
Every person and family situation is different, and there is no blanket answer for this. I always recommend working with professionals to customize the plan to your needs, and a good tax professional can save significant taxes if they are engaged early in the planning process.
One challenge is the fact that the entire pension is included in your taxable income, with no simple way to offset that tax liability. If you have other income (e.g., Social Security, a spouse that works, you working part-time, etc.), taxation of your Boeing pension can significantly impact your bottom line—especially if it pushes you into a higher marginal tax bracket.
This is where planning can yield powerful results. You can control when monthly pension benefits begin…even after you retire. If you take the lump-sum buyout, you have even more control of how much—and when—you take taxable distributions. Typically, you would rollover your lump-sum into an IRA, which you can then invest and distribute as you please. You cannot, however, leave it in the IRA forever and avoid taxes. Beginning with the year in which you turn age 70½, you must take Required Minimum Distributions (RMDs). Prior to that time, you have the flexibility to use the IRA to optimize your tax situation each year, e.g., taking larger distributions before Social Security kicks in, or converting some of the IRA to a Roth IRA in years when your tax bracket is low.
I can’t stress enough that every situation is different; your needs will differ from the needs of your colleagues. This is where a team approach can add significant value. Here at Viridian, we do financial and retirement planning as fiduciaries (not to sell products), and we have a separate Tax and Accounting team. We all work collaboratively, evaluating each client’s unique circumstances to develop a plan that best balances your needs, goals, risk capacity, and tax situation.
Timing is Everything
Choosing the best time to start collecting your Boeing pension is also important. The Boeing pension grows more significantly from age 55 to 60, but then grows very little from 60-65. If you are retiring at 60, its probably best to start pulling your pension right away. However, if you are retiring at 55, it might be better to wait. You will need to take your total financial situation—assets, income sources, living requirements/expenses, etc.—into consideration. It is important to build an income timeline that includes your other investment accounts, Social Security, 401(k) and IRA accounts, Roth conversions, and deferred compensation, so that you don’t end up running out of money and/or paying more in taxes than necessary. Let’s look at an example.
The sample timeline above illustrates how, with some planning, assets and income sources can really work together. This example considers a couple that retires at 55 with $200,000 in a personal savings (i.e., after-tax investments), $500,000 in 401(k) assets, and a need for $50,000 a year in living expenses.
In order to let their pension grow, they decide to wait until age 60 to begin drawing pension benefits. During the first 3 years (55 to 58), they live by spending some of their after-tax savings (as counter-intuitive as that may seem). They also convert $75,000 each year of 401(k) money to a ROTH IRA, thereby keeping them in the 15% marginal tax bracket, while creating a ROTH IRA that can grow tax-free (not just tax-deferred). I also have them converting more 401(k) money to the ROTH IRA in later years—whenever their gross taxable income is below $75,000. After those first 3 years, they withdraw money from their 401(k) to live on for the next 2 years (to 60), allowing their pension to further accumulate. (Note: while most people would pay a tax penalty for taking money from their 401(k) before age 59½, the Boeing 401(k) allows retired individuals to pull money as early as 55 with no tax penalty.)
At 60, they turn on their pension, supplementing that pension income with money from the 401(k) as needed. At 62, the person with the smaller Social Security starts pulling their benefit “early,” but the other spouse waits until 70 to let their benefit build up. I often recommend this to help protect a surviving spouse; when one of them dies, the smaller of their two social security checks will stop, and the larger check will continue. This is regardless of which spouse dies first, so letting one check get as big as possible can make sense. Meanwhile, the 401(k) can be used to bridge gaps, and as inflation pushes their needed income higher in later years, the ROTH IRA can be strategically used to keep them in a lower income tax bracket. Note: the above hypothetical does not imply or guarantee best strategies for you.
Take your Time – and Consider Hiring A Pro
Only 8% of private employers still offer pension plans, according to the Bureau of Labor Statistics. So consider yourself one of the lucky ones. Building a retirement plan, and deciding how and when to draw your pension, however, can feel cumbersome, if not overwhelming; don’t let that keep you from doing it. I strongly recommend working with a financial planner to build a comprehensive financial plan. Don’t settle for a 5-minute analysis from someone that calls themselves a planner, but is really just trying to sell you investment or insurance products. You’re likely to miss a key detail, and end up with less income and/or more taxes than necessary. Take the time to make an informed decision and work with someone that can explain the reasoning behind their recommendations.
Matthew Boelter is a Financial Advisor with Viridian Advisors (www.viridianadvisors.com). Assurance, Tax, Consulting, Accounting services offered through Viridian Tax and Accounting, Corp. Financial Planning and Investment Management services offered through Viridian RIA, LLC.a Registered Investment Advisor
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
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