Common Sense Financial Podcast

Positioning Your 401k and Pension Assets

Episode Intro

What should you think about when positioning  your 401k and pension assets?

Show Notes

  • When you’re accumulating money – when you’re working and accumulating – you’re not needing the money that you’re saving. You’re putting it away for retirement. You’re living on the income that you’re receiving. In this phase, everything is about watching your account value grow.
  • On the other hand, when you reach retirement and shift over to utilization, it’s no longer about rate of return. The focus here is on having money available when you need it.
  • When it boils down to your money, there are two main purposes. Money can be used as a resource to produce income (the proverbial “golden goose” that produces income each month or each year for whatever duration of time needed). However, money can also be the money that’s set aside and that you use for big ticket items, college expenses, vacations, and similar expenses – this is the consistent flow of capital coming in and that you can live off of.
  • The way in which you can determine how much money you need for income is understanding your cash flow. By understanding the chronological cash needs that you have, you’re going to learn just how much money you’re going to need to spend.
  • Your cash flow design becomes the blueprint for how to arrange the assets you have. Once you know the purpose of the money, you can focus on arranging your assets to fulfill its purpose – and the purpose can either be using the money for income or using that money to ultimately spend it on big-ticket items.
  • For Brian, understanding your cash flow before making any decisions regarding the distribution of your 401k or pension is key.
  • In some instances, you may find yourself in the position of having to choose between a monthly amount or a lump sum option. If your main focus is maximizing the amount of the monthly income today, oftentimes opting for the monthly pension benefit makes more sense. However, if you don’t necessarily need the income right away – or would like to have some flexibility or control over that money – then, it’s advisable to take the lump sum option instead.
  • Beware of what Brian refers to as a “pension trap”. In some cases, taking the reduced benefit leads to your spouse getting the reduced benefit if you pass away but to your children not inheriting anything in the case of the passing of both you and your spouse.
  • Many pensions have the so-called Cost of Living Adjustments (or COLA) built in. COLA is based upon parameters such as the consumer price index, and it’s really there to protect the person receiving the pension from the erosion of inflation going forward.
  • When purchasing your insurance through the pension department, you may be put in a situation where, basically, the cost of your life insurance policy increases every single year, while the benefits decrease. That’s because, with such a policy, every year you live is one less year of benefits your spouse is going to receive.
  • As a potential solution to the problem, Brian suggests looking for alternative planning options by using a personal life insurance policy that’s outside of your pension. This would give you more control on how much life insurance you purchase, as well as how long you maintain that policy.
  • According to Brian, retirement planning is about having access to money when you need it, and about having as much control as possible over the purpose of that money.

The handling of your money is always about knowing how you plan to use the money you have.