I’m retiring and my pension loan lowers my payment. What to do?

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Q. I am 57 and work for the State of New Jersey. I am planning on retiring on Jan. 1, 2024. I have an outstanding pension loan and I’ll also have medical deductions from the pension. I have concerns about how much I’ll get each month. Any practical advice?

— Getting there

A. Congrats on your coming retirement.

Retirement is a big transition and it’s important to understand the impact that a reduction in income will have on your lifestyle.

Before finalizing the decision, you should take the time to get a thorough understanding of how much you spend each year, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

She said you may want to delay your decision if the change in income is going to present a financial hardship for you and working longer will enable you to continue to pay off the pension loan and get a bigger benefit down the road.

Mott said there are a number of tools and apps that can help with the process of gathering your expense information, such as Mint or Quicken. Several banks, like

Bank of America, PNC and Chase also provide the capability of tracking spending and building a budget either online or through their mobile app, she said.

“Using paper and pencil along with bank statements and credit card annual summaries is also a perfectly good way to learn more about how your income is used to meet your expenses,” she said.

The goal would be to learn what a year’s expenses look like for both your must-haves like rent/mortgage, utilities, food, transportation and the discretionary items like dining out and entertainment.

“This total would then be compared to your anticipated pension income to determine what is called your `cash flow,’” she said. “If expenses exceed income, cash flow is negative and either spending needs to be reduced or more income earned to cover the shortfall.”

And when income is greater than the level of expenses, cash flow is positive and the excess could be used for savings or a bit more spending, she said.

You know how much your pension will be, so once you’ve been able to gather the information about your living expenses, you’ll have a better idea as to whether you are going to have a positive cash flow or a deficit — expenses are greater than income — and how much it might be, she said.

“If you find that your reduced pension is going to leave you with a shortfall, part-time work could fill in the gap until your pension loan is paid off and your pension is restored to its full value,” she said.

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This story was originally published on March 30, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.