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Pensions · Money In Motion with Klaas Financial

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This is money in Motion with Class Financial, a fun and informative show designed
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to help you get answers to all your retirement questions in one place. And
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the phone lines they are open for you right now at six O eight three
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two one thirteen ten. That's so eight three two one thirteen ten. If
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you have questions for our retirement planning professionals from Class Financial love to get you
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on the air this morning again, the studio line here at the station for
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So kind just head on over to Class Financial dot com. That's Klaas Financial
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dot com. Their telephone number six O eight four four two five six three
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seven No charge for that initially. Get to know your appointment at Claus Financial.
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It is complimentary to you. Again the office number six eight four four
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two five six three seven and to get on the air this morning with Malia
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and CJ. Six eight three two one thirteen ten. It's three two one
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thirteen ten. Speaking up. CJ. Malia, guys, how are we
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doing this week? Doing great? How are you sewing? I'm doing really
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well. Great to hear from you A CJ. Malia, how are you
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today? Very good? Everything's blooming and my nose feels it. It's beautiful,
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though it's always kind of that yang and the yang, Yeah, but
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it is, yes, And we've got we've got a really interesting and important
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conversation, especially for folks who have this, have them pensions, and we're
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going to get into pensions. And I know obviously here in Madison, Dane
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County with the state capital and a lot of government workers, I know a
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lot of them. This will definitely apply to them. But great information as
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well, just to learn a thing or two. We'll talk about that and
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just a moment a couple of things to keep in mind throughout the program.
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Of course, it's an open form. If you ever have questions, it's
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a great opportunity to ask of us. Call six eight three two one thirteen
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ten. We'll get you on there with CJ and Malia. Also great opportunity
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a little bit later on the program to win a fantastic prize with the Class
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Quiz Question the Week. This week you'll have a chance to win a twenty
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five dollars gift card two Best Buy provided by our friends at Claus Financial'll tell
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you a little bit later on the show how you can win. That's a
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little tipped. I would pay particularly close attention to the program because typically the
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question and answer come up during the show, and before we start talking pensions,
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let's actually take a look back at last week's Class Quiz Question the Week
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and get the question and the answer there as well. Yeah, so last
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week we talked about what you can add into your retirement plans when it comes
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to, you know, looking at your future retirement, what you should be
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doing today with perhaps your four O, one K or four three B.
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So our question of the week was what is the total amount that you're allowed
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to add into such retirement plans if you're over fifty in twenty twenty three?
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Is it twenty five thousand dollars or thirty thousand? That would include a catchup
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and Carl of Madison correctly answered thirty thousands, So write that down. So
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if you are over fifty, that is the amount you can contribute in twenty
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twenty three. Thanks for listening. Listen carefully for today's question, another great
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price, say twenty five dollars gift card to Best Buy. And we've got
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a fantastic conversation about pensions this morning and the different choices surrounding them. If
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you're entitled to one, what should we be aware of before making that choice?
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CJ. Yeah, So the landscape on on the number of retirees who
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receive pensions has changed quite a bit in the last few decades. For those
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who don't know, we're going to kind of dig into the difference here between
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defined benefits and define contribution plans. And so these are kind of the typical
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broad two categories that that corporations will provide. And when I say corporations,
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the really corporations, local governments, municipalities, federal governments. They will provide
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retirement plans to their employees in one of these two categories, or in some
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cases actually both of them. So again broadly, they are known as defined
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benefit plans and define contribution plans. So and by the way, Again,
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our industry loves acronyms, So define benefit as dbs, defined contributions as dcs.
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So in some cases employers of private industry workers and state local governments again
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have access to both of these benefits. But just to put that in a
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numeric percentage, twelve percent of private industry workers and thirty four percent of state
4:31
and local governments had access to both, so it's a pretty small percentage of
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all the employees that are out there. A pension is just one of many
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types of retirement plans. Again, defined benefit dbs are synonymous with pensions.
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So when you hear defined benefit, think pension. And by the way,
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I always hated how similar these terms are, defined benefit and define contributions,
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So here's an easy way to think about it. Define benefit pension plan has
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a defined benefit meaning a future income stream, but it does not have a
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defined contribution. So again defined benefits that our pensions have a defined future income
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stream, but there's not a defined contribution. So that's one easy way to
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think about it. But a participants retirement there's different things that impact the benefit,
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so that would be things like participants retirement age, the length of their
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service, earnings, they had before they retired. A few different things impact
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that future benefit that you will receive. If your employers, say, promises
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to pay you three thousand dollars per month after you reach age sixty five,
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again, that would be an example of a defined benefit plan. Your employer
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made a promise to pay you a certain amount of money in the future,
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and that's where the term kind of pension defined benefit comes from. Talking this
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morning with c J. Claus and Malia Quavis, our retirement planning professionals from
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Class Financially. If you've got a question, let's get you on the air
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this morning six eight three two one thirteen ten. That's six o eight three
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two one thirteen ten and Jeff from Darlington joins us this morning. Jeff,
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welcome to the program. You're on the air with c J. Class and
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Malia Quavis. Good morning, everybody. How are you doing today? Doing
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great? Thanks for calling in. Jeff, Yeah, Hey, I've just
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had a quick question for you. I have a pension to the state of
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Wisconsin, and that's just relevant to the conversation today. But I also have
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a fifty year old retiree. I've served about thirty years in law enforcement,
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and I have a four fifty seven B through the State of Wisconsin that I
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don't really need to use right now. Yeah, but it's fair and it's
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available to me. And I was wondering, since I'm not employed anymore,
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I'm not using that account right now. If I rolled it over into an
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IRA, will I still be able to access access that fund at my current
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age of fifty Such a great question, Jeff, So a couple of things
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here. First things first, thank you for the service that you provided to
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everybody. Appreciate you being in law enforcement. That's a tough job these days.
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Number two, you may know this, but as it relates to your
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pension plans, your employee Trust funds pension plan, because of the type of
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service you are doing, you actually well you know this because you retired earlier.
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But your benefit is larger as a percentage of what goes in there than
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it would be for other workers. It's like the rate they apply, and
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it has to do with the risk that you took on. So as a
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law enforcement officer, your pension can become larger faster. And then as it
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relates to your question, though I'm sorry I'm rambling, it relates to your
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question. The four fifty seven B I, can you roll it over to
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an IRA and still have the ability to access it now? And the answer
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is no. Now, some people don't know what you're talking about, Jeff.
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They're like, what do you mean access it now? You know you
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can't touch it till fifty nine and a half. That's not true of four
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fifty sevens. Everybody who's listening out there, Jeff knows us, but maybe
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not all of you do. Four fifty seven's actually offer the ability to access
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the money before fifty nine and a half without a penalty, But if you
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roll it over to an IRA, then fifty nine and a half prevails.
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So Jeff, there could be well, there's a bigger dialogue to be had
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here about what kind of four fifty seven it is, how it would work.
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But I would say you is be ever so cautious about rolling that over
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because my understanding is then fifty nine and a half would prevail. Excellent question.
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Thank you for the call, great questions. It's great to hear from
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you, and I love those questions and a really really good one. And
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if you've got a question for Malem CJ love to get you on the air
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this morning, six eight three two one thirteen ten. That's six eight three
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two one thirteen ten and CJ. If we would have been doing the show
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ten fifteen, twenty years ago, the conversation might have been a little bit
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different as far as pensions. Correct. Yeah, So, according to the
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Bureau of Labor Statistics to find benefit plans were more prevalent for state and local
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government workers in twenty twenty two, whereas defined contribution plans were more prevalent for
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private industry workers. Again in twenty twenty two. Now only fifteen percent of
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private industry workers had access to a defined benefit pension plan, compared with eighty
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six percent of state and local government workers. And again to your point,
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shown one percent of Americans retiring had access to a defined benefit pension plan.
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So you can see that those numbers are coming down in terms of access.
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Now, I will just say, kind of off the cuff here, people
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say, why is this happening? I mean, I know my grandfather worked
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somewhere for thirty years and he had a pension, and between his pension and
9:41
Social Security he's living pretty comfortably. Why do I not have access to this
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anymore? Well, for like Jeff the gentleman who called in he still has
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access to a pension. He worked for the police force. Others may,
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but many private sector workers do not. And here's the reason why they're a
9:56
big risk to the employer. I mean, you can imagine if you put
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money into some group insurance bucket through a defined benefit plan, and I have
10:07
to pay you, as an employer three thousand dollars a month for the rest
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of your life when you retire from my place at sixty and you lived in
10:13
ninety five, that is a huge cash drain to my corporation over the court.
10:20
And it's an unknown cash drain. If you die early, I might
10:22
be okay. If you dilate, it's a big problem for me. So
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effectively, corporations, as people have started living longer, corporations have said,
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you know what, I just want to give you the money and say when
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you retire or leave, good luck, right, and the money's yours.
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So that's why four when K plans have become more prevalent amongst private employers,
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especially because they don't want the risk of your longevity. That's the key here,
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they don't want the risk of your longevity. I actually counsel corporations against
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using to find benefit pension plan because of the risk it represents to the corporation
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and all the funding that they have to do of it. So you should
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expect, I would imagine to see less and less private sector employers offering to
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find benefit pension plans because of what I just mentioned. Talking this morning with
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CJ Class Emilia Quavis, i'll retirement planning professionals from Class Financially. If you've
11:18
got a question, love to get you on the air this morning six three
11:20
two one thirteen ten. You can learn more about Class Financial on their fantastic
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website Class financial dot com that's Klaas Financial dot com and their telephone number for
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the office right here in Madison six O eight four four two five six three
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seven. No charge for the nationial gets no employment at Class Financially. It
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will be complimentary to you again their telephone number six O eight four four two
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five six three seven. So as we're kind of breaking down why there are
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so few private sector pensions out there, CG any more information on that?
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Yeah. The only other thing I just quickly mentioned everybody is don't forget about
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your former employers. This happens quite often as people will come in and say,
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you know, I've worked at three or four different locations. I'm not
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quite sure what they had available, And it turns out after doing some digging
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that they have two old four O one gays and an old defined benefit pension
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plan from the state that they used to work for. So as you're jumping
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between states, because of course our communities are more transient now, they'll move
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from state to state. They might work for the federal government than a private
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employer, and what can happen is you can lose track of all of these
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benefits and they can be pretty substantial. Now, typically it'll get found out
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at some point you'll get a notice from Social Scurity Administration about something you left
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behind, or you'll get notice from the employer because they'll find you. But
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it's more about you're not planning appropriately right. You don't know what you have
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and therefore you're not able to actually plan for when you can retire. So
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our biggest encouragement would be keep track of all the places you used to work,
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along with the benefits you have there, and make sure that you're either
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consolidating them or continuing to get statements as you move to new addresses. Talking
12:56
this morning with CJ. Clossom Lea Quavis, I'll retire and planning professionals from
13:01
Class Financial phone lines are open. Love to get you on the air this
13:03
morning with your question. Telephone number at station six O eight three two one
13:07
thirteen ten. That's three two one thirteen ten. If you haven't been to
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Class Financial yet this morning dot com check them out online Class Financial dot Com.
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Great website there and they're telephone number six O eight four four two five
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six three seven. That first appointment, it is complementary to you again,
13:22
they're telephone number six O eight four four two five six three seven. Some
13:26
big decisions in very important decisions that you don't want to take caphazardly when it
13:31
comes to pension choices, when it comes to how you choose to work out
13:37
that pension. We'll talk about some of the details with Malia and we will
13:39
take your call next as Money in Motion with Class Financial continues here on thirteen
13:43
ten WIBA. This is Money in Motion with Class Financial, a fun and
13:52
informative show designed to help you get answers to all your retirement questions in one
13:56
place. Talking with our retirement planning professional CJ. Closs and Malia Quaevis.
14:01
Of course They come to us from Class Financial online. Class financial dot com
14:05
that's k l a as Financial dot com. They have a great website you
14:09
can learn more about Class Financially. You can also sign up for the weekly
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Market Pulse newsletter that all available at class financial dot com. Their telephone number
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six O eight four four two five six three seven that first appointment, it
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is complementary to you. Again the telephone number for Class Financial six O eight
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four four two five six three seven. And to get on the air this
14:28
morning with your question six O eight three two one thirteen ten. That's six
14:31
O eight three two one thirteen ten talking pensions this weekend. What should someone
14:35
know before they retire when it comes to their pension choices that may be offered
14:41
Malaya. Yeah, and hopefully this education will you know, assist you when
14:46
you open up that that packet you know in the future and you're like not
14:50
freaking out, like what should I pick here? So hopefully this will resound
14:54
with you as those choices come up. I just wanted to feed off something
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c Jay just mentioned though about remembering those old employer pensions, because honestly,
15:05
people just can't remember where they worked half the time. But the caveat to
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that also is maybe you had a former spouse that had a pension, and
15:16
perhaps you won't realize any income from that former pension of your former spouse unless
15:22
you seek it out. So some of those things today are handled in the
15:26
courts going when you go through a divorce, But many of those old pensions
15:31
that are out there, you may have a right to some of them that
15:33
you were, you know, previously entangled with with a spouse. So keep
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that in mind as you're building out your future retirement income with pensions. But
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now when we're talking about actual choices when you go to retire, you're going
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to see a list of choices if you're vested in your pension plan, and
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you'll have to choose how am I going to receive those benefits. And you
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have to remember that the whole idea of the pension plan is to provide you
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with that steady stream of income once you're retired, similar to your Social Security
16:04
benefit. So normally pension benefits are paid in the form of lifetime monthly benefits.
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Hence that's why, as CJ mentioned, we can't and companies don't want
16:15
to be on the hook for thirty five years so when you have choices and
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we're going to review those in a second, employers are making available sometimes these
16:27
days also one time benefit, meaning a lump sum benefit payout option, So
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you want to be very careful if you have that opportunity. One thing you
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need to understand is once you sign the paper, the paperwork can make those
16:41
choices. Generally it's irrevocable from that day forward, So you really want to
16:47
steady what those choices are, which one mathematically makes the best sense. And
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so that's where we tell you slow down, don't just mark a box and
16:56
hope it works out, you know, really sit down with your financial planner
17:00
and see if this type of income stream that they're offering you is the best
17:06
choice of perhaps the four. So the four choices, generally speaking are number
17:11
one a single life and that's usually the highest monthly payout. So you have
17:17
to understand though, that this payout ends when you pass away, and so
17:21
there's no residual going to a spouse or inn a state if you choose single
17:26
life. And this can make sense even for a married couple. It depends
17:30
on the other sources of income. And again, none of us knows how
17:33
long we're going to live, so you know, looking at that higher payout
17:37
may make sense in a certain situation. The second choice generally is fifty percent
17:44
joint and survivor. Now, this is where you're going to take a lower
17:47
benefit, lower monthly payout now, but upon your death, your surviving spouse
17:52
will get fifty percent of your current benefit. So this is vital that you
17:56
understand these choices because when we're dealing with retirees, many times retiring sooner than
18:03
later, we want to make sure that there's an adequate income for you now
18:07
but also in the future if one of you would pass away, and most
18:11
generally the spouse has to sign off on these choices so that they're aware of
18:15
what will happen in the event someone passes. A third choice is one hundred
18:22
percent joint and survivor. Many times this is perhaps i'd say more common than
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not, but you have to understand this is usually a lower amount of benefit
18:30
now, because upon your death, your surviving spouse will continue to receive that
18:36
same benefit. So whatever you're getting maybe two thousand and three thousand dollars a
18:41
month, it will remain the same going forward. But again it's not as
18:45
high of a benefit as a single life would have been for you. There's
18:48
also life number four. Life was ten years certain, so this payment is
18:52
guaranteed to be paid out for a minimum of ten years and will continue as
18:57
long as you live. But if you die prior to ten years, the
19:00
payments will continue through your ten So there's some different choices. We're just giving
19:06
you the most common ones that we typically see with pension packets. And then,
19:11
finally, as I mentioned earlier, lump sum, So you could receive
19:15
a lump sum and then from there you could roll it into an I array
19:18
and we would say this probably offers the most flexibility. The money is coming
19:22
in to quote your estate. If you pass away tomorrow, that money can
19:26
be rolled out to beneficiaries. But that's not necessarily the right choice for everyone.
19:33
So again you want to hesitate and look if that makes sense to you.
19:37
Sometimes we look at the way in which people are able to manage their
19:40
own money, and quite honestly, a pension coming out for the rest of
19:44
their life may make the most sense. On the other hand, for us,
19:48
we like to see the most flexibility there because you don't know what retirement
19:52
is going to look like exactly, and so sometimes having that lump sum option
19:56
could make the most sense as long as you're on a guided path, So
20:02
just tread carefully, sit down with someone and just carefully revoid review those choices
20:07
before you just mark a box. Really great choices, but you gotta make
20:11
sure you're choosing the right one, and that's an important thing to consider.
20:12
And we're talking, of course this week about those pension options if you do
20:17
have one, and pensions in general. We'll talk about that option of the
20:19
lump sum one of the things and some things to consider if you do think
20:23
about taking it. Kind of some planning on that. We will do that
20:26
next to the class quiz question the week. If you have been to the
20:29
website yet class financial dot com, check them out online class financial dot com.
20:33
That's klaas Financial dot com and the telephone number six O eight four four
20:37
two five six three seven. No charge for that initial gets to no you
20:41
appointment deck Class Financial. It will be complimentary to you. Again. They're
20:44
telephone number six O eight four four two five six three seven. We'll talk
20:48
about that lump sum option and we'll do the class quiz question the week.
20:51
Next is with te to our conversation with c J. Class, Amalia Quavis
20:53
and Money in Motion with Class Financial right here on thirteen ten WIBA. This
21:00
is Money in Motion with Class Financial, a fun and informative show designed to
21:06
help you get answers to all your retirement questions in one place. Talking this
21:11
morning with our retirement planning professionals, c J Class and Malia Quavis. Of
21:15
course, they come to us from Class Financial online, Class Financial dot com.
21:18
That's Klaas Financial dot com. They're telephone number six to eight four four
21:23
two five six three seven. No charge for financial to get to new appointment
21:26
a Class Financially. It is complimentary to you again the telephone number six to
21:30
eight four four two five six three seven. Talking pensions this week, and
21:34
just before the break, Malia, you had mentioned some options, the common
21:38
options when it comes to pension choices, and CJ that lumps some option.
21:45
I think a lot of people hear that and they say, oh, that's
21:48
interesting. There are some things there though, to consider before just jumping in
21:51
right. There definitely are. As a matter of fact, I'm gonna kind
21:53
of go off script here for a moment and just mention something as it relates
21:57
to these pensions, and then I'll kind of dig down into some of the
22:00
considerations. But here's the thought. If I get a defined benefit pension plan,
22:06
I get a steady amount of income for an unknown period of time.
22:11
The unknown period is how long either I live or if I take a survivor
22:15
benefit, how long I along with my spouse live. Right, So it's
22:18
an unknown amount, but I can create a math equation to come up with
22:22
my expectation of that. I can say three thousand a month until age ninety,
22:27
right, and I can just say, okay, that's that's the income
22:30
I would I would receive, assuming there's no cost of living adjustment on that.
22:34
So the question becomes done. Well, if I take a lump sum,
22:37
I am foregoing that three thousand dollars a month. Right. That's the
22:40
whole point is I get a lump sum. I no longer have the three
22:42
thousand a month, but now I have the lump sum. The good news
22:45
is if you do that, and Molly already mentioned this, obviously, if
22:48
you die one or two years in that was a smart choice, right,
22:52
because you got the lump sum, it's part of your state and the income
22:55
is not lost. So that's that's a no brainer. However, the question
22:59
would be if I took at lump sum and then started a three thousand dollars
23:03
a month income stream off of the lump sum, what rate of return would
23:07
I need to receive in order to get three thousand a month until age ninety
23:12
like in my former projection. This is known as what is called an internal
23:18
rate of return an IRR. So what we would suggest that you do is
23:22
you actually compare these things before you would ever take a lump sum. We
23:26
suggest you have a financial planner or your accountant do an IRR calculation because it's
23:32
called a hurdle rate. You are wanting to get an understanding of what your
23:34
hurdle rate is. The hurdle rate is the amount I must get or more
23:38
to equal what I would have received in income and if I had just left
23:44
it in the pension. So I know these are hard things to describe on
23:48
radio, but I hope that makes sense to our listeners. It is critical
23:52
if you are going to consider a lump sum pension that you are aware of
23:56
your IRR, which is known as your hurdle rate. Okay, with that
24:00
being said, here's some other considerations. If you take a lump sum.
24:03
The responsibility for managing the money shifts from your employer to you. Let me
24:07
repeat that, if you take a lump sum, the responsibility and risk of
24:12
the management of that money goes from your employer to you. In addition,
24:17
you increase the risk of outliving your money, because of course with a pension,
24:19
you can't outlive it. As long as the company doesn't go belly up,
24:22
you can't outlive the pension, whereas in the case of your four O
24:26
one K, if you don't manage the money right or if you live too
24:29
long, you can run out. And so you know, that's just something
24:33
for you to be aware of. There's another consideration would be how confident am
24:37
I in the stability of the employer where who's giving me the pension, Because
24:44
if they go out of business, then the pension would be turned over to
24:47
what's called the PPGC Pension Benefit Guarantee Corporation, and they don't typically pay a
24:52
hundred cents on the dollar, So then there's this question of stability of the
24:55
employer that is paying me the pension. Another consideration would be what is my
25:00
spouse have or what other sources of a guaranteed income are available to me?
25:04
If you already have a lot of guaranteed income sources, then you might want
25:08
to consider the lump sum because you don't need more guaranteed income that's going to
25:12
force you to pay more taxes when you just don't need that income coming into
25:17
your checking account. And then you know some questions to ask is are you
25:22
taking your pension in a lump sum because you're worried that you may not live
25:26
long enough to get the money back. So this gets into longevity. If
25:30
you if everybody in your family died at seventy and you're retiring at sixty five,
25:36
you might not want to take the pension because you're not going to live
25:38
long enough to recoup what you would have received in a lump sum. So
25:42
family medical history starts to start to matter in this case. So here's the
25:48
point. We're not giving you everything on this list, but we're giving you
25:51
some thoughts. Highly encourage you, when you have a pension that offers both
25:55
a lump sum and multiple claim options, that you sit down with a financial
25:59
advice wiser to come up with what's best for you and your family. Important
26:03
considerations. As always this week with our retirement planning professionals from Claus Financial CJ
26:07
Class and Malia quaevis one last thing before we get to the claus quiz question
26:11
leak, because I know everybody wonders about this, which is distributions for my
26:15
pension. Malia, do you have to pay taxes? Just Sean Sean has
26:19
penned, but yes, yes, most pension benefits are federally taxable, so
26:23
keep that in mind. However, you know, if you live in the
26:26
state of Wisconsin, you're looking at income from retirement accounts, pensions, distributions
26:33
from I raise there is there is taxes. However, income from a government
26:37
pension, for example Wisconsin retirement system is not taxable. So you can move
26:42
to a state if you're getting a pension that perhaps doesn't tax such as Alaska
26:48
and Florida and Illinois and so forth. But be careful when you're signing again
26:52
like Okay, I'm taking this pension, I live in this state, and
26:56
understand your tax implications. Well, and just to Clara, I think I
27:00
think William mentioned this, but she said it's not taxable, not stayed income
27:03
taxable. So again federally income taxable, not state income taxable. And then
27:07
you just need to be aware of the state you live in. Absolutely fascinating
27:11
stuff. A great show this week. As always, if you miss any
27:12
part of the program, you could always listen back at klass Financial dot com.
27:17
That's Klaas financial dot Com. Also listened to previous shows as well.
27:22
Share those with your friends and family. Don't forget also to sign up for
27:25
the weekly Market Pulse newsletter that at class Financial dot com. That's Klaas Financial
27:30
dot com. Telephone oper for the office here in Madison six O eight four
27:33
four two five six three seven. No charge for that initial gets to no
27:37
you appointment at Class Financial. It is complimentary to you again the number six
27:40
O eight four four two five six three seven. Speaking of Class Financial's office
27:44
here in Madison. Time now for the class quiz question the week. It
27:47
works like this and just a moment, I'll ask you the class quiz question
27:49
the week. You will then, if thirty minutes from the end of the
27:51
day's program to call the Class Financial office right here in Madison at six O
27:55
eight four four two five six three seven. If you are the first call
27:59
correct answer will win this week's prize, which is a twenty five dollars gift
28:02
card. Two best buy. This week's class quiz question, the week.
28:06
Is this which pension choice will provide my spouse with the same monthly benefit if
28:11
I should pass away? Is it one hundred percent joint and survivor or a
28:17
single life pension? Telephone number six O eight four four two five six three
28:22
seven first call correct answer one, the twenty five dollars gift card two best
28:26
buy and again that's Class Financial's office right here in Madison six to eight four
28:30
four two five six three seven see Jamilia. It is always great chatting with
28:33
you guys. You enjoy this fantastic day. Thanks. Son News is next
28:37
here on thirteen ten WIBA. This is Money in Motion with Class Financial Asset
28:47
Advisors LLC, a registered investment advisor registered with the SEC. The content of
28:53
this show is for informational purposes only and should not be considered individual investment advice.
29:00
Class Financial does not offer tax or legal advice. Any opinion offered during
29:04
the course of this show is the opinion of that particular investment advisor representative,
29:08
and not necessarily the opinion of Class Financial