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L1: where to beginI will be retiring at age 56 in just a few months. My employer offers a lump sum pension option, which I plan to take. I will need to take monthly payments right away. My son wants to manage my account and thinks by investing in stocks he can get me a higher yield than a typical financial planner, but I have no idea where to start. I know i have to roll it into a qualified IRA, but then what?. What type of professional should i initially consult. Can anyone provide some advice as to how to get started.2010-05-06 01:03, By: bobbi, IP: [69.14.178.182]
L2: where to beginBefore getting investment advice (from anyone including your son), start with making a budget so you will know how much you will need to meet currrent expenses.
Once you have a budget, then look at assets and determine what income it will provide – in today’s environment, try using an average return of 3% or 4% – anything higher is great, but will come with some risk. Is the income sufficient? Or will you need to work at least part time to meet your income objectives.2010-05-06 01:16, By: Gfw, IP: [24.148.10.164]

L3: where to beginI think that you NEED a qualified tax or financial advisor. It is obvious, to me, that your son is not qualified. If he were qualified, he would have asked you the following :1. Is the employer’s plan a 401-K ? If so, can you take withdrawals either on a fixed basis, or vary the timing and amounts ? If so, then you SHOULD NOT ROLLOVER to an IRA. You are permitted to stay in your 401-K plan with the employer, and take withdrawals that are not subject to the 10% early distribution penalty before 59 1/2 because you are over 55 and will be separated from service. ( I’ll bet your son doesn’t know that.)2. Does the employer’s plan have NUA investments in it ? ( I’ll bet your son doesn’t know what they are, and the tremendous savings in taxes if you take a lump sum distribution, but NOT ROLL IT OVER to an IRA.) This approach minimizes taxes, and allows you complete flexibility as to timing and amounts of withdrawals.3. As GFW replied, you need a budget to determine your needs for the rest of 2010, and future calendar years.4. Did your son tell you that by setting up a SEPP 72-T you are locked into the plan, and the annual distribution for 5 years, until you are 61, rather than until 59 1/2 ?5. Once you determine your annual needs, you should usethe reverse calculator on this site to determine the minimum IRA account amounts needed to fund the SEPP 72-T plan. ( Does your understand what that means ? ) Then, if a SEPP 72-T paln is appropriate, because none of the other options apply to your situation, you can set aside any excess IRA funds for future emergencies, or to set up a 2nd SEPP 72-T plan for additional resources if needed.Hopefully you will now see why using your son could be a very expensive mistake.2010-05-06 02:57, By: dlzallestaxes, IP: [173.49.30.37]

L4: where to begin
I agree with the previous posts. As to your son, I am sure that he is well meaning and doing his best to be of help. In some cases, though, a little knowledge can be a dangerous thing as it encourages people to dive in where angels fear to tread. A vicious bear market can devour 40-50% of the money you invest in stocks. These can come along at ANY time. Two of them occurred in the 2000-2010 decade, doing tremendous financial damage to millions of savers and retirees. Can you afford this? Most of us cannot. You will need a very well allocated portfolio of investments that contains a substantial amount of high quality bonds and cash with some exposure to conservative mutual funds. In my opinion, you do not need ANY stocks as the risk of loss associated with individual companies is excessive for most retirees. If you wanted to dabble with 5-10% of your portfolio in individual stocks, that would be one thing but the bulk of your retirement money should be in more secure investments. This is money that may well have to support you for 35-40 years. You cannot afford to be the least little bit careless with it. Additionally, you will want to control your investment costs, so a good low cost custodian for your IRA, if appropriate, is one place to start. I have had good luck with Vanguard and can recommend them as a good IRA custodian.
Ed2010-05-06 06:00, By: Ed_B, IP: [71.236.183.224]

L5: where to beginI have never heard of a “Lump sum pension option” (as it was described by original poster) as something that involves a 401k plan, so I am guessing it is a defined benefit plan that allows you to take a lump sum that can be rolled over to an IRA, in lieuoftaking the employer’s annuity type of pension payment plan. Maybe I am wrong, but it seems that sometimes the respondersare supplying info that is not related to the question thatwas posted. I could be wrong,Perhaps the poster can clarify the source of the pension, and let us know if it has anything to do with a 401k (that was not mentioned). I do agree that he should look at the rough $$ amount he could roll over to an IRA, and use the 72t calculator on this site (using attained age by 12/31/2010) in the formula to see what he would currrently be allowed to take out each year if he started at 72t plan, just to see if this is anywhere near what he thinks he needs to live on until he can collect social security. He should also compare it to any possible pension amount the employer would pay him, if it wasnot paid out in a lump sum, and if married, ask what the amount would be for a 100% spousal option. Ken2010-05-07 04:16, By: Ken, IP: [71.192.120.143]

L2: where to beginMany other questions need to be answered before you make a decision. Do you have any other assets that are not part of a retirement plan that could be utilized so you wouldn’t be forced into starting 72t distributions? If you have money in a 401(k), those funds could also be accessed without penalty since you are past age 55. Good Financial Planners will not try to maximize your investment return, but rather insure you will have enough monthly income to hopefully meet your budgetary needs and minimize taxes and possible penalties. Surely your co-workers should know of a local and qualifiedCFP that has has successfully helped other retirees from your company.2010-05-08 23:38, By: Roger, IP: [71.227.22.28]

L3: where to begin
Good suggestions, Roger. 401k plan money MAY be available for withdrawal and it is worthwhile to check on this. While the law allows 401k plans to distribute penalty-free partial distributions to those who separate from service during or after their 55th year and request them, it does not require them to do so. Consequently, some plans allow this and others do not. The company HR department or the custodian can answer this question and it would be good for the OP to consult with them about it. He can also look it up in the Summary Plan Document for their 401k plan. The law requires companies with 401k plans to make this document available to any employee who requests it. The HR department usually has a copy in their files and some companies also keep a copy in the employee benefits section of their web sites.2010-05-09 05:09, By: Ed_B, IP: [71.236.183.224]

L4: where to beginBut check about NUA stock in the plan FIRST, because that’s an even better solution.2010-05-09 13:58, By: dlzallestaxes, IP: [173.49.30.37]

L5: where to beginin answer to Ken’s question, yes, it is an pension plan, not a 401k. my monthly pension would be slightly higher than the amount i would be allowed with the 72t. So where can i go for some unbiased advise as to what to do. I have seen a financial advisor who is very well regarded by my co-workers, but he definately stands to gain if I take a lump sum and allow him to handle it. Is there any type of professional out there who would be unbiased, because maybe the monthly pension would really make more sense for me. Also, if i were to roll this lump sum PENSION into a 401k, would the 55 year old age exception apply to my distributions making the 72t unnecessary? thanks all for your help. really do appreciate it.2010-05-09 21:17, By: bobbi, IP: [69.14.178.182]

L6: where to beginIf you are going to use a financial planner, look for a fee only planner. They will charge you a fee, but they have nothing to gain from their investment/plannng recommendations.
In terms of the pension plan, for many it does make financial sense to actually take the pension. Thing to consider before taking a pension… Are you married? If yes, do you anticipate a difference in life expectancy? If yes, then do a real careful review of the pension options – when I took my pension, I took a joint & 100% based on the fact that my wife will probably outlive me by many years. At the same time we took hers as a life only – same reason.
Can you roll the pension into the 401(k)? Check with your employer/ plan administrator.
BTW… we had no cash out option on our pension plans and we are totally satisfied with the results. Its niceto get a fixed amount in additionto other amounts that flow in from consulting, etc.2010-05-09 21:34, By: Gfw, IP: [24.148.10.164]

L7: where to beginNo, I am not married. The lump sum is attractive because upon my death, the money can be left to my sons. Plus if there were an emergency, I would have funds available. But again, it would be nice to just have that monthly payment coming in for the rest of my life. but back to my original questions. If i were to choose to let my son handle my pension and wanted a self directed ira, with a sepp, how do i go about setting it up. furthermore, would i need a 72t, if i were rolling my entire company pension lump sum into a 401k… would the over age 55 penalty exception apply to my distributions. I hope i am using the right terminology for all this. i am just a novice at this.. thanks again.2010-05-09 21:58, By: bobbi, IP: [69.14.178.182]

L8: where to beginYou still haven’t answered the question if there is any NUA employer stock in your pension. Most companies fund their contribution with company stock. An excellent reference for advice is a qualified CPA or tax advisor. They are all fee only, and will advise you from a tax standpoint of the alternatives, and the tax consequences. Based upon where the monies end up, your son can then advise you about the investments, but the tax decisions must be made first.2010-05-09 23:23, By: dlzallestaxes, IP: [173.49.30.37]

L9: where to beginYou cannot just rollover a pension into a 401-k. You must be working for a company that has a 401-k, and that plan must permit you to roll over funds into it. Then you must separate from service from that employer after you reach 55.You obviously need professional advice just to explain to you what all of the terminology means. Doing things in the wrong way can cost you a fortune in taxes.2010-05-09 23:36, By: dlzallestaxes, IP: [173.49.30.37]

L8: where to begin
> If i were to choose to let my son handle my pension and wanted a self
> directed ira, with a sepp, how do i go about setting it up.
You would open an IRA at a custodian of your choice. This could be a mutual fund company, such as Vanguard, Fidelity, T. Roe Price, etc., a bank, or a brokerage house. The fees that are charged for managing your money range from quite small at the low-cost mutual fund companies and brokerages to substantial at the higher cost custodians. You can look at various prospectus documents on their products or at their web sites to see if you think that you will be getting good value for the money spent for their services.
Next, you would do a direct transfer from the pension fund into the previously established IRA. This direct transfer is not a roll-over, so your 1 roll-over per 12-month period would still be available to you if needed. A direct transfer is usually from one custodian to another without the money ever passing through your hands. In some cases, custodians will not do this but will want to send a check directly to you. This is OK as long as the check is not made payable to you. Instead, it should be made payable to: New Custodian’s Name, FBO Your Name, where FBO means “For Benefit Of”. You cannot cash such a check but it can be deposited into your IRA account. Also, some custodians will print your IRA account number on the check that they send to your new custodian to help keep things straight. Once you have sent this check to your new custodian, they will deporit it into your IRA account.
Once the money is in the IRA account, typically in a money market fund, you and/or your son can research the various investments offered by that custodian to see what appeals to you. There are any number of theories on how such funds should be invested. My thought is that it should be invested over a 3-6 month period so that it does not all go into the market at one time and that you should determine the asset allocation that you want before you start buying the mutual funds that will form your investment portfolio.
While there are many possible ways to do this, a typical investment portfolio might look something like this: 30-40% of your money in large cap stock funds with emphasis on companies that pay good dividends; 40-50% of your money in high quality corporate and government bonds; 10% in real estate (REITs); and 10% in the money market fund. The stock portion of your money would be invested in specific ways as well, with about 50% in large cap US companies, 25% in mid and small cap companies, 15% in overseas stock funds, and 10% in commodity funds that invest in oil, gas, precious and non-precious metals, agricultural products, etc.
Note that this is a very generic blueprint that may not be the best fit for you and your specific financial profile and goals. It IS a place to start, however. Knowing what your aversion to risk is would be helpful to you in setting up your particular asset allocation. The more that risk scares you, the less you would have in stocks and vice versa.
Now that the money is in the IRA and allocated among the various investments you want, you need to do the SEPP calculations to determine how much you can take out per year. There are 3 IRS approved calculation methods: Required Minimum Distributions; Amortization; and Annuitization. If you are not handy with math, it would be good to have a fee-only planner do this calculation for you. You can use the calculators on this and other web sites to check the math of your calculations. It is not uncommon for them to differ by $0.50 or so due to differences in the number of decimals used in the calculations and rounding. This is not a problem.
To set up your SEPP plan, create a 1-2 page “letter of intent”. This is a letter to whom it may concern that you will keep as part of your SEPP files but that you can show to the IRS if they inquire. In this letter, you state that you are creating a Substantially Equal Periodic Payment plan, the type of calculation you are using, the amount that you are starting with, the interest rate used (if any), and your age in the year that your SEPP begins.
Now, all that is left is to request that your IRA custodian send you distributions from your account at an interval of your choice. It is likely that they will have a specific form for this. It may be a SEPP setup form or it may just be a regular distribution request form. Either way, it should be filled out and sent to the new custodian.
You must take at least 1 distribution annually but you can also choose to take semi-annual, quarterly, or monthly payments. The main thing is to make sure that you do not take more or less from your IRA than the SEPP calculation shows. These payments must continue for the longer of 5 years or you attaining age 59.5. After that, you can change the distributions to whatever you want or stop them altogether.

> furthermore, would i need a 72t, if i were rolling my entire company > pension lump sum into a 401k… would the over age 55 penalty
> exception apply to my distributions.
It would IF the 401k plan to which you have access will accept the money and IF the 401k plan allows partial distributions. Some plans will do 1 or both of these while other plans will not. The law allows them to do these things but does not require them to do them. The Summary Plan Document, your HR staff, or the old custodian that manages these retirement plans will know what is permissible and should be able to advise you on the specifics of your particular 401k plan.
Finally, I suggest that you and your son begin reading some of the personal finance magazines, such as Money, Kiplingers, and Smart Money. From these, you can learn the lingo of personal finance and investing plus you can find references to lots of web sites where additional information can be found.
I apologize for the length of my reply but this is a complicated issue that should be discussed in depth. In spite of this, I am sure that I am leaving out some things that should be said here. I trust that my fellow 72t.net contributors will help us by jumping in here and adding their comments.
Ed
2010-05-09 23:53, By: Ed_B, IP: [71.236.183.224]

L9: where to beginTHANK YOU ED.2010-05-10 00:01, By: bobbi, IP: [69.14.178.182]

L10: where to begin
You’re most welcome, Bobbi.
Ed
2010-05-10 15:14, By: Ed_B, IP: [71.236.183.224]

L9: where to beginEd gave you an excelent response. I have 1 change — the sequence of his paragraphs. They seem to indicate that you make your investment decisions first, and then calculate the annual SEPP 72-T distributions. It is actually the reverse.You use your total balance to calculate the annual calendar year distributions based upon your balance, age, federal interest rate, etc. See if that will provide the cash flow you need. It’s possible that you would not need all of it, and therefore you would segregate part of your funds into the SEPP 72-T paln, and keep the excess for future emergencies, or a 2nd or even 3rd plan.Then you have to determine the cash flow within the plan to provide the cash that you need to distribute each year. While “distributions in kind” (i.e. securities) are permitted, the requirement for exact annual distributions means that you will need some cash to bring the annual totals to that exact figure.Once all of this is determined, THEN you set up the actual accounts, and then make the specific investments.2010-05-10 00:09, By: dlzallestaxes, IP: [173.49.30.37]

L10: where to beginGreat point, Dlz. As you have surmised, I did not intend to say that investment choices come before the basic calculations. As in all complex issues (and people HAVE written books on this very subject), some decisions must be more basic and therefore come before others. Determining whether or not one has the resources to support them in retirement is certainly one of the 1st and it was not my intention to suggest otherwise. I apologize for any confusion that I may have inadvertently created by the sequencing of my paragraphs.
That said, buying “A Practical Guide to 72(t)” would be a great option for anyone who is looking into the possibility of using the 72t exemption from the 10% early withdrawal tax. Although I did not purchase this book, I know now that I should have done so. That would have saved me a LOT of time doing research on this subject to learn more about it when an authoritative and concise guidebook already exists to meet this need.
I am sure that several other books could be found in libraries and bookstores that would be well worth reading and I would encourage the OP to check them out and learn as much as possible before venturing forth in this rather complex area. Even if he eventually ends up turning all of this over to a professional financial planner, it would be most helpful to understand the basics of what he is trying to do. This can help reduce the amount of the planner’s time he needs to buy and allow him to ask the precise questions to which he needs answers.
Ed2010-05-10 15:12, By: Ed_B, IP: [71.236.183.224]

L11: where to beginI want to address a couple of elements of your entire postings. The first item is …”My son wants to manage my account and thinks by investing in stocks he can get me a higher yield than a typical financial planner, but I have no idea where to start.”Why does your son think he can manage your investments better than a professional money manager? What is your son’s track record managing money and how long has he been doing it? What research does he use in his money management role? Doesyour son manage money on the side after working his normal day-job? If so then how would he havemanaged to deal with the recent (last Thursday’s) massive turmoil in the markets if he were stuck at work and couldn’t take any action on your account until he got homeafter the markets were closed? What methodology does your son use to develop a risk-adjusted investment plan that is correct for you and not just correct for him? But the most important question you need to ask is what is going to happen to your family relationship if your son blows it and looses your nest egg? Now let me move on to the second item …”So where can i go for some unbiased advise as to what to do. I have seen a financial advisor who is very well regarded by my co-workers, but he definately stands to gain if I take a lump sum and allow him to handle it. Is there any type of professional out there who would be unbiased, because maybe the monthly pension would really make more sense for me.”Just because a professional advisor is going to make an income from providing advice or managing your investments does not make theadvice “biased” as you imply. I am a financial advisor and have been working with retirees for more than 17 years and I can assure you there is more toretirement planningthan simply managing investments. You will have tax planning issues more than filling out your annual IRS Form 1040 or setting up a 72(t) plan; estate planning issues which could entail having a qualified estate planning attorney build a miriad of legal documents; insurance issues such as life and long term care to deal with end-of-life planning to reduce the impact of Uncle Sam sitting around the table with your family to get his cut (first) before your family gets what’s left of your estate; and finally, other issues that are unique to your personal situation which will come outas you work with a qualified financial advisor, who is really your “quarterback” in pulling together the different pieces of your life’s financial puzzle.Whether your financial advisor earns a commission or fee is immaterial. Not everything can be handled on a “fee only” basis. Life and Long Term Care insurance is always a commission product and can only be sold to you by a licensed insurance agent. Investment advisory fees are based on “assets under management.” Some investment vehicles, like insurance, are “commission only” items and they may be quite suitable for your situation … part of the puzzle. The fact is that most financial advisors wear all hats as investment advisors as well ascommissioned investment and insurance salesmen. It all goes into how your advisor is compensated for the advice your receive, not that he or she is “ripping your off” if not a pure “fee only” advisor. By the way, most pure “fee only” advisors won’t take you as a client unless you agree to let them manage your entire account and the minimum is usually $1 million or more.My last thought is for you to purchase Bill Stecker’s book, available on this web site, and learn more about how to set up and run a 72(t) SEPP Plan. Then you will be better prepared when you meet with your “financial quarterback” to get your financial house in order.Jim2010-05-10 16:42, By: Jim, IP: [70.167.81.119]