This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Considering A Pension Advance? Ask These 5 Questions





There is a growing danger that threatens the financial security of retirees who should have been relatively insulated from the market setbacks of recent years: people with defined-benefit pensions.

Unlike people in 401(k) plans and other defined-contribution vehicles, people with defined-benefit pensions don't see their retirement benefits bounce up and down with the market. Instead, their benefits are guaranteed by their former employers. With the corporate community having largely abandoned defined-benefit pensions, it is often government employees, including military personnel, who are still covered by these plans.

The threat comes in the form of pension advance loans, which often employ predatory terms that can greatly reduce the value of a retiree's benefits.

What are pension advance loans?

Pension advance loans provide an upfront amount in exchange for payment from the retiree's future pension benefits. While that may make sense in some situations, one general problem is that it feeds into the common tendency of Americans to overspend now at the expense of their financial futures.

What's worse is that pension advance loans often charge exorbitant interest rates. While today's mortgage rates are down around 3.5 percent and bank rates on deposits are even lower, an investigation by The New York Times found that after factoring in all costs, the pension advance loans surveyed charged effective interest rates between 27 and 106 percent.

At that cost, pension advance loans are not just a case of sacrificing the future for the sake of the present -- they are pretty much like throwing money away.

What to consider before you take out a pension advance

Here are five things to consider before you agree to a pension advance loan:

  1. What will happen to your financial needs as you age? Unless you have reason to believe your expenses will be considerably lower in the future than they are now, you should not give up future benefits for the sake of current spending.
  2. Are you borrowing for short-term or long-term benefit? This is the difference between using money for something that will benefit your for years to come, or splurging on something you may regret for years to come.
  3. What is the effective interest rate? Calculate how much you'll have to pay in the form of future benefits compared to how much you'll get now. At a time when even high-yield savings accounts are only paying about 1 percent, and even most credit card rates are in the teens, paying 20 percent or more for a pension advance loan is hard to justify.
  4. Did you plan on leaving an inheritance? As people age, they start to think not just about their own future, but about future generations. If you had planned to leave any money behind, hanging onto your retirement benefits rather than borrowing against them may by your last chance to accumulate some savings.
  5. Can you plot another course before it's too late? People often resort to pension advance loans because they are in a bind. Before you get into that situation, work on maintaining a lifestyle that your benefits can afford.

By charging excessively high interest rates, pension advance loans can effectively rob retirees of a portion of their benefits. The worst part is that by signing on to those loans, retirees are active accomplices in that robbery.

null

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,191.37 -195.84 -1.13%
S&P 500 2,002.16 -27.39 -1.35%
NASDAQ 4,637.9940 -43.5030 -0.93%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs