Episode R: Retirement - what now?

Welcome to Retirement A to Z, I’m Sue Burnett w Monarch Financial Advisors, and this series focuses on Qualified Retirement Plans. 

This is Episode R, where we’ll be discussing what happens when you reach your retirement date.  You've worked hard, and now the day has come – you’re ready to retire! Now what? What happens with your retirement plan if you’re a business owner? What happens to the money that’s in your plan? What happens if there’s life insurance in the plan? What about Social Security?

Take a listen!

Have any questions? Shoot me an email at MonarchFinancialAdvisors@gmail.com. 

Thanks for listening in! 

Transcript

Welcome to Retirement A to Z, I’m Sue Burnett w Monarch Financial Advisors, and this series focuses on Qualified Retirement Plans. There are a lot of moving pieces with these plans, and the rules are complicated and complex, so we’re going to break them into smaller pieces – 26 pieces, to be exact, from A to Z, with maybe a few extras thrown in for good measure. 

This is Episode R, and it’s only fitting that we talk about Retirement! You work hard, and now the day has come – you’re ready to retire! Now what? What happens with your retirement plan if you’re a business owner? What happens to the money that’s in your plan? What happens if there’s life insurance in the plan? Let’s talk it through. 

So you’ve gotten to the point where you’re ready to retire, and you have your retirement savings that have been built up in this qualified plan over the last few years, and … now what? What’s next?

First of all, your final benefit will be calculated, and you’ll have some decisions to make with regard to that benefit. We cover this in detail in Episode D of our podcast, for “Distributions” – most of the time, the money will be rolled out into an IRA, and no taxes will be paid at that point. When the money comes out of the IRA, into your pocket, that’s when you’ll pay income tax on it.  You certainly have the option to take the money right then and there – but you’ll have to pay income tax on it, as well as a 10% excise tax if you’re under age 59 ½, so think carefully about whether you want to do this. 

If there’s insurance in the plan, there’ll be some additional paperwork that you’ll get, because you can choose to keep the insurance if you want, or not. If you don’t want it, the policy is surrendered within the trust, and the value of that policy is included in your total plan benefit. If you want the policy, then the ownership is changed from the plan to you, and the value of the policy will be taxed as income because you’ve taken a distribution. At that point you have an after-tax policy to do with what you wish. As an example, let’s say you have a $250,000 benefit due from your pension plan, and $50,000 of that is the value of a life insurance policy. This means that the other $200,000 will come from the general investments of the plan. If you want to keep the insurance, you pay taxes on the $50,000, and then you can roll the other $200,000 into an IRA if you’d like. If you don’t want the policy, it’s surrendered, and the $50,000 gets thrown into the general investments. Then, you have $250,000 to roll into an IRA. You’ll get the $250,000 either way – it’s just whether that $50,000 stays as a cash value in insurance, or becomes cash. 

If you’re the business owner, and the next owner doesn’t want the plan, then the plan will be terminated. This shuts the plan down totally – final benefits will be calculated for all of the participants, and all of the money that’s in the trust will be paid out, with the employees getting first dibs, and the owners getting what’s left. Everyone is immediately vested when a plan terminates, so even if an employee has only been there for a few years, they’re entitled to the entire benefit that they’ve accrued up to that point. Once the employees are all paid, the owner gets the rest – if it’s less than you’re due, you can put in a contribution – which is deductible – to fund it up to where it should be. If it’s MORE than what’s due, hopefully the plan can be changed to increase your benefits, so that you can get all of the money out of the trust. If not, then the excess money – whatever’s in the trust that’s above what your benefit is - reverts back to the company. The excess amounts get hit with a 50% excise charge, plus income tax, so the company will get maybe 10-20 cents on the dollar. If you’re an owner, and you are considering retiring in the next year or two, make sure you talk to your administrator to make sure the plan isn’t over funded, that’s a bad thing. 

Termination is a lot of paperwork, but as long as the plan has been in place for 3- to 5 years, it’s a process, but not a big deal. Once the last dollar is paid out, the plan is done – there’s no more qualified plan. 

So, now you may have an insurance policy, and an IRA. What can you do with that? Whatever you’d like! If you want to keep the IRA as a lump sum, and pull money out as needed, great. There is a fear for a lot of new retirees that you’ll outlive your income – that your IRA will get down to zero, and you wont have any money to live on. Well, one option when you retire is to take your retirement benefit and roll it into two different IRAs. One can stay as a lump sum, and the other can be “annuitized”, or provide an income over your lifetime. This way, you still have a portion to draw from like a savings account, but you’ll also be receiving monthly payments from the other. If the lump sum account runs out, you’ll still have the income from the monthly payments, plus social security, coming in. 

Speaking of social security, I often get asked “when should I take my social security benefits? Should I take them as soon as I’m eligible for them?” My answer is “it depends”, because no one answer would be right for everyone. Social security is reduced about 6% per year from your retirement age to when you start taking it – so, if your retirement age is age 67, and you start taking benefits at 62, your benefit will be reduced by 24-25%. It’ll then go up with cost of living adjustments each year, which may be 2-3%. Now, if you knew you were going to pass away by the time you were 66, it would make a lot of sense to take those 4 years of payments! But most of us don’t know when our last day on earth will be … I can tell you that mathematically, it’s a question of whether you believe you’ll live to age 80 or so. If you believe you’ll pass away before that, then you should start your social security benefits early. If not, then it makes more sense to hold off, and receive higher benefits at a later date. 

So that’s the social security story. Will social security still be around when you retire? I would say yes – maybe not in the same form that it is now, but it’s way too big to go anywhere, in my opinion. 

Wrapping it all up – when you’re ready to retire, you’ll have the option of how to get your retirement benefits out of the plan, including keeping an insurance policy going, if there’s one in there for you. If you’re the owner, and your retirement means the plan is done, then the administrator will put the plan through a termination process, which is a bunch of required steps that ends with paying out every last dollar in the trust. How you, and the other participants, receive your benefits is up to you – roll them over, take as cash and get taxed, it’s a decision that each person will make with regard to their own benefits. Remember, if you’re the owner and you’re considering terminating the plan, coordinate with your TPA, your third party administrator, to make sure the plan isn’t overfunded and that you can get all of the money out! 

Wanna learn more? Tune into the other a to z podcasts where we continue to break down these wonderful and complex plans into bite size pieces. Remember, how do you eat an elephant? 1 bite at a time. Have any questions? Shoot me an email at MonarchFinAdvis@gmail.com. Thx for listening in and have a great rest of your day!