Sunday, February 24, 2008

Some Thoughts on Ford Buy-Outs

I’ve been working with Ford for over 22 years, having prepared and presented a multitude of financial programs for hourly and salary employees. There are some interesting things about the Ford pensions that make a retirement decision a little more complicated than normal. With the recent ’08 round of buy-out for hourly workers, our firm was asked to prepare a brochure with some examples, plus I did a brief web-cast for Ford. Here are some of my thoughts on evaluating whether to retire from Ford if you’re an hourly worker with a buy-out option:

  • It’s ‘Work at Ford’ or ‘Don’t Work at Ford’. The first thing I try to get across to people is to get a frame of reference. If you have 30 or more years of service, the UAW-Ford pension will pay you about $3,140 a month to NOT work at Ford. If you have an offer, add maybe $50 grand on top of that to the deal. So, the way I ask people to look at it is, “Ford will pay you about $5,051 a month to make cars, or about $3,140 plus $50,000 (or more, read the story) to NOT make cars.” Now that you put it that way…

  • It’s not how much you make, its how much you KEEP. The second big point I keep hammering on is that you have to look at the net paycheck to the net pension check. If you work at Ford, your paycheck has a variety of reductions, like federal income tax, state income tax, Social Security tax, Medicare tax, Union dues, and maybe TESPHE (That’s Ford’s hourly 401(k) plan), to name a few. The $5,051 gross paycheck may only be a take-home of $2,969. A pension check of $3,140 has reductions as well: you pay federal income tax. There is no Social Security or Medicare tax on pensions, and in our home state of Michigan , there is no state income tax on pensions (up to about $42,000 on single people and about $84,000 on married filing joint returns). Add two bucks for union dues (annually), and you might take home $3,001. Think that one over: you can net $2,969 a month from Ford to make cars, or Ford’s pension will pay you net $3,001 (plus $50,000) to NOT make cars at Ford.

Watch a video on Work or Retire here.

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The 401(k) or TESPHE, is a retirement asset. Recognize that (hopefully) you’ve been saving tax-deferred money in TESPHE. There’s a variety of complex tax rules on TESPHE (for a booklet on it, click HERE). There are lots of things to know about TESPHE withdrawals, but I’ll start with my most important ones: Don’t touch the principal, mind the taxes, and take inflation into account. What this boils down to is TESPHE is a retirement nest egg, and you should protect it. Your age has a lot to do with what you might do with TEPSHE:

    • If you’re under 55, the only way you can touch funds in TESPHE is to do a tax-free direct transfer (you probably had heard the phrase ‘rollover’) to an IRA. You can then take a regular withdrawal (like monthly) without a penalty under something called the Section 72(t) rule. (For a decent 72(t) calculator, click HERE. So you could retire from Ford at 49, have a $150,000 TESPHE balance, and take $8,368 a year (or $697 a month) from your rollover IRA without penalty. You’d have to keep up that distribution until you reach the age of 59 ½. (The IRS rules say that if you start a 72(t), you have to keep going for the longer of age 59 ½ or five years. For the IRS publication, click HERE. But, if you made 7% on your IRA (from TESPHE), your investment return would be about 10,950. You’d be taking out $8,368 under the 72(t) loophole, so you’d have additional income, plus be GROWING your nest egg. Mo’ money, mo’ money, mo’ money. [By the way, we manage IRA rollovers for clients. If you’re interested in some professional help, contact us.

    • If you’re between 55 and 59 ½, you can leave your TESPHE money at Fidelity in the TESPHE account and take it out without penalty; or you can do the rollover and 72(t) as discussed above.

    • If you over 59 ½ and under 70 ½, you can leave the money in TEPSHE and withdraw it or roll it into an IRA and withdraw it without penalty. I think you should stick to my rules about eating your seed corn and minding inflation. I advise my clients to keep their withdrawals to about 4% of the balance.

    • If you’re over age 70 ½, you must begin a distribution under something called the Required Minimum Distribution ( RMD ) rules. The RMD rules require that you withdraw a specific amount (or more) or you are hit with a 50% penalty on the withdrawal. To look at IRS publication (get some coffee!) 590, click HERE.

Overall, I advise start out with your pension alone and see how it works out. Remember if you rollover to an IRA and start taking funds out under the 72(t) loophole, you’re stuck until you get to the longer of age 59 ½ or five years from the start of the withdrawal.

  • Social Security and the supplements. The Ford supplements, particularly the ’30 and out’, are designed to replace social security retirement benefits. When you get to the point that you would receive 80% of your Normal Retirement Age Social Security benefit (somewhere between the ages of 62 and 64, depending on the year you were born: click HERE to see a calculator); your supplement drops off and your Social Security (theoretically) begins. But, as usual, the big print giveth and the fine print taketh away. Here’s some little tidbits:

    • You can collect Social Security at age 62 (and get less than 80%), and still collect the supplement for a period of time. For example, if you were born in 1955, like me, you’d collect your Full benefit at age 66 and 2 months. You’d get 80% of your Social Security at age 63 and 2 months, which is when your 30 and out supplement would drop off. BUT, you could collect 74.2% of your Social Security at age 62, thereby giving you a ‘double dip’ period for about 14months.

    • Your Social Security benefit is based on the highest 30 out of 35 years of covered pay prior to your collecting benefits. So, if you retire at 55 and don’t go back to work, and then collect Social Security at 63, you would have 3 years of zero wages in the calculation (They don’t care how long you worked in total, it’s the number of years before collecting benefits). Three out of 30 is about 10%, so you could be reducing your Social Security benefit by 10%. If you worked for 3 years in that time frame between 55 and 63, you’d add back years into the calculation (you can play with the calculator linked above).

    • Disability is a factor as well. For Social Security Disability, you must be covered for 5 out of the 10 years before the disability. So, if you retired at 50, didn’t work and then had a disability at age 56, you might not get any Social Security Disability benefits. I tell my retiree friends to get at least a part time job every other year to stay in the system. You don’t need to make much to stay in the System.

    • Social Security benefits are partially taxable; the pension supplements are fully taxable. This means that a retiree getting a full Social Security benefit will have more after tax income if they were receiving the same amount in a supplement. (HERE is a book on the taxation of Social Security benefits: grab a strong cup of coffee!)

    • The last BIG trap on Social Security is the earnings limitation. This is when you have your Ford supplement drop off and Social Security kicks in, but you have another job and are making money. Under the supplements, you can work elsewhere and nothing happens to the supplement. With Social Security, if you earn more than $13,560 (for 2008) and are collecting benefits and are between age 62 and Normal Retirement Age, you can lose $1 for every $2 above that limit, up to your whole benefit! HERE is a calculator to find out the earnings limits.

Well, that sums up my Ford retirement blog for now. If you have questions, I’ll try to get to them if you click on the contact us button. If you live in Michigan and want an appointment, you can also call our office for an initial consultation. Our web site has a lot of more information about us. I wish you success in your retirement: live long and prosper!

Leon C. LaBrecque