6 tips to maximize the value of your AbbVie Pension Plan
Let’s face it, reading about pension plans is not exciting. It’s not fun to write about them either. I’ve been putting off this post for over 3 days because the content was so dry.
So, let’s make it quick, easy to consume, and easy to apply to your life.
If you’re over 21, based in the USA and have worked at AbbVie for longer than five years, you are eligible for the pension plan.
The formula is everything when it comes to understanding your benefit at retirement.
In the calculation of the pension benefit, it takes into consideration your average earnings for the last five years of employment. These earnings are regular base and overtime pay, reduced for contributions to tax-deferred plans. Bonuses, deferred compensation payments and awards are not included. The maximum income that can be used in 2019 per IRS rules is $275,000.
TIP #1: If you’re making over $275,000, then for purposes of the pension, you should be trying to defer all income above this. Not only will it save you in taxes now and provide income for the future, but it doesn’t increase your pension benefit if you receive it as income. However, if you receive income over $275,000, then AbbVie may include it the excess in a Supplemental Pension plan, but that is not guaranteed. Make sure you’re maxing out your 401(k), HSA and putting money in to AbbVie’s Deferred Compensation Plan (if applicable).
TIP #2: Your goal in the last five years of employment, if you make under $275,000, is to make as much money as possible. Only the last five years of earnings are taken into consideration for the pension benefit, so try and time a promotion / pay rise to fit into that window, or accelerate overtime pay during that time to increase your income.
The pension is calculated using the given formula:
(1.1%) x (Average of last five years earnings) x (Years of Service) = ANNUAL BENEFIT
TIP #3: Don’t work longer than you have to as the Years of Service portion is maxed out at 35 years. BUT, there is also a penalty for retiring at 55 and starting your pension immediately. Your pension benefits will be reduced by 5% per year for every year you start your pension before age 62. If you retire at age 55, then this could be up to a 35% permanent reduction in benefits.
TIP #4 : If you HAVE to retire before the age of 62, then don’t start your pension straight away. Make sure you have some income coming in (think 401k withdrawals or deferred compensation payouts) to bridge the gap and keep your pension benefits in tact until age 62 – and for the rest of your retirement.
When you take your pension, you’re going to be given a number of options when it comes to receiving the money. It can either be given to you in monthly payments for the rest of your life, for a specific period of time, split between you and your spouse, or in a lump sum.
Tip 5: While it’s easy to think of taking the payment that covers both you and your spouse (50% or 100% to your partner), it sometimes does not make financial sense to do that. If you spouse is older than you, chances are you might outline them. So why take a smaller payment with the chance that you could have had a higher payment and not needing the survivor benefit. Additionally, instead of taking the survivor option and having a lower payment for your life, you can find out what it would take to put life insurance in place that would provide a lump sum payment when you die. This is called Pension Maximization and is covered in more detail here.
Tip 6: Sometimes the lump sum option can be great and others times it’s not – and it’s all due to interest rates. When interest rates are low, that means your lump sum payout will be higher. When there are higher rates, the payment will be lower. But don’t go on this metric – how financially stable is AbbVie when you are looking to receive your pension? Would you like to leave them with the risk of paying you, or are you comfortable taking the lump sum and trying to generate income for yourself?
As you can see, there are a number of things to think about when optimizing your situation for your pension. Some of them can happen as far away as five years away from retirement while other large decisions can happen the day before you retire.