Advanced Personal Finance

Until recently, I worked for one of the few remaining companies to offer a real, old-fashioned pension.  When I quit a few months ago, I did something I’d read you’re never supposed to do.  I cashed out and took a lump sum from the pension plan.  Here’s why I did it.

My old employer is one of the few that still offers a pension (only 11% of private employers still do, according to the BLS and the Fed).  Well, they still kinda offer a pension.  A couple of years ago they stopped contributing to the plan.  You didn’t lose anything if you worked there, you just didn’t get anything more than what was already there.  Since 1985, the commonality of defined benefit plans (i.e. ‘pensions’) has dropped off a cliff.  For most people going forward, retirement savings depends almost entirely on defined contribution (i.e. IRAs and 401(k)s) plans and Social Security.

When you leave a company that has a pension, though, you have a choice to make.  You can either take your pension as a lump sum or take the annuity (monthly payments).  It wasn’t even close - I took the lump sum for four reasons.

1. There were no negative tax consequences of doing so.  I was able to roll the money directly into an IRA without paying taxes or penalties.  This was a biggie.
2. I strongly suspect I can achieve greater returns investing the money myself.  Not because I’m some genius investor (check out my super-duper asset allocation) but because I have a long time horizon and am risk tolerant.  Pensions have a lot of advantages when investing money, but they can’t lose money.  I’m not in the position of having to pay out money every quarter.  With the money in an IRA, I can literally invest in anything.
3. The array of choices for the annuity was ridiculously lengthy and confusing.  Seriously, there were easily twenty-five choices for how you could get the annuity.  I like to think I’m a reasonably smart guy, but I couldn’t make heads or tails out of that list.
4. It is a reasonable possibility that by the time I retire in 30 years that money won’t be there if I’d left it in the pension plan.  Pensions not only suspend contributions like mine did, they also fold completely like several airline pilots’ plans did in 2005.  And while there exists the federal Pension Benefit Guaranty Corporation that’s supposed to insure against it, the PBGC is hurting real bad.

The process itself was pretty straightforward.  Fill out a couple of forms, get them notarized (In my case twice.  Don’t ask.) and tell the pension manager where to send the money.  I actually never saw the money in the form of a check.  Strangely, they could send the money directly to my investment company (USAA) but I couldn’t do that with my 401(k) money.  In the case of a 401(k) rollover, you get a check made out to the investment firm and you send it to the them.  Whatever.

So that’s it.  I was able to put something like $30K into my IRA instead of leaving it with the pension fund.

It’ll be a little something extra come retirement time.

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If you or a loved one is in the military and is or is about to be deployed to a hazardous duty zone, there’s a great federal program that gives you a guaranteed 10% interest on savings up to $10,000.  It’s a great program I learned about recently offered by the military called the Savings Deposit Program (SDP).

Savings Deposit Program

Not to be confused with the Thrift Savings Program (TSP), the Savings Deposit Program is an awesome way for deployed military members to earn a great, guaranteed return on their savings.  By participating in the SDP, you are guaranteed to earn 10%, compounded quarterly, for as long as you’re deployed in a combat zone.  10% Guaranteed!  That’s phenomenal.  It would be a very respectable return in any environment, but with interest rates as low as their are right now and the volatility in the stock market, this is practically unbeatable.

The SDP has several key eligibility requirements:

• You must be an officer or enlisted member of any U.S. military service
• You must be deployed to a ‘hazardous duty zone’ for the period of time you participate in the program
• You must be in that combat zone for at least 30 consecutive days or one day in each of three consecutive months

Key things to know about SDP

Besides the stringent eligibility requirements (it sucks to be in a combat zone), there are a few key points about the program to be aware of.

• To participate in the SDP, you submit your deposit through your pay office either in cash or check, or you can set up an allotment out of your LES.  Obviously it’s to your advantage to deposit as much money as you can right at the start of eligibility since it gives you the most opportunity to earn the 10% interest.
• You’re limited to a $10,000 deposit in the program.  You can actually deposit more, but since anything over $10,000 doesn’t accrue interest, why would you?  This might be important to note if you participate by allotment.  Once you reach $10,000, you should stop the allotment.
• You can’t withdraw your deposit until after you redeploy except in extreme circumstances.  Don’t put in any money you might need before you get back.  On the other hand, your spouse can’t get at the money either, so that might be an advantage to some people.
• You can actually leave your deposit in the plan for 90 days after you return and it keeps earning interest.  After that, it stops earning anything, so you should close out the account.  Again, you could leave your money there, by why would you?
• Though your pay in a combat zone is free from federal tax, the interest earned in this program is not.

The Savings Deposit Program is simply a great benefit to the generally cruddy situation of being deployed to a combat zone.  I highly recommend looking in to it if you or a loved one is about to be deployed.

Links of interest:
DFAS homepage
SDP information pamphlet

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I freely admit that I am not in tune with the cost of health insurance in the U.S. That’s because I’m one of the fortunate individuals who has always had subsidized health care. First it was the parents, then the U.S. Army (that sort of counts as health care), and then a series of employers.

That’s why it was completely stunning to me to learn the total cost of my family’s health insurance. I just started a new job and as part of orientation, HR went over benefits. For my family of four, we’ll pay in the neighborhood of $150 every two weeks for what I would consider excellent coverage. What the HR person said during orientation, though, just blew me out of the water. My company picks up 75% of the cost of coverage.

That means that for my healthy family of four, the total cost of health insurance is about $1,200 per month!

For those of you without a calculator, that’s $14,400 per year. I couldn’t believe my ears. I actually asked the woman to repeat herself to make sure I heard correctly. I did.

Apparently that number isn’t too far out of line. According to this report by the Kaiser Family Foundation, the average cost of health insurance for a family is $10,880 per year (2006 numbers).

I just didn’t know how high the total cost of health insurance was. I’m ashamed of that. I mean, I’m a pretty well informed individual. I know that millions of U.S. citizens don’t have health insurance of any kind. In fact, according to the federal government’s own data, at least 47 million people (16% of the population) were without health insurance as of 2005 (the latest data available). What I didn’t know was just how high the cost is for those who do have insurance.

Sadly, none of this is going to change anytime soon, in my opinion. The three main contenders for the Democratic presidential nomination all talk about their (strikingly similar) plans for national health insurance. (It’s completely off the radar of the Republican candidates.) But the fact is this country has a disturbing tendency to wait until a policy is completely, obviously off the rails before doing anything about it. We’re not yet at that pain point as a nation. Don’t look for anything to change. Not yet.

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Something I just can’t figure out about some companies’ benefits - 401(k) waiting periods. Why in the world would a company limit how soon you can start participating in their 401(k) plan? It goes totally against the current movement toward automatic enrollment, yet some places it persists.

Why? The party line

I had occasion recently to take a look at the benefits package of a medium-size company that had a waiting period on their 401(k). When I did a little research, I could only find a couple of pretty weak reasons for a waiting period.

• 401(k) administration costs money, so a company wants to make sure you’ll stick around before incurring start-up costs. This doesn’t make sense to me for two reasons. First, these ‘administrative costs’ are tiny for each additional person in the plan. Second, how does waiting three months or six months overcome this objection?
• Means testing puts limits on contribution levels for participants if there are enough non-participants. I guess companies that have waiting periods figure you’ll start out as a non-participant and lower their means testing ceiling. Again, though, this doesn’t really make sense as the principal of inertia says people who have to take action to make a change tend not to do so. If you’re prevented from participating, even temporarily, in a 401(k) plan, your chances of never participating are much higher. By the time the six month waiting period expires, you’ve gotten used to your full paycheck and likely will have forgotten all about retirement savings. Dumb.

Regardless of the reason, 401(k) waiting periods exist at a shockingly high number of companies. The data I could find says a third of companies have a waiting period and a quarter have a one year waiting period! Simply amazing.

How to overcome a waiting period

If you do take a position at a company with a 401(k) waiting period, there are a couple of strategies you can employ so you don’t lose too much ground saving for retirement.

• Use an IRA as a substitute. You can use an IRA as a low-rent substitute for a 401(k) in a pinch. You have two choices - deductible (or ‘traditional IRA’) and Roth. In general, I think the Roth is the better deal, but it has no current-tax-reducing qualities, so if you’re looking to reduce your taxes this year, the traditional IRA might be for you.
• Save outside a traditional retirement plan. Once you’ve maxed your IRA for the year, you can start saving in a taxable investment account. This isn’t really such a bad idea, because you can use such an account for anything, not just retirement, so if something else comes up, the money’s there.
• Negotiate with the employer. This might seem far-fetched, but after a hiring manager knows he or she wants you, you have a bit of leverage. Traditionally, people just ask for more money. If the 401(k) is important enough to you, and you’re important enough to them, there may be room to move.
• Save outside the plan then save twice as much once you’re in the plan. Start saving in a savings account from day one of employment. Then once you’re eligible, make your contribution twice as much as you normally would and live off part of the savings account each month to fill in the gap in your monthly budget.
• Be more aggressive. Once you’re eligible to save in the 401(k), you can be a bit more aggressive with your asset allocation than you normally would, at least for a little while. This strategy isn’t without risk like the others are, though, so consider it carefully. Besides, being more aggressive is easy to say and hard to do sometimes.

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I just did benefits renewal at my employer. It’s a glorious time of year. You get to see how much more you’ll be paying to get worse coverage. And boy am I paying more. And oh, how it is worse.

At the top of the list for this crapenfest is health insurance. Now I am an educated man, but how the hell am I supposed to understand all this crap? I mean seriously. PPO, HMO, EPN, catastrophic care, indemnity option, out-of-pocket maximums, blah, blah, blah.

News flash for company benefits people - I’m not a health insurance expert. That’s not what I do for a living. I don’t know the difference between a PPO and an EPN and I don’t want to know.

Here’s what I need: reasonable medical coverage for a reasonable price.

Is that so hard to deliver? Apparently it is.

And no wonder. Have you ever seen the little form your doctor uses to select what services he or she performed during your visit? It’s two pages of 8-point font. Then the office staff has to translate that into a code for each and every insurance they take. Is there any wonder billing screw-ups are routine? If you don’t have one of these stories, either you’ve never used health insurance or you’re not trying hard enough.

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