September 24, 2008

What Should I Do If I Leave Education?

I had a visitor to the site ask me about leaving education. Specifically, they asked me about their 403(b) and their pension.

As an advisor, I look at each one separately when it comes to what to do after you leave education. During your time in education though, I would view them together with the pension as a fixed income investment and the 403(b) as an equity investment.

403(b)

As I stated in my last post, many times the annuity based 403(b) vehicles sold by AIG-VALIC, Jefferson National, Lincoln National, etc. have additional "hidden" fees called mortality fees which are typically about 1% of the account per year. This fee is charged in addition to mutual fund fees, the quarterly statement fee, plus anything else they tack on. They would like for you to leave the assets where they are so they can continue to receive these fees for as long as you hold the account. The interesting thing is the fees do not give you any additional benefits.

The short answer is roll the 403(b) over into an IRA.

A quick example - My firm would also charge you 1% to manage those assets, but the difference is, we would continually review the holdings, make changes as the market and economy dictate, and discuss the various options with you. That's not all though - we would also help you with any other financial issues you have. Refinancing, purchasing a house, pension options, student loans, estate planning, etc., etc. All for the same 1% fee. No hidden fees, no hidden service charges, no compensation paid to us by anyone but our clients.

The annuity firms would charge you their fees (described above), and if you wanted to make an appointment, you could go sit down and talk to a representative about your account. They would make some recommendations, then you would most likely not hear from them again.

We have a service business for our clients, and they have a holding business for your assets.

Pension

If you are truly sure you will never go back to education, then the issue is are you vested? In Georgia, if you were an educator for 10 years or more, then please do not let anyone talk you into rolling over your pension! It may not seem like much, but you will receive 20% of your salary forever once you reach age 60 if you taught just 10 years - 30% for 15 years - 40% for 20 years - 50% for 25 years - 60% for 30+ years.

A guaranteed income stream is a good deal, and the additional item is if you do roll it over, you only receive the funds that you contributed - not your funds plus the state funds they contributed for you.

If you are not vested (less than 10 years), then please rollover the balance into an IRA. Only do this though if you are sure you are not going back to education. If you go back, you will need to repurchase those "lost years" later to receive the pension for it.

Just last week I met with a potential client that asked me what to do. They could either take a pension as a lump sum ($100,000), or they could have a salary for life of $8,500. Since I am bound to look at the best interest of the client, I literally had to convince them that the annual pension was the best idea. They finally agreed, but it was only after I found out they wanted to take the lump sum to pay a few small debts off first. Pay a few small debts, lose a lifetime pension... not a good idea.

If you have a specific question(s), always feel free to e-mail me. I am happy to help you, and it may just save you from making a huge mistake.

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