How do you set financial priorities?
Should you invest or pay down debt? Should you help your siblings plan for their retirement? Should you pre-pay your mortgage? These and related questions appear in today's Reader Mailbag.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Pension benefit options
2. Unapplied mortgage funds
3. Moving and investing simultaneously
4. Underwater home and credit cards
5. Setting priorities
6. Toilet paper value
7. First time credit worries
8. Car cost versus salary increase
9. Helping family with finances
10. Insurance priorities
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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My Christmas shopping is almost finished for the year. Aside from some children’s gifts, every present that I’ve picked up so far is either homemade or is something specifically utilitarian. None of those “Thanks for this…. thing” gifts – no one likes those, neither the sender or the recipient.
The one exception to that: our extended family is doing an interesting “Yankee swap” Christmas gift exchange in which everyone is putting a DVD into the mix, then we’re opening them “Yankee swap” style, which means you can swap your newly-opened gift for a gift that someone else has already opened. This will make a normally ho-hum gift exchange decidedly more interesting – and entertaining.
Q1: Pension benefit options
I got a job with a large insurance company directly out of high school. After ten years of working my way up the ranks, I took a position with a different institution. my company notified me that since I have ten years of service, I have a pension available. I can take a monthly benefit of $202/mo or a lump sum payment of approximately $4,800. The monthly annuity would begin at age 65. If I took the lump sum, they would withhold 20% for taxes. My current tax bracket is right on the cusp of the 15/25% border, so I would likely have to pay an additional 5% in taxes.
So which option do I take? On one hand, the annuity is a nice backup to my 401k savings (10% of gross income). However, factoring in inflation over the next 35 years brings the value down considerably. Also, this is a company with a choppy history – what guarantee do I have that the pension will be available in 35 years? Is that a serious risk? The lump sum is enough to pay off all my remaining existing debt (which is scheduled to be paid by March of next year) and cushion my emergency fund. My husband and I want to start and family in the next year and purchase a house in the next five, so debt reduction and aggressive savings are our top priorities right now. The lump sum could make this happen much faster, but I don’t want to cheat my future self out of the benefit of a lifetime annuity.
The first thing you need to find out is whether this annuity is actually a product of your company or whether it’s held by someone else. If you doubt the long term viability of the company you work for and the pension isn’t insured in any way, then I would be suspicious of the long term value of that pension.
In other words, if you believe there’s any sort of significant chance that the company providing your pension won’t exist when you’re 65, I would take that lump sum now. Just put half of it in the bank for taxes – you probably won’t need that much, but you’re better off being safe than sorry.