Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Monthly Pension or Lump Sum?
Old 08-03-2010, 02:42 AM   #1
Recycles dryer sheets
 
Join Date: Jul 2010
Location: Torrance
Posts: 112
Monthly Pension or Lump Sum?

I'm 54 and will be eligible to retire at 55 next year. 30 years at Megacorp.

- Salary = $140K
- 401K = $500K (I contribute $22K/yr pretax & $15K/yr after-tax)
- $650K house paid off
- Wife is 50, makes $75K & can retire at 55 with $30K/yr COLA'd pension & $200K 401K.
- SS should be worth ~30K/yr at 66.6 and another $15K/yr when wife is 66.6. I'd be happy to get maybe 2/3 that amount.

- 2 teen kids with ~$100K total set aside for college at this point.
- Our current yearly expenses are about $100K (yikes). Hope to get this down to ~$70K or less when the kids are grown & on their own.

My work is pleasant enough and I can save ~50K/year so it's hard to walk away from.
I can take a COLA'd pension of $60K/yr at 55 or $72K/yr at 60.
Or.... I can take a lump sum of $1.7MM at 55. It actually goes down at 60.
I want the lump sum because the current low interest rates make the payout huge.
I figure if rates go up to something more normal I can get an equivalent annuity if I want, with lots of dough left over.
I wouldn't mind working a few more years & saving more money, but I am paranoid about that $1.7MM being snatched from my grasp.
By various accounts I'm out $50-$100K for each quarter percent rates go up.
I am also concerned that the lump sum option will be discontinued in the future.
And I prefer not to be dependent on the financial health of my pension plan for the rest of my life.

Any opinions on whether my concerns are justified? What would you do?
Thanks for reading.
__________________

__________________
bob boag is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-03-2010, 06:56 AM   #2
Full time employment: Posting here.
 
Join Date: Mar 2008
Posts: 637
WOW- You've done well.

Have you used any financial tools file FireCalc to determine if you have enough assets? If you retire early, will you need to pay for medical coverage? Is your pension a COLA pension? If you were to die a year after retiring, and took the pension, would your wife be OK financially? Are your teens 13, or 19?--big dfference. Could you take the lump sum and get another job elsewhere- or consult with megacorp? Does your projected budget after retirement include taxes?

Just a few things to consider. Definately run some scenarios. I'd want to take the lump sum too, especially with pensions failing. But you'll need to run the numbers and see if that makes sense.
__________________

__________________
bizlady is offline   Reply With Quote
Old 08-03-2010, 07:02 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Jun 2010
Location: France
Posts: 1,195
As long as the "interest on the lump sum" versus "COLA pension" amounts are close, here are the factors which would be influencing my choice:

- Given that you have SS to kick in later, with the lump sum you will be able to afford to spend more now (especially if you are a fan of Bernicke's argument that spending tends to drop off with age). You don't say how old your teens are, but it sounds like you have several more years before they're buying dinner. With the lump sum, you could fill out their college fund *and* live well now.
- $1.7M spread around should be at least as low-risk as relying on your pension plan.
- You didn't say what happens to your pension if you die before DW. Is there a survivor's clause? On the other hand, if that $1.7M is sitting in the bank, it's hers. (Hmmm, if she starts to get a glint in her eye and sharpening the kitchen knives, this might not be a good thing. )

So, three points in favour of the lump sum. In favour of the pension? Just the COLA. In theory the pension is the less risky of the two, but with pension funds and the market generally being the way they are, I'm not sure if even that is true any more. In your position I would be asking a lot of tough questions about the stability of the pension fund, before I walked away from the $1.7m.

ETA: bizlady entered pretty much the same points, concurrently with mine but faster and more concisely!
__________________
Age 56, retired July 1, 2012; DW is 60 and working for 2 more years. Current portfolio is 2000K split 50 stocks/20 bonds/30 cash. Renting house, no debts.
BigNick is offline   Reply With Quote
Old 08-03-2010, 07:58 AM   #4
Full time employment: Posting here.
ronocnikral's Avatar
 
Join Date: Apr 2010
Posts: 852
Quote:
Originally Posted by BigNick View Post
In your position I would be asking a lot of tough questions about the stability of the pension fund, before I walked away from the $1.7m.
of all the old guys i work with, this is their biggest concern. of course, more market risk than a pension annuity, but the OP may want to shop around to see what $1.5m or can buy him in terms of a SPIA.

while there is the funding retirement side, which the OP seems to have nailed down, we have heard nothing about the expense side. they seem to have plenty of money, but the type of retirement is dependent on what they spend.

if i were the OP, I would take the money and run!!
__________________
ronocnikral is offline   Reply With Quote
Old 08-03-2010, 12:27 PM   #5
Thinks s/he gets paid by the post
frayne's Avatar
 
Join Date: Oct 2002
Location: 19th Hole
Posts: 2,535
My two cents, take the lump sum and roll it and 410K into an IRA. You can pick your investments/portfolio style and even could consider taking some out via 72T without the 10% penalty.
__________________
A totally unblemished life is only for saints.
frayne is online now   Reply With Quote
Old 08-03-2010, 04:54 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,451
I plugged 1.7 million into a joint life (50% survivor benefit) limited COLA on the TSP annuity calculator and it gave estimated pension of $5,038 so very much inline with 60K form megacorp. So I doubt you can do significantly better getting a pension in the outside.

To me the strongest argument for taking the lump sum is you can probably leave something for the kids, with a minimal reduction in your standard of livingl
3.5% Safe Withdrawal Rate is $59,500 a year.
__________________
clifp is offline   Reply With Quote
Old 08-03-2010, 09:07 PM   #7
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
What my DH did was take the lump sum. There were several reasons for taking the lump sum (in his case his lump sum was less than yours -- just over 7 figures -- but his pension would have been a bit more). The reasons we decided for the lump sum:

1. If his company discontinues the pension plan tomorrow or goes broke we won't care since he received the lump sum. I don't care how solvent and wonderful a company may seem. Stuff happens.

2. Yes there is the Pension Guaranty. However, we took a close look at it. First, there is a limit as to how much it will pay a year. That amount was less than my husband's potential pension.

3. We had the option for me to have a 100% survivor pension under DH's plan and we would have gone for that. However if the Pension Guaranty took over they would only pay a 50% survivor pension.

4. The Pension Guaranty could change. The above is the law now. If lots of companies go under the rules could always change for the worse.

5. He could have deferred taking his pension but in his case he wouldn't have received more money. Also if he didn't take the lump sum now it might not be available later. Even if the company wanted to pay it a lump sum can't be paid unless the company has a certain level of funding of the pension plan. Again, stuff happens.

6. You are correct that the current rates make lump sums particularly attractive.
__________________
Katsmeow is offline   Reply With Quote
Old 08-03-2010, 10:39 PM   #8
Recycles dryer sheets
 
Join Date: Jul 2010
Location: Torrance
Posts: 112
Thanks to all. It's extraordinary to get insight & advice from sharp, unbiased, financially savvy people (for free!). This site & boggleheads are the best secrets on the web.

Firecalc says I'm good if I keep expenses under about $110K/year. I think I've been brutally complete in capturing my expenses for the last couple years; about $100K/year. I was dismayed. We're not really that extravagant. Southern California is expensive, as are my kids (12 & 14). I stumbled on a useful USDA report called "Expenditures on Children by Families, 2009". I don't have the dryer sheets to post a link but you can google it. Among many other things it suggests that my two kids probably cost me at least $40K/year. So my WR may be a little high in the near term but I feel pretty confident in the long run.

I can get my company's group medical rate until 65; they even kick in a bit. They want me to consult which would be awesome but I can't depend on it (and I may not want to!)

Thanks again to all for confirming that I'm not crazy - it's hard to step away from a paying gig in this environment but I'm more scared of the risks of not grabbing a sure thing that will make me FI.
__________________
bob boag is offline   Reply With Quote
Old 08-04-2010, 06:20 AM   #9
Recycles dryer sheets
 
Join Date: Jun 2007
Location: Oklahoma City
Posts: 275
I would take the 1.7 Mil and roll IF it was "OK" with wife to have you retired while she continued to work the next 5 years.

You will have a consistent annuity (guaranteed $$) coming from her retirement at 55 and then reinforced from the SS checks later down the road so you really do not need anymore "locked in" security pension/annuity.

Even if your wife would not be thrilled about being the only one working for 5 years what are the chances of you grabbing the $$ and coming back as an independent contractor, consultant at your present location. OR doing something a little different employment wise until the wife retires and kids are closer to college. ??

I'll trade you spots and make the choices for you!!
__________________
USAF Veteran -- Retired Air National Guard -- OSW -- ONW -- OIF
militaryman is offline   Reply With Quote
Old 08-04-2010, 08:48 AM   #10
Recycles dryer sheets
HsiaoChu's Avatar
 
Join Date: Feb 2010
Posts: 389
Quote:
Originally Posted by bob boag View Post
[FONT=Calibri][SIZE=3]Firecalc says I'm good if I keep expenses under about $110K/year. I think I've been brutally complete in capturing my expenses for the last couple years; about $100K/year.
I really enjoy it when I see these kinds of statements. In my 40 years of working life, the maximum I've ever made was about $72K working.

But my 2 cents is that if you KNOW that your pension is stable and will keep providing, and that no entity can come in and raid it, then take the pension since it will keep you on a fixed stable budget, and you won't be tempted to raid it yourself for stuff.

But you may need to downsize your life so that you don't need $110K to survive.

If not, take the money and run.

HsiaoChu
__________________
HsiaoChu is offline   Reply With Quote
Old 08-04-2010, 10:06 AM   #11
Recycles dryer sheets
 
Join Date: Jul 2010
Location: Torrance
Posts: 112
Quote:
Originally Posted by militaryman View Post
I would take the 1.7 Mil and roll IF it was "OK" with wife to have you retired while she continued to work the next 5 years.
She actually thinks she may want to work to 60! But I'm assuming 55. The hardest thing will be to explain to my 80 yo father why his clueless 54 year old "kid" wants to quit his job in this economic environment (and my in-laws).
__________________
bob boag is offline   Reply With Quote
Old 08-04-2010, 10:11 AM   #12
Recycles dryer sheets
 
Join Date: Jul 2010
Location: Torrance
Posts: 112
Quote:
Originally Posted by HsiaoChu View Post
But my 2 cents is that if you KNOW that your pension is stable and will keep providing, and that no entity can come in and raid it, then take the pension since it will keep you on a fixed stable budget, and you won't be tempted to raid it yourself for stuff.

HsiaoChu
I kind of agree with you. I haven't been brilliant with finances (witness my 500K 401k). Someone accurately described annuities as allowance for adults, which isn't a terrible idea for me. But I've seen enough horror stories about busted pension funds that I don't want to be tied to one for the rest of my life.
__________________
bob boag is offline   Reply With Quote
Old 08-04-2010, 10:12 AM   #13
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
Quote:
But my 2 cents is that if you KNOW that your pension is stable and will keep providing, and that no entity can come in and raid it, then take the pension since it will keep you on a fixed stable budget, and you won't be tempted to raid it yourself for stuff.
The thing is that it is difficult to know that a pension is stable. My DH worked for a really good megacorp who has been doing extremely well financially. The pension fund has always been very solid. One might think then that taking the pension would be more stable.

Bear in mind that in taking a lump sum the idea is that the lump sum is the equivalent of taking the pension.

Anyway, DH decided to retire earlier this year and gave notice to retire this summer (and planned to take a lump sum). After notice was given, the Gulf oil spill occurred. DH's employer was adversely affected by the oil spill (no he didn't work for BP). It remains to be seen how that will shake out over the next couple of years. Whether a lump sum can even be taken is based upon the funding of the pension fund as of the beginning of the year. It is entirely possible that employees of that company might find that next year that they can't even take a lump sum. Also, seeing this adverse impact for something that was no fault of DH's employer it really brings home the idea that you never know. Even very good stable employers can go under if something really bad happens.
__________________
Katsmeow is offline   Reply With Quote
Old 08-04-2010, 10:27 AM   #14
Recycles dryer sheets
beowulf's Avatar
 
Join Date: Oct 2007
Posts: 466
If I had to make the same choice, I would probably take the lump sum. The only area I didn't see covered was health insurance - if you can't get it through your DW's job, that's going to be a big expense with 4 people. Figure over $10K a year if you are footing the whole bill. The other issue would whether you can get another job (assuming you want one) in your field (or another one) that pays a reasonable amount. May not be what you get now, but a part time job at $50K a year would be useful.

FWIW, $100K a year in expenses is not a lot in a high cost area. With travel, eating out and our normal expenses, I doubt we could drop under a $100K a year in expenses until we are a lot older.

Good luck with your decision.
__________________
Mission accomplished - not necessarily ER, but certainly R.
beowulf is offline   Reply With Quote
Old 08-04-2010, 10:42 AM   #15
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
[QUOTE=beowulf;964473]If I had to make the same choice, I would probably take the lump sum. The only area I didn't see covered was health insurance - if you can't get it through your DW's job, that's going to be a big expense with 4 people. Figure over $10K a year if you are footing the whole bill. QUOTE]

The OP said
Quote:
I can get my company's group medical rate until 65; they even kick in a bit
.

This is similar to DH's company. He gets subsidized group medical. Even after he turns 65, I can continue getting it until I turn 65.

That said, even the subsidized rate for the coverage we have is over $1k a month! (This is a family plan that does include our kids). Next year we will switch to the high deductible plan which is only a few hundred dollars a month (but with a much higher deductible of course).
__________________
Katsmeow is offline   Reply With Quote
Old 08-05-2010, 03:36 PM   #16
Recycles dryer sheets
HsiaoChu's Avatar
 
Join Date: Feb 2010
Posts: 389
Quote:
Originally Posted by beowulf View Post
Figure over $10K a year if you are footing the whole bill.
If you know where to get full health care for four people for only 10K a year, I sure want to hear about it. I'm looking at $11K + for two people and that's with my current employer's group policy until I'm 65(3 more years).

HsiaoChu
__________________
HsiaoChu is offline   Reply With Quote
Old 08-05-2010, 10:31 PM   #17
Recycles dryer sheets
beowulf's Avatar
 
Join Date: Oct 2007
Posts: 466
Quote:
Originally Posted by HsiaoChu View Post
If you know where to get full health care for four people for only 10K a year, I sure want to hear about it. I'm looking at $11K + for two people and that's with my current employer's group policy until I'm 65(3 more years).

HsiaoChu
Sorry, that's just a swag from what I heard from other people. I receive health care with my retirement, so I have no real experience buying health incurance on the open market.
__________________
Mission accomplished - not necessarily ER, but certainly R.
beowulf is offline   Reply With Quote
Old 08-06-2010, 11:14 AM   #18
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Quote:
Originally Posted by bob boag View Post
She actually thinks she may want to work to 60! But I'm assuming 55. The hardest thing will be to explain to my 80 yo father why his clueless 54 year old "kid" wants to quit his job in this economic environment (and my in-laws).
Easier to explain to a father than a father-in-law who might want to know why his little girl "has" to keep working while his slacking ne'er-do-well son in law goofs off all day.

Actually, I may be that guy in 5-10 years if all goes well. And my wife would be fine with it.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Pension lump sum value? hankster FIRE and Money 17 03-24-2008 02:13 PM
monthly pension vs. lump sum kbst FIRE and Money 25 11-20-2007 05:31 PM
lump sum or monthly payment valve monkey FIRE and Money 20 03-26-2007 09:18 PM
Pension: Lump Sum or Monthly Payment ? Helena FIRE and Money 12 09-07-2006 10:00 AM
Lump sum vs. monthly payments K. B. Sharkstooth FIRE and Money 4 10-29-2004 07:08 PM

 

 
All times are GMT -6. The time now is 04:47 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.