When Should You Retire #8 Pension PLOP Graphic

How to Retire from a Large Corporation #8: Pension PLOP and Leveling Options

David Larson |
Categories
Retirement Planning

Are you like many people we know in Harrisonburg and Rockingham County who are excited about their retirement years, but are overwhelmed by the complexity and all of the numbers in front of you? When should you draw Social Security? How much will healthcare cost? How much will you actually spend in retirement? 

All these numbers are important and you should absolutely get a handle on them as you get closer to the date; but do not get overwhelmed with the complexity of the task. The goal is to stay focused on the big picture and break down your decisions into simple action items.

This blog is the 8th in a series, “How to Retire from a Large Corporation” and is designed to accompany an e-book by the same name.

Are you fortunate enough to have a pension from your company? If so, then you should celebrate, because your children will probably not have the luxury of a pension when they retire. The next few blogs in this series were written to equip you to make the very best decision for you and your family.

Before we dig in, here is an important disclaimer required by our back office: A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages.:

 

  • Leave the money in his/her former employer’s plan, if permitted;
  • Roll over the assets to his/her new employer’s plan, if one is available and rollovers are permitted;
  • Take a lifetime annuity check from company plan, if applicable
  • Roll over to an IRA; or
  • Cash out the account value.

 

Your pension may be one of your largest retirement assets. If you are like most folks we know in Harrisonburg, VA, and around the Shenandoah Valley, the pension decision can be the most difficult to plan around. Options abound, opinions are abundant, and you do not want to make a mistake with a decision this important. 

 

If you have read our last blog, then you are already fairly familiar with pension lump sum and survivor benefits. But many pensions can give you even more flexibility by making available “PLOP” or “Leveling” options. What are these????

 

Leveling Option: A “leveling option” is generally an option for people who retire from their company before Social Security Full Retirement Age (FRA). Essentially, the pension pays you more money until FRA, and then drops back to a reduced benefit when Social Security kicks in. These can sound appealing because you immediately begin receiving a higher benefit. Exercise extreme caution before choosing this option for these reasons:

 

  • This decision is permanent. Once you choose it, you cannot go back.
  • This additional income will be taxable to you when it is paid out. If you decide to go back to work, or if you spouse has income, this income could be heavily taxed.
  • Inflation can severely erode your retirement income. Do you really want your pension income to scale back after you have been retired for a few years?
  • The “break-even” payout for the leveling option compared to other options is usually before your life expectancy. So if you choose a leveling option, you will likely get less total money if you live a long time.

 

PLOP Option: A “Partial Lump Option,” or PLOP, provides the retiree with a large lump sum amount that can be rolled to an IRA or taken as cash. The trade-off is that taking the PLOP reduces your monthly income permanently. Exercise extreme caution before choosing this option for these reasons:

 

  • This decision is permanent. Once you choose it, you cannot go back.
  • This additional income will be taxable to you if it is not rolled over. This lump distribution could kick you into a significantly higher tax bracket.
  • Inflation can severely erode your retirement income. Do you really want your pension income to be reduced for the next 20-30 years.
  • The “break-even” payout for the PLOP option compared to other options is usually before your life expectancy. So if you choose the PLOP option, you will likely get less total money if you live a long time.

 

Careful readers will quickly notice that these warnings are very similar with both options!  When you look closely at the math, these are generally a bad idea. If you live long time, then you will likely be better off by forgoing these two options. In certain cases, they can make financial sense, but not often!

 

Check back next time as we dive deep into the math to determine what rate of return a hypothetical investment would need to earn to give you more total money than a pension life annuity. If you are fortunate enough to have a pension, then make the most of it!. To download the full “How to Retire from a Large Corporation” eBook you can find it here.

 

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This is the 8th of many blogs we are writing to help you finish strong in life. Much of the content is pulled from an eBook we wrote entitled “How to Retire from a Large Corporation.” Click here to download the document. If you would like to discuss any of these topics in more detail, you can schedule a time to talk through this link.