20 Dec How can I buy out my teacher’s pension?

Q. I was a teacher for eight years and I am not returning to the field. I have heard that one can buy out their pension and I am looking to do so. How?
— Changing gears

A. For starters, good luck in your new career.

We’re glad you don’t want to leave your pension money on the table.

“Pensions are like a guaranteed paycheck for life,” said Jeanne Kane, a certified financial planner with OneDigital in Boonton. “As a financial planner, I love guaranteed income.”

She said the pension system takes on the risk of the investments and the returns needed to pay you the guaranteed income stream.

“If you take your money out of the pension fund, you then take on the risk of the investments,” she said. “The financial markets can be volatile and risky. You’re not taking on the risk to deliver money for your retirement.”

You didn’t say so, but it sounds like you’re younger than age 65. You would not be eligible for a monthly payment option with eight years of service.

So for you, it would make sense to either roll over the funds to an IRA or a new employer’s retirement plan. The other option is to take a lump sum distribution, but you probably don’t want to do that.

“The rollover to an IRA or a new employer’s retirement plan is their best bet,” Kane said, noting there would be no taxes due if you made this move. “The funds will continue to grow tax deferred and remain set aside for retirement. It took years for the reader to save those funds, so better to keep them invested for retirement vs. taking a lump sum.”

Kane said taking a lump sum distribution would count as ordinary income, but if you’re under 59 ½, you’ll also have a 10% penalty.

If you were eligible for the monthly pension payments, you would have to decide if the monthly payment or taking a lump sum to roll over would be the best option.

Your first step would be to contact human resources or the New Jersey Division of Pensions and Benefits to ask what your estimated annual payout would be from the pension and what the lump sum would be if you rolled it over to an IRA or a 401(k).

Kane ran with these assumptions for an example.

Let’s assume that you’re 65 and use a reasonable withdrawal rate of 4%, which takes into account inflation. If your lump sum payout is $100,000, a 4% withdrawal rate is $4,000 per year. If your estimated annual pension payout is more than $4,000, then it makes sense to keep the funds with the pension, Kane said.

If you qualify for the pension, she said taking a lump sum “is most times a fool’s bet.”

“Pension plans are expensive to administer, and many organizations would love to have participants take a lump sum to go away,” she said. “The pension plan is responsible for paying you what they promised. The stock market provides no guarantees. Taking the money out puts the risk on you.”

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This story was originally published on Dec. 20, 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.