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benefits of rolling over a pension to an IRA

Whether you are about to retire or if you were just notified that your company is terminating their pension plan, making the right decision with regard to your pension plan payout is extremely important. It’s important to get this decision right because you only get one shot at it. There are a lot of variables that factor into choosing the right option. While selecting the monthly payment option may be the right choice for your fellow co-worker, it could be the wrong choice for you. Here is a quick list of the items that you should consider before making the decision.

  • Financial health of the plan sponsor
  • Your age
  • Your health
  • Flexibility
  • Monthly benefit vs lump sum amount
  • Inflation
  • Your overall retirement picture

Financial Health Of The Plan Sponsor

The plan sponsor is the company, organization, union, municipality, state agency, or government entity that is in charge of the pension plan. The financial health of the plan sponsor should weigh heavily on your decision in many cases. After all what good is a monthly pension payment if five years from now the company or entity that sponsors the plan goes bankrupt?

Pension Benefit Guarantee Corporation

But wait……..isn’t there some type of organization that guarantees the pension payments? The answer, there may or may not be. The Pension Benefit Guarantee Corporation (PBGC) is an organization that was established to protect your pension benefit. But PBGC protection only applies if your company participates in the PBGC. Not all pension plans have this protection.

Large companies will typically have PBGC protection. The pension plan is required to pay premiums to the PBGC each year. Those premiums are used to subsidize the cost of bankrupt pension plans if the PBGC has to step in to pay benefits. But it’s very important to understand that even through a pension plan may have PBGC protection that does not mean that 100% of the employee’s pension benefits are protected if the company goes bankrupt.

There is a dollar limited placed on the monthly pension benefit that the PBGC will pay if it has to step in. It’s a sliding scale based on your age and the type of pension benefit that you elected. If your pension payment is greater that the cap, the excess amount is not insured. Here is the PBGC 2018 Maximum Monthly Guarantee Table:

pbgc guarantee

Another important note, if you have not reached age 65, your full pension benefit may not be insured even if it is less than the cap listed in the table.

Again, not all pension plans are afforded this protection by the PBGC. Pension plans offered by states and local government agencies typically do not have PBGC protection.

If you are worried about the financial health of the plan sponsor, that scenario may favor electing the lump sum payment option and then rolling over the funds into your rollover IRA. Once the money is in your IRA, the plan sponsor insolvency risk is eliminated.

Your Age

Your age definitely factors into the decision. If you have 10+ years to retirement and your company decides to terminate their pension plan, it may make sense to rollover your balance in the pension plan into an IRA or your current employer’s 401(k) plan. Primarily because you have the benefit of time on your side and you have full control over the asset allocation of the account.

Pension plans typically maintain a conservative to moderate growth investment object. You will rarely ever find a pension plan that has 80%+ in equity exposure. Why? It’s a pooled account for all of the employees of all ages. Since the assets are required to meet current pension payments, pension plans cannot be subject to high levels of volatility.

If your personal balance in the pension plan is moved into our own IRA, you have the option of selecting an investment objective that matches your personal time horizon to retirement. If you have a long time horizon to retirement, it allows you the freedom to be more aggressive with the investment allocation of the account.

If you are within 5 years to retirement, it does not necessarily mean that selecting the monthly pension payment is the right choice but the decision is less cut and dry. You really have to compare the monthly pension payment versus the return that you would have to achieve in your IRA to replicate that income stream in retirement.

Your Health

Your health is a big factor as well. If you are in poor health, it may favor electing the lump sum option and rolling over the balance into an IRA. Whatever amount is left in your IRA account will be distributed to your beneficiaries. With a straight life pension option, the benefit just stops when you pass away. However, if you are worried about your spouse’s spending habits and your spouse is either in good health or is much younger than you, you may want to consider the pension option with a 100% survivor benefit.


While some retirees like the security of a monthly pension payment that will not change for the rest of their life, other retirees prefer to have more flexibility. If you rollover you balance to an IRA, you can decide how much you want to take or not take out of the account in a given year.

Some retirees prefer to spend more in their early years in retirement because that is when their health is the best. Walking around Europe when you are 65 is usually not the same experience as walking around Europe when you are 80. If you want to take $10,000 out of your IRA to take that big trip to Europe or to spend a few months in Florida, it provides you with the flexibility to do so. By making sure that you have sufficient funds in your savings at the time of retirement can help to make things like this possible.

Working Because I Want To

The other category of retirees that tend to favor the IRA rollover option is the “I’m working because I want to” category. It has becoming more common for individuals to retire from their primary career and want to still work doing something else for two or three days a week just to keep their mind fresh. If the income from your part-time employment and your social security are enough to meet your expenses, having a fixed pension payment may just create more taxable income for you when you don’t necessarily need it. Rolling over your pension plan to an IRA allows you to defer the receipt of that income until at least age 70½. That is the age that distributions are required from IRA accounts.

Monthly Pension vs Lump Sum

It’s important to determine the rate of return that you would need to achieve in your IRA account to replicate the pension benefit based on your life expectancy. With the monthly pension payment option, you do not have to worry about market fluctuations because the onus is on the plan sponsor to produce the returns necessary to make the pension payments. With the IRA, you or your investment advisor are responsible for producing the investment return in the account.

Example 1: You are 65 and you have the option of either taking a monthly pension payment of $3,000 per month or taking a lump sum in the amount of $500,000. If your life expectancy is age 85, what is the rate of return that you would need to achieve in your IRA to replicate the pension payment?

The answer: 4%

If your IRA account performs better than 4% per year, you are ahead of the game. If your IRA produces a return below 4%, you run the risk of running out of money prior to reaching age 85.

Part of this analysis is to determining whether or not the rate of return threshold is a reasonable rate of return to replicate. If the required rate of return calculation results in a return of 6% or higher, outside of any special circumstances, you may be inclined to select the pension payments and put the responsibility of producing that 6% rate of return each year on the plan sponsor.

Low Interest Rate Environment

A low interest rate environment tends to favor the lump sum option because it lowers the “discount rate” that actuaries can use when they are running the present value calculation. Wait……what?

The actuaries are the mathletes that produce the numbers that you see on your pension statement. They have to determine how much they would have to hand you today in a lump sum payment to equal the amount that you would have received if you elected the monthly pension option.

This is called a “present value” calculation. This amount is not the exact amount that you would have received if you elected the monthly pension payments because they get to assume that they money in the pension plan will earn interest over your life expectancy. For example, if the pension plan is supposed to pay you $10,000 per year for the next 30 years, that would equal $300,000 paid out over that 30 year period. But the present value may only be $140,000 because they get to assume that you will earn interest off of that money over the next 30 years for the amount that is not distributed until a later date.

In lower interest rate environments, the actuaries have to use a lower assume rate of return or a lower “discount rate”. Since they have to assume that you will make less interest on the money in your IRA, they have to provide you with a larger lump sum payment to replicate the monthly pension payments over your life expectancy.


Inflation can be one of the largest enemies to a monthly pension payment. Inflation, in its simplest form is “the price of everything that you buy today goes up in price over time”. It’s why your grandparents have told you that they remember when a gallon of milk cost a nickel. If you are 65 today and your lock into receiving $2,000 per month for the rest of your life, inflation will erode the spending power of that $2,000 over time.

Historically, inflation increases by about 3% per year. As an example, if your monthly car payment is $400 today, the payment for that same exact car 20 years from now will be $722 per month. Now use this multiplier against everything that you buy each month and it begins to add up quickly.

If you have the money in an IRA, higher inflation typically leads to higher interest rate, which can lead to higher interest rates on bonds. Again, having control over the investment allocation of your IRA account may help you to mitigate the negative impact of inflation compared to a fixed pension payment.

A special note, some pension plans have a cost of living adjustment (“COLA”) built into the pension payment. Having this feature available in your pension plan will help to manage the inflation risk associated with selecting the monthly pension payment option. The plan basically has an inflation measuring stick built into your pension payment. If inflation increases, the plan is allowed to increase the amount of your monthly pension payment to help protect the benefit.

Your Overall Financial Picture

While I have highlighted a number of key variables that you will need to consider before selecting the payout option for your pension benefit, at the end of the day, you have to determine how each option factors into your own personal financial situation. It’s usually wise to run financial projections that identify both the opportunities and risks associated with each payment option.

Don’t be afraid to seek professional help with this decision. They will help you consider what you might need to pay for in the future.  Are you going to need money spare for holidays, transportation, even funeral costs should be considered. Where people get into trouble is when they guess or they choose an option based on what most of their co-workers selected. Remember, those co-workers are not going to be there to help you financially if you make the wrong decision.

As an investment advisor, I will also say this, if you meet with a financial planner or investment advisor to assist you with this decision, make sure they are providing you with a non-bias analysis of your options. Depending on how they are compensation, they may have a vested interest in getting you to rollover you pension benefit to an IRA. Even though electing the lump sum payment and rolling the balance over to an IRA may very well be the right decision, they should walk you through a thorough analysis of the month pension payments versus the lump sum rollover option to assist you with your decision.

Michael Ruger

About Michael………

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

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Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.