After several years of being unemployed and living off the extremely strained graces of relatives, I made a financial decision that I regret to this very moment. I converted my pension into an annuity.
I was a college adjunct and academic adviser in another life. Teaching was a career that didn’t appeal to me. I have been a freelance writer for over a decade.
Anyway, one of the best aspects of teaching for me was my pension. My employer paid into a fund that would be waiting for me as a supplemental income as I entered elderly age.
Depending on the prerequisites of your job, you need to stay steadily employed for a few years to a decade or two to qualify for a pension. However, the average pension payout is about $36,000.
Instead of gaining interest and having a supplemental income waiting for me in old age, I opted for an annuity. As per the conditions of the company offering the pension, this converted my pension into an annual payment for a decade.
Desperate people do desperate things. Still, this action was a brain-donor level of stupid thing for me to do.
To best illustrate why, let’s differentiate the differences between a pension and an annuity.
A pension is basically an employer-maintained retirement plan. You know that police officers and other civil servants get a pension after two decades of employment or so.
Well, many other jobs also offer a pension. A lot of people may be tragically unaware that their own employer offers a retirement plan.
Most pensions are defined benefits plans. How much you get in a pension, how it is paid out, and so on, is taken care of by your employer.
A 401(k) is a defined contributions plan, where you can match the monies contributed by your employer. You don’t have to match contributing funds in a defined benefits pension plan.
A pension can be borrowed against. You can use it for investment. At the very least, it’s a supplemental income, no matter how modest, waiting for you when you’re elderly.
That is better than nothing. Only about 13 percent of Americans have pensions. Over 46 percent of Americans have nothing or very little money saved for retirement.
Some pensions can be converted into other financial products. Most pensions can be transferred upon spouses and relatives, converted into tuition payments, turned into a lump sum payment, etc.
Or, turned into an annuity.
There are various kinds of annuity financial products. You can buy an annuity that pays you a supplement income. Or, you can have a portion, or all of your retirement converted into an annuity.
Why is that a bad thing? It depends on the conditions of the provider.
As I explained in the opening of this piece, I was basically penniless a decade ago. I had forgotten about my pension. While going through some papers, I stumbled upon the pension plan.
I called the pension provider and talked about converting it into an annuity. (To say that I was financially illiterate at the time would be a woeful understatement.)
No two pension plans are alike. My pension plan could be converted into an annuity. But it would be an annual payment, not monthly, for a set amount of years.
I was warned by several representatives not to do this. As per the conditions of this pension provider, I couldn’t convert the annuity back into a pension.
I did it and I have rued that decision ever since. I only thought to consider the consequences after doing it.
For the immediate benefit of a few hundred dollars annually for a few years, I erased a supplemental income that would have been waiting for me in a few decades.
Treasure your pension. Don’t assume your employer doesn’t offer one, ask. Also, remember that all pension and annuity plans are not alike. Each will have distinct conditions of use.
The working-class job of today you take for granted could offer you a modest supplementary income you appreciate in the future.