By Carmine Coppola
The MetLife Personal Retirement Account (PRA) is a cash balance pension, an additional retirement account that complements the discretionary 401(k) plans most employers offer today. This plan allows employers to reward employees with extra retirement savings on a tax-deferred basis. Though cash balance pensions do not allow for you to contribute to the plan yourself or choose how to invest the balance, it’s important to understand what options you do have when you leave or retire from the company, including understanding how to manage distributions when the time arrives. (For more information on how the PRA works, visit our MetLife page to get yourself up to speed and prepare for making a smart decision.)
Evaluating Your PRA Options When Leaving MetLife
If you’re moving onto the next chapter of your career or life soon, you’re probably already asking yourself the big question: What do I do with my PRA when I leave MetLife?
The answer depends on your specific circumstances. The PRA offers four different options when you separate from MetLife:
- Leave the money in the plan, although you can only do this until age 65.
- Annuitize the PRA into an income stream – almost like purchasing a traditional pension.
- Roll the balance over into an IRA, allowing you to invest the funds however you’d like.
- Take a lump sum distribution, noting that the entire balance would be taxable to you.
Hint: Option 4 is rarely the best option (unless your balance is particularly small), so we’ll focus on the other three potential choices in this piece.
Let’s start by reviewing each option and the scenarios in which you might use it. Then, I’ll provide you with a list of steps to help you determine which option is most favorable for your situation.
First, we’ll explore each option’s nuances and the contexts in which they are most advantageous so you have a comprehensive understanding to guide your decision-making process effectively.
Option 1: Leaving Money In The Plan
MetLife only allows you to leave your balance in the PRA while employed or until you turn 65, whichever occurs later. So, this option is not available if you’re retiring or leaving the company after age 65. However, if you’re under 65, this could be a solution to consider.
Your PRA will receive monthly interest credits based on the declared annual crediting rate. This rate is based on the 30-year treasury bond rate for November of the prior year. You can reference your benefits portal to find the current year’s crediting rate.
If you’re considering leaving money in the plan, you’ll find it helpful to compare how this would fit into your overall investment portfolio and look at the alternatives. Remember, all investments have tradeoffs, so working with your investment advisor is important to determine which option aligns with your financial plan.
Who does this option work well for?
- Someone who is a conservative investor and does not need additional income.
- Someone who is a conservative investor and finds this rate to be higher than rates they are currently receiving in other vehicles.
- Someone who is close to retirement and may want to tap into the guaranteed income option at a later date.
Who does this not work well for?
- Someone who is a more aggressive investor or nowhere near retirement.
- Someone who is not anticipating they will need additional income.
In my experience, it’s uncommon for people to leave money in their PRA unless they plan to annuitize it later.
Option 2: Annuitizing the Plan to Create an Income Stream
This option essentially amounts to purchasing a “traditional pension” for yourself using the cash balance of your PRA. MetLife has multiple annuity options, both single-life and joint-life.
If you’re looking for additional income in retirement, going this route may work well for you. If you’re retiring and know you’ll need an income stream immediately, this could help you meet that goal. On the other hand, if you prefer liquidity and flexibility with your assets, it might not be the option that aligns with your needs. And if you’re far from retirement and still working, it probably won’t appeal to you.
What are the advantages of annuitizing my PRA?
- It allows you to create a guaranteed income stream to supplement your other retirement income sources.
- It offers the option to choose a joint payout with your spouse, allowing the income stream to continue for whichever person lives longer.
- It transfers the investment risk to MetLife.
What are the disadvantages of annuitizing my PRA?
- The asset loses liquidity, so you can’t access cash if you need it sooner.
- If you choose the joint option, the income stream dies with you or the last surviving spouse, meaning it will not be passed along to your heirs or be part of your estate.
- Choosing this option means potentially facing the opportunity cost of not being able to invest the cash balance elsewhere.
Important Note: If you determine that you want more guaranteed income and are planning on annuitize the PRA, it’s always advisable to price out other income-producing investments as well, such as outside annuities, to compare income amounts. You might find a higher income rate at another insurance company.
Option 3: Roll Over the PRA into an IRA
This option is simple. It involves taking the cash balance of your pension and rolling it into an IRA you already have or establishing a new IRA account to roll it into.
What are the advantages of rolling over my PRA?
- It gives you complete control over how funds are invested, allowing you to align your investment strategy with your overall financial plan.
- It enables you to maintain the asset, which can now be passed down to your heirs and your estate.
- If you change your mind and decide you’d rather have a guaranteed income stream, you can always purchase an annuity at some point in the future.
- It offers the most flexibility out of all the options.
What are the disadvantages of rolling over my PRA?
- You bear the investment risk, so if the market goes down, so does the value of the asset.
- You no longer receive the interest credit.
- You can no longer annuitize through the MetLife pension (see Option 1). But you will still have the option to annuitize through another insurance company at a later date if you choose to do so.
Steps for Evaluating What Option Is Best for You
Let me start by saying that determining what to do with your PRA is not a decision that should be made in a vacuum. It’s something that should be considered in tandem with the rest of your financial plan. Here are the steps you can take to start the evaluation process:
Step 1: Are You Retiring or Continuing to Work?
The answer to this question will play an important factor in determining what the goal of money is. Typically, if you’re retiring, you have an immediate income need, and if you’re continuing to work, you have time before you need to start taking income. This consideration will also affect the IRR calculations in Step 5.
Step 2: What are Your Guaranteed Income Sources in Retirement?
We’re only talking about guaranteed income sources here — Social Security, pensions, annuities, etc.
Step 3: What Are Your Anticipated Expenses in Retirement?
Create an estimate of your retirement expenses. For the most helpful figure, I would focus first on the needs (home, food, etc.) versus the wants (vacations, entertainment, etc.).
Step 4: Identify the Income Gap
See how much of your anticipated expenses will be covered by your current guaranteed income sources. If there is a gap, do the math to determine whether or not annuitizing the PRA will fill the gap. If there is no gap, annuitizing probably does not make sense.
Step 5: Calculate the Internal Rate of Return (IRR) of Annuitizing Your PRA
You can run this using the IRR formula in Microsoft Excel OR have your financial advisor or planner run the analysis for you. (Pro tip: If they can’t run it for you, it’s time to start looking for a new advisor!) The IRR will give you a number that you can compare to an alternative investment strategy.
Step 6: Compare PRA IRR to Investment Strategy
It’s crucial to always compare any available financial option to an alternative. In our experience, the annuitization of the PRA is often a sound income stream. However, it’s not always the most favorable investment choice when considering its IRR compared to an alternative.
Keep in mind that the alternative investment strategy can also be another income-generating investment. So, even if you want more income, it’s important to compare all options before deciding to annuitize the PRA.
Step 7: Run a Financial Forecast for Each Scenario
This is the most important step. Run each option as a separate forecast and compare the possibilities. This will provide a long-term view of how each option may affect your financial future. You could find that annuitizing the PRA fills the income gap but leaves you with fewer assets to pass along to your children, or vice versa.
If you want to know what to do with your PRA when you leave MetLife, walking through these seven steps should help you understand which option makes the most sense for your specific circumstances. When making a final decision, you should run all the scenarios against your overarching financial plan. Your situation is unique and should be treated as such.
Empowering Your Future: Making Informed Decisions with Your PRA Post-MetLife
Navigating the options for handling your Personal Retirement Account (PRA) after leaving MetLife requires thoughtful consideration and strategic planning. You’ll need to weigh the benefits and drawbacks of each potential choice against your unique financial goals, needs, resources, and preferences. By following the outlined steps and seeking guidance from an experienced financial advisor, you can confidently make an informed and appropriate decision.
Schedule a free consultation with us today, and we’ll help you choose a path that aligns with your long-term retirement goals, risk tolerance, and overall financial plan and vision for the future.
This represents the views and opinions of Strata Capital and has not been reviewed or endorsed by MetLife or any of its employees. MetLife is not affiliated with Strata Capital and has not endorsed or approved their services.
Strata Capital is a wealth management firm serving corporate executives, professionals, and entrepreneurs in the New York Tri-State Area, focusing on corporate benefits and executive compensation. Co-founded by David D’Albero and Carmine Coppola, the firm specializes in making the complex simple to ensure clients feel confident in their financial decisions. They can be reached by phone at (212) 367-2855, via email at carmine@stratacapital.co, or by visiting their website at stratacapital.co.
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