As an employee of Duke Energy, you have access to an employee benefits package that offers a variety of valuable financial, healthcare, and insurance benefits.
At R.P. Boggs & Co., we have helped many Duke employees prepare for retirement by educating them on how to make strategic elections to maximize their corporate retirement benefits. As independent financial advisors familiar with the plan, we’d like to share our recommendations for how to make the most of your Duke retirement benefits.
We believe that as the world becomes more complicated, planning becomes increasingly critical. It is never too early to plan ahead and maximize
your employee benefits prior to retirement. We hope you find this guide helpful as you navigate your Duke retirement benefits.
Dukes 3.5% Annual Increase Pension Annuity Option- Is It Better?
At first glance this new pension option looks interesting, as it provides 3.5% compound inflation growth each year for life (along with your spouse’s life if survivorship option is elected). To fully understand how this new option works, we decided to run an analysis of the regular level pension option versus the new 3.5% increase pension option. Read More →
The Duke Cash Balance Pension Plan
The Duke Pension Plan provides either a lump sum or an annuity stream over your lifetime and, if you elect, over the lifetime of your spouse. If you are an eligible employee, you will become fully vested in the plan after only three years of service.
When we work with Duke employees prior to retirement, we often see that they are confused over the various choices they have in distributions and the timing of distributions. From our experience, the first decision you need to make is whether you want to roll the pension into an IRA as a lump sum or take an annuity for your life and the life of a spouse.
DETAILS TO CONSIDER ABOUT EACH OPTION:
Taking The Pension As A Lump Sum Rollover
A lump sum rolled tax-free into an IRA allows you to control the assets and invest them independently (or use a financial advisor to invest them). This choice has many advantages, including the ability to adapt to future market conditions, the opportunity to grow the account to keep pace with inflation, and the option to leave funds to create a legacy for your children. On the other hand, this choice does expose you to more risk as the markets ebb and flow.
Taking The Pension As An Annuity
If you choose to take your pension as an annuity, you have the advantage of a fixed monthly income over your lifetime without market fluctuations. There are several disadvantages as well, namely in the form of inflation. As the years go by, your payment amount will not change, meaning your purchasing power will erode as cost of living increases. Also, once you die, there is usually nothing left to leave as an inheritance for your children.
In addition to the advantages and disadvantages of the two options, you should consider the tax impact as well. In a lump sum rollover into an IRA, you will not pay any taxes on the rollover. However, once you reach age 70 ½, you must take Required Minimum Distributions (RMDs) that are taxable. On the other hand, taking the annuity option means you have no ability to alter your payout strategy for tax purposes, however, you are not subject to the RMD rules at age 70 ½.
Another factor that enters into the decision-making process with these two options is the current state of interest rates in the market. If you take a lump sum payout, then the amount that is rolled over is the balance in your account. If you choose the annuity, then the actual monthly amount depends on the interest rate used to calculate the stream of income over your life.
Here’s How It Works:
01. Annuity Benefit Calculations
The pension plan provides that the interest rate is set by using the 3 tiered corporate bond rates published monthly by the IRS. There are two dates that are important in making decision, August 31st and December 31st. For example, if you retired on July 1st, the interest rate used to calculate your monthly annuity payment would be the IRS rate for August of the previous year.
There is a window between September 1, and December 31, where you will know the rates for both years and can choose the higher one to maximize your benefit. Once you start receiving your annuity payments, the payment remains unchanged for the rest of your annuity. The higher the IRS rate, the higher your monthly payment will be for your lifetime. Thus, it is important to pick the right year to begin receiving your pension annuity. We might recommend that you wait until early September to decide which year to start your annuity.
02. Hybrid Annuity/Rollover Option
To further complicate matters, you also have the option of taking part of the account as a lump sum rollover and part as an annuity. This hybrid plan could make sense if you only wanted to cover your basic living expenses with an annuity and invest the rest for the discretionary purchases.
The Duke Retirement Savings 401(k) Plan
Besides your pension, your other significant asset from your Duke benefits is your 401(k) plan. You have two planning opportunities here that we like to discuss during the year of retirement.
First, in the year of retirement, you may only work a partial year
In this case, you should consider maximizing your contributions over the shorter year, which means you have to increase your monthly contributions to make sure the maximum is in by retirement.
Second, there is a little known rule that says if you contribute after-tax amounts to your 401(k)* you can roll this amount into a Roth IRA.
* in addition to your pre-tax amounts
A Roth IRA allows you to have tax-free earnings for your lifetime, which is a good tool to have as part of your retirement income strategy. We usually recommend that you contribute over and above the maximum 401(k) pre-tax amount, when possible. If you roll that after-tax amount into a Roth IRA, this will give you an extra tax-free financial buffer.
After retirement, the planning continues in terms of deciding what to do with your 401(k) balances. As financial professionals, we would want to determine how much of your contributions were pre-tax versus after-tax.
Pre-tax amounts and earnings could be rolled over to a traditional IRA and the after-tax contributions could be rolled into a Roth IRA. There are strict rules to this process, so make sure you have professional guidance and all the details in place.
Duke Stock in Your 401(K)
An interesting tax-savings opportunity is available if you have Duke Energy Stock in your 401(k). There is a tax provision that could allow you to distribute your stock and only pay tax on the cost basis under certain circumstances. Upon a later sale of the stock, any gain would be long-term capital gains, which is usually taxed at a lower rate. We can determine if this is possible for you.
Duke Medical Plans
Oftentimes, employees retire prior to age 65 and need medical coverage before Medicare kicks in. Duke has a retiree health plan that is more costly than the active coverage plan but provides monthly subsidies through a Health Reimbursement Account (HRA) for most people (at least 55 years old and with 10 years of service) up to their Medicare-eligible age of 65.
As an early retiree, you will have a choice of several different plans and coverages. You will need to study the details and select the one that best fits your needs. Also, you cannot stop or suspend your coverage and get back in at a later date unless you go to work for another employer and provide proof of coverage.…
For those who do not qualify for retiree medical or choose not to use it, you have access to COBRA coverage that allows you to continue the active medical plan, at your expense, for up to 18 months after termination.
Once you reach age 65 the subsidy ends and you can apply for Medicare. At that time, the Duke medical plan becomes the secondary plan and Medicare becomes your primary insurer.
Basic, supplemental, spousal, business travel, and accidental death coverage all end with termination from Duke. However, some employees may be able to continue benefiting from some of the policies. You should contact HR to determine what, if any, coverage is convertible after retirement.
The amount of life insurance coverage you choose is a very personal decision and unique to each employee. At R.P. Boggs, we conduct an in-depth insurance analysis for each of our clients to determine the amount of coverage needed and the most economical way of obtaining that coverage.
Coordination Of Social Security With Duke Benefits
Determining the most advantageous Social Security strategy is a very complex analysis. At R.P. Boggs, we use an advanced computer program to make sure we optimize the benefits for you and your spouse.
Such an analysis requires us to look at your sources of income, primarily Duke benefits, to see if we can delay applying for Social Security to increase the benefits.
You can apply for Social Security benefits starting at age 62 but will receive only about 75% of what you would get if you waited until full retirement age (FRA), which is around age 66 for people retiring soon. Moreover, if you wait until age 70 to apply, you will receive 132% of what you would have received at age 66. By delaying just a couple of years, you are, in effect, earning about 7-8% per year in increased benefits.
This could be better than the returns you receive on your other investments and these benefit increases are guaranteed by the U.S. government! This is a substantial reason to wait until at least FRA to begin taking Social Security benefits
By delaying just a couple of years, you are, in effect, earning about 7-8% per year in increased benefits. This could be better than the returns you receive on your other investments and these benefit increases are guaranteed by the U.S. government! This is a substantial reason to wait until at least FRA to begin taking Social Security benefits
In our analysis, if you retire before age 66, we look to see if we can use assets other than Social Security benefits to support you until you reach your FRA. We may suggest you live on the Duke pension and 401(k) rollover and forego Social Security to bridge you until FRA. In this way, you can increase your Social Security benefit for life.
There are other strategies that can be applied to maximize your Social Security benefits and those of your spouse, simply by making certain elections. Social Security is a major component of your retirement strategy and much care should be taken to make sure you choose the best options for you and your family.
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