Agili Principal and Financial Strategist, Marilee Falco, CFP®, ChFC, recently shared a comprehensive list of financial scenarios that long-term employees should consider prior to retiring. Readers with subscriptions to Lehigh Valley Business have access to the article here.
The article is below in italics.
For employees getting on in years, the litany of decisions that need to be made before retirement is a long, complex and even intimidating one. For long-term employees especially, the options may seem overwhelming indeed.
Before delving into these retirement considerations, let’s take a moment to talk about some statistics. According to the Bureau of Labor Statistics, employees in the manufacturing and utility/energy sectors tend to stay with a company longer (at least 5.1 and 7.7 years respectively) than employees in other sectors (4.1 years on average). And since some of the Lehigh Valley’s largest employers fall into the manufacturing or utility/energy sector, we can assume that by the time these employees are approaching retirement, they are likely to be fully vested in their companies’ retirement plans and probably have a broad array of retirement benefits available to them.
Long-Term Employees: Retirement Basics and More
Like every other soon-to-be retiree, long-term employees need to determine the basics: the optimal time for you to retire, your tax bracket upon retiring, whether you’ll have sufficient income in retirement to last the rest of your life, and when to begin taking Social Security. But a long-tenured employee also needs to think about more financially complicated scenarios, such as how to handle net unrealized appreciation of company stock in a 401(k) plan and possibly whether to receive a pension as a lump sum or in monthly payments over a lifetime. A trusted financial planner can help.
Net Unrealized Appreciation of Company Stock
If you plan to roll over your 401(k) when you retire and you have company stock in it, there are certain tax advantages to rolling the company stock portion (only) into a brokerage account, thanks to net unrealized appreciation (NUA) rules. NUA can be defined as “the difference in value between the average cost basis of shares of employer stock and the current market value of the shares.” Employees opting to roll over company shares into a brokerage account will pay income tax on the cost basis, but the remainder will be eligible for more favorable long-term capital gains tax treatment when the shares are ultimately sold. (But remember, only the company stock portion of the 401(k) can be rolled into a brokerage account.) Another advantage to pursuing this tax strategy is that you reduce assets that will be subject to future required minimum distributions RMDs.
Yet, it’s not always a good idea to roll over company stock using the NUA tax strategy, it’s very complex and, therefore, important to consult with a financial advisor before making that decision.
Pensions: Lump Sum vs. Monthly Payments
Some lucky long-term employees work for companies that offer pensions upon retiring. If given the option of receiving a lump sum at the time of retirement or getting a monthly benefit for life, it can be hard to choose. By picking the lump sum option, investment-savvy retirees have the benefit of investing the money more directly. But having the funds up front can also be very tempting to certain individuals and there is a risk that the funds may not last over the course of your lifetime. So, it is critical to be able to honestly predict future spending behavior in retirement.
If you choose the monthly pension payment option, and you pass away earlier than projected, your beneficiaries may no longer receive those monthly payments (unless you opted for spousal and survivor benefits upon your death – usually with smaller monthly payments). For certain personalities, knowing that you will receive monthly benefits for the rest of your life is a very reassuring prospect.
Understand Your Company’s Specific Retirement Benefits Rules
Prior to retiring, long-term employees would be wise to meet with your company’s human resources specialist to ask any future benefits questions you might have. Deferred compensation plan distribution options, for example, vary from company to company, so be sure to understand your company’s rules and carefully consider your options. Businesses also have their own rules guiding company stock options, restricted stock and performance shares upon retirement. Make sure you have a solid grasp of these rules.
Company Retirement Healthcare Benefits
In addition, it’s important for long-tenured employees to make a plan for future healthcare expenses. If you are younger than 65, determine if your company offers retiree healthcare insurance coverage for those not yet eligible for Medicare. And be sure to ascertain if your company offers Medicare supplemental plans for those 65 and older.
Suffice it to say, long-term employees have countless scenarios to consider as they approach retirement. Be sure to have a firm grasp of your company’s retirement benefits and the rules guiding them so that you can make the best possible decisions for a long and happy life after work. Of course, financial planners have seen it all – and can help you make informed recommendations based on your unique circumstances.