LJPR is a fee-only advisory firm that specializes in the financial, tax and estate planning needs of retirees. Among our expertise is the Ford system. Our advisors wrote the UAW-Ford FEIP and FEIP-II programs, provided the salaried employees with financial education and pre-retirement planning programs and the UAW-Ford members with a ‘Work or Retire’ video program to assist potential retirees with their decisions. We’re independent, we don’t work for Ford and we don’t work for the UAW and we don’t work for Fidelity. We work for our clients: you.
The following is list of items we like to cover with pre-retirees.
1. Define Your Decision. The first thing we tell people is to look at the decision. First of all, the decision is not Work or Retire (even though that’s what we named our program), but rather ‘Work at Ford’ or ‘Don’t Work at Ford’. There are no restrictions on what you can or can’t do. You can go the conventional retirement route, or you can work elsewhere, or take classes, or play golf or whatever. So the first range is to get the frame of reference into “Work Here” or “Don’t”. The second part of this decision is to understand that you will retire someday (either on your feet or otherwise). The next wave of your question should be “Do I Retire Now?” or “Do I Retire Later?” Here’s where you have to take a hard look at the offer and what it entails. Maybe I was going to retire in a couple of years. A $50,000 (or $70,000) lump sum could really make me reconsider. So the questions you should be asking yourself are “Do I Want to Work at Ford Now?” or “Do I Want to do Something Else Now?”. Then you can add in the money to see if it’s worth it to you.
2. Look at the Bottom Line. Our managing partner likes to say “It’s not how much you make…its how much you keep!” When you take a hard look at a retirement decision from Ford, you have to look at the bottom line. For assembly workers, you’re generally looking at gross pay without overtime (which is how you should look at it: overtime is certainly not guaranteed!) of about $5,051 more a month. Your retirement income, if you have 30 years or more and are under age 62, is $3,140 a month. At first, this looks like a big difference, about $1,911 bucks. But, its not how much you make, its how much you keep. From your paycheck, you pay federal taxes, Michigan taxes (maybe City taxes too), Social Security taxes, Medicare taxes, TESPHE contributions, Union dues, and other job related expenses (like driving to and from work and so on). From your pension check, you still pay federal taxes, but NO Michigan taxes, NO Social Security taxes, NO Medicare Taxes, NO TESPHE contributions and NO job-related expenses (by the way, we think the retiree union dues are absolutely worth it, so you do have about $2 of union dues to have an organization bargaining for your pension and health care). Your bottom line might be that there’s only about a $378 a month difference between working at Ford now and not. So you may be working for Ford for $2.18 an hour. Your mileage may vary, but look at the bottom line for you.
3. Don’t Forget about What Happens to the Pension at age 62 and 1 month (or the 80% level in this Contract). The UAW-Ford pension is a very good pension. If you retiree before you’re eligible for Social Security, you can get a supplement. If you have 30 or more years of service, this supplement is an amount that can reasonably replace your Social Security benefit. The supplement currently drops off when you become eligible for 80% of your Social Security. What you need to know is a couple of things. First, your Social Security is calculated based on the highest 30 out of 35 years before you collect benefits, not on your highest 30 years. If you retired at age 49, you wouldn’t be eligible to collect Social Security until you were age 62 and 1 month (which would be reduced to about 75% of your Normal Benefit). If you didn’t work from 49 to 62, you’d have 13 years of zero earnings in the calculation of your Social Security benefits. Social Security will throw out five years, so you’d have your benefits reduced, and then reduced again by 25% (for retiring at 62). This can be a significant problem, you could have a pay cut when you hit 62. So, if you’re retiring before the age of 57 (62 minus 5 years), consider working or seeing someone who knows this stuff to give you some advice on keeping your Social Security benefit healthy. The second thing you need to know is that Social Security (at least for now) is not fully taxable. Social Security benefits can be tax-free, or partially taxed at 50% with a maximum of 85%. The added tax gain is useful in your future plans.
4. Keep TESPHE/SSIP in the Decision. TESPHE (the Tax-Efficient Saving Plan for Hourly Employees) and SSIP (the Saving Stock Investment Plan for salaried employees) are tremendous wealth accumulation tools. TESPHE/SSIP provide an opportunity to defer income into an investment account, further defer income taxes on the contributions and the investment return, and then withdraw the funds later at a tax advantaged rate. In the current round of buyouts, you can take the lump sum of $50,000 or $70,000 and transfer it tax-deferred to TEPSHE without any current taxes. TESPHE/SSIP (and 401(k) plans in general) have a variety of complexities, including:
a. Taxes. The tax rules on TESPHE distributions relate to your age. There’s one set of rules if you are under 59 ½ and another if you are over. Over 59 ½, you pay taxes on what you take out. When you reach 70 ½ you HAVE to begin withdrawals, or face a stiff penalty. If you’re under 59 ½, you may take funds out without penalties through an IRA (called an IRA rollover and a loophole called 72(t)) or through TESPHE directly if you are at least age 55 or older when you separate from service.
b. Capital preservation. These are trying times (we suppose all times are trying times). In these times, we’re advising you keep as much in your TESPHE/SSIP as possible. Either don’t start withdrawals and retain TESPHE/SSIP as a nest egg, whether within TESPHE or maybe better, in an IRA; or take small enough withdrawals to never use up the TEPSHE/SSIP balance. Preservation of principal, plus preservation of inflation purchasing power. That’s our motto for TESPHE/SSIP.
c. Beneficiaries. Taxes aside, you can structure your 401(k)/IRA into a tax treat or a tax nightmare for your beneficiaries. There are a wide variety of considerations for picking your beneficiaries. For most people with a spouse and kids they name their spouse primary beneficiary and the kids as secondary (word it correctly!). The beneficiaries can stretch the tax over many, many years, giving more money to your family, and not the IRS.
d. Investing. TESPHE/SSIP is retirement money, not gambling money. Retirement money should follow established principles of investing, like diversification (don’t put all your eggs in one basket), fee management (look for no-or low-load investments) and asset allocation (having a variety of types of investments). You should have your retirement nest egg in a moderate global portfolio to minimize your risk, and to maximize the one thing we see as certain: the growth of the world.
We wrote another piece (and blog) called ‘Five Reasons to Roll Out of TESPHE…and One Reason to Stay’. Grab a copy, or go to http://www.LJPR.com to get a copy.
5. Gain perspective on the buyouts. We’ve been to many plants talking to many prospective retirees. To us, the $50,000 (or $70,000), or any of the other varieties of enhancements are significant enough to at least get a piece of paper and a calculator out to look at the situation. Among a variety of other issues, we see two big ones: First, how long would it take you to save $50,000? If you were making $50,000 a year and saved 10% of your pay in TESPHE, it would take ten years to get gross contributions into your account. The second consideration, and it’s a touchy one is this: Once you retire, you’re being paid by a 95% funded, federally insured (fully insured for the age 65 benefit) pension plan. If you stay, your paycheck comes from a domestic auto company with a significant debt load, ferocious competition, and an unstable oil market. Will your pension still be there later? We’re pretty certain of it. Will the buyouts be there later? Who knows?
6. Watch out for the Social Security Disability Trap. Besides the retirement trap we mentioned above in item 3 (the 30/35 rule), it’s important to note that you are not eligible to receive Social Security disability benefits if you do not have covered earnings in 5 out of the ten years prior to disability. This mean that if you retire at age 53, and don’t work anywhere to get Social Security coverage, and become disabled at age 59, you will not receive disability benefits (regardless of how many other years you paid in. It doesn’t take a lot to stay in the system (it actually is a little over $2,000), but it’s worth having some earnings to not only buff up your retirement benefit, but also to keep your disability benefits. Go paint houses with your brother in law or work at the golf course (‘move along please’) or sell sporting goods. Do something fun, make some money, keep some money.
7. Watch out for the Social Security Earnings Trap. Since we’re on traps, there’s another one you should know about. Once you retire from Ford, you can pretty much make as much as you want and your pension still comes in. However, once you start collecting Social Security, there is an earning limitation that can reduce or eliminate your Social Security benefits. If you work (or have earned income) between the ages of 62 and your Normal Retirement age, your Social Security benefit will be reduced for every dollar you earn above $13,560 (for 2008: it changes every year) by 50%. In other words, earn $2, lose $1 of benefits. Watch out when working past 62. Once you reach age 65 there is no reduction.
8. This is a timing decision. When we’re faced with advising on what to do in a financial decision, our recommendations always start or end with “this is based on what the deal is now”. A lot of Ford employees are thinking they may wait for a better deal, or better circumstance, or until they have more money. There are three scenarios we see: the good the bad and the ugly (cue some Clint Eastwood music). Under the ‘Good’ scenario (which is what we hope for), Ford regains some market share, transfers production, sell cars, keeps people employed and America stays healthy in the car business. Under this arrangement, no more buyouts (good!). Under the ‘Bad’ scenario, Ford continues to struggle, has problems in the credit market, oil prices stay unstable and Ford suffers. The credit markets have stretched Ford pretty far, but under this scenario, Ford may continue to offer buyouts. Under the ‘Ugly’ scenario, Ford doesn’t survive at all under its current status, either seeking court protection, or a buyer or merger. Under this unpleasant option, we would see no buyouts (for example, when Kmart went out, the buyout was two weeks pay). Analyze your situation based on what’s in hand.
9. Watch your common sense. If you take a buyout or don’t take a buyout, you still should be concerned with your money. Get a Will; get a good Financial Durable Power of Attorney and Health Care Power of Attorney (even think about a trust). Set up and follow a budget. Save some extra money, either in TESPHE or in a Roth IRA. Stash some money away for the kids in a good §529 plan (like the MESP). Pay off high interest credit cards. Save some money, you can never have too much!
10. Get help if you need it. You are going to retire once from Ford. If you need help in this decision, consult an advisor. We think we’re the top advisors on these buyouts for this decision (especially in Michigan). First seek out someone competent in tax issues. Make sure they understand the Ford benefits. Be sure they have the interaction of Social Security. Look for someone who can advise on investments and withdrawals. And most important, look for someone unbiased. Your advisor should work for you, not for a brokerage house or an insurance company or a bank or anyone other than you. You’re the end result and this is your decision. Good luck!
Note: The forgoing information is provided by LJPR, LLC and represents the sole opinions of the authors. LJPR is an independent firm and does not work for, nor provide the official position of Ford, the UAW, or Fidelity Investments. All information and tax rules are as of the beginning of September 2008.
©2008 LJPR, LLC. All rights reserved.