Monthly Pension or Lump Sum?

[bob boag]

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.

[bizlady]

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.

[BigNick]

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!

[ronocnikral]

Quote:

Originally Posted by BigNick 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!!

[frayne]

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.

[clifp]

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.

[Katsmeow]

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.

[bob boag]

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.

[militaryman]

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!!

[HsiaoChu]

Quote:

Originally Posted by bob boag [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

[bob boag]

Quote:

Originally Posted by militaryman 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]

Quote:

Originally Posted by HsiaoChu 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.

[Katsmeow]

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.

[beowulf]

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.

[Katsmeow]

[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).

[HsiaoChu]

Quote:

Originally Posted by beowulf 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

[beowulf]

Quote:

Originally Posted by HsiaoChu 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.

[ziggy29]

Quote:

Originally Posted by bob boag 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.