Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Pension Payout
Old 03-08-2011, 11:01 AM   #1
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Pension Payout

Hi Guys, I am being offered a lump sum pension at 55. I was considering taking it but I'm hesitant. Could I really be better than professional pension managers to invest this money for the next 40-45 years? My wife is 12 years younger. Especially in this interest rate environment. Here's what makes sense for me (please comment). I can take a "level income option" now that pays a level income until 62, then drops by the amount of social security. I'm still working but our cash flow is tight. I'd like to take part of the monthly pension check and invest in riskier stock funds for growth. That way I would not found feel badly if things drop 50% again-I still get the monthly pension checks.
By the way, if I'm working at 62 I won't take social security then but wait until I stop working. The reduced pension payout would continue even if I did not take SS at 62-we'd have to plan on that but I think cash flow would be made up from regular paycheck.
Thoughts?
__________________

__________________
Bobby99 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 03-08-2011, 11:07 AM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
We get these kind of threads quite a bit.

yes you can probably do better investing the lump sum option in stocks. However your risk goes up. And because the risk goes up your withdrawals should be modest.

Ask yourself...

What would I do in a sustained down market ? Would I have to eat dog food ?

Does the potential increased income from a stock portfolio outway the certainty of a pension annuity ?

Just to show what you could be up against in a worst case scenario- Go read Bernstein's articles on "The Calculator from hell"

(FAQ archive): Bernstein's "Retirement Calculator from Hell" articles

That's the really bad negative side to scare you.

Then for the possible upside in the best-of-all worlds, here's something fun to examine:

The New Math of Retirement
__________________

__________________
MasterBlaster is offline   Reply With Quote
Pension Payout
Old 03-08-2011, 11:17 AM   #3
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Pension Payout

I think you might have mis-understood my plan. I'll take the company pension at 55 as the" level income option" payable monthly as a single and 100% survivor pension. No lump sum. It is these payments I would use a portion of to get higher growth. No risk to pension payments at all.
__________________
Bobby99 is offline   Reply With Quote
Old 03-08-2011, 11:23 AM   #4
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
OK I misunderstood what you posted.

The level income options I have seen give you more income until SS kicks in, and then the funding drops. The idea is to keep your income level.

So what you propose is to use that option and then save and invest some of the income.

But really (To a much lesser extent) the issues with a lump sum versus a constant pension annuity payment are the same. Consider the accelerated payment before 65 as a form of a (partial) lump sum.
__________________
MasterBlaster is offline   Reply With Quote
Old 03-08-2011, 11:24 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 9,888
I think you need to restate the actual question more clearly. I interpret it as a question as to whether you should take a lump sum or an income string.
__________________
Yes, I have achieved work / life balance.
travelover is offline   Reply With Quote
Pension Payout
Old 03-08-2011, 11:58 AM   #6
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Pension Payout

What do you think of my plan to make my own hybrid plan-take monthly pension as "level income" and at 62 the amount drops down to account for your SS payment at that time. I would invest the monthly pension checks in more aggressive funds without having an entire lump sum at risk. I will sleep better knowing I don't have to manage the entire amount-just the monthly checks from the pension plan which could continue for another 40-50 years because of my wife's age. Thoughts?
__________________
Bobby99 is offline   Reply With Quote
Old 03-08-2011, 12:02 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,974
Quote:
Originally Posted by Bobby99 View Post
Hi Guys, I am being offered a lump sum pension at 55. I was considering taking it but I'm hesitant. Could I really be better than professional pension managers to invest this money for the next 40-45 years? My wife is 12 years younger. Especially in this interest rate environment. Here's what makes sense for me (please comment). I can take a "level income option" now that pays a level income until 62, then drops by the amount of social security. I'm still working but our cash flow is tight. I'd like to take part of the monthly pension check and invest in riskier stock funds for growth. That way I would not found feel badly if things drop 50% again-I still get the monthly pension checks.
By the way, if I'm working at 62 I won't take social security then but wait until I stop working. The reduced pension payout would continue even if I did not take SS at 62-we'd have to plan on that but I think cash flow would be made up from regular paycheck.
Thoughts?
1) You or someone needs to analyze the specific options - there is no pat answer irrespective of the actual $. The lump sum should be equal to what it would cost you to buy a level income option for yourself, and will be with many companies - but you can't assume so. However, you can't necessarily count on it and one may be advantages to you aside from the risk of investing for yourself.
2) Interesting pension option. If I'm interpreting correctly, your pension will provide a level pension before and after Soc Sec by making up the difference once SS kicks in. Since Soc Sec is COLA'd, I assume that means eventually your pension will pay nothing, displaced entirely by Soc Sec. It might depend on what age eventually works out to. And it makes #1 above more a little more difficult to evaluate, but still very doable.
3) Of course your longevity is a factor in the decision too. If you're average in every way, it's neutral. But people who are in poor health and know it might do better with a lump sum. Someone with a family history like 'everyone in my family lived to be over 100' might do better with a pension (annuity). Not saying you necessarily know, and we can all be hit by a bus or develop a life threatening illness, but some people have a good idea how their longevity will compare to the average.

Some things to think about...best of luck.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 03-08-2011, 12:13 PM   #8
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
2) Interesting pension option. If I'm interpreting correctly, your pension will provide a level pension before and after Soc Sec by making up the difference once SS kicks in. Since Soc Sec is COLA'd, I assume that means eventually your pension will pay nothing, displaced entirely by Soc Sec. It might depend on what age eventually works out to. And it makes #1 above more a little more difficult to evaluate, but still very doable.
I suspect that the pension is also COLA'd. Therefore the pension before and after SS kicks in gives the same level of income adjusted for (CPI) inflation.
__________________
MasterBlaster is offline   Reply With Quote
Pension Payout
Old 03-08-2011, 12:33 PM   #9
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Pension Payout

Quote:
Originally Posted by MasterBlaster View Post
OK I misunderstood what you posted.

The level income options I have seen give you more income until SS kicks in, and then the funding drops. The idea is to keep your income level.

So what you propose is to use that option and then save and invest some of the income.

But really (To a much lesser extent) the issues with a lump sum versus a constant pension annuity payment are the same. Consider the accelerated payment before 65 as a form of a (partial) lump sum.
True, but with much less risk than taking the whole as a lump sum. Also, no 10% penalty is put into IRA and you need $ above what a SEPP could payout. In essence, my pension/IRA hybrid mix will be well balanced by 62 with the contining pension stream considered the risk-free bond portion and the payouts used to fund more aggressive stock portion. If stocks plunge at the wrong time, I still have the pension and can at least high grade cat food!
__________________
Bobby99 is offline   Reply With Quote
Old 03-08-2011, 01:27 PM   #10
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Quote:
Originally Posted by Midpack View Post
1) You or someone needs to analyze the specific options - there is no pat answer irrespective of the actual $. The lump sum should be equal to what it would cost you to buy a level income option for yourself, and will be with many companies - but you can't assume so. However, you can't necessarily count on it and one may be advantages to you aside from the risk of investing for yourself.
2) Interesting pension option. If I'm interpreting correctly, your pension will provide a level pension before and after Soc Sec by making up the difference once SS kicks in. Since Soc Sec is COLA'd, I assume that means eventually your pension will pay nothing, displaced entirely by Soc Sec. It might depend on what age eventually works out to. And it makes #1 above more a little more difficult to evaluate, but still very doable.
3) Of course your longevity is a factor in the decision too. If you're average in every way, it's neutral. But people who are in poor health and know it might do better with a lump sum. Someone with a family history like 'everyone in my family lived to be over 100' might do better with a pension (annuity). Not saying you necessarily know, and we can all be hit by a bus or develop a life threatening illness, but some people have a good idea how their longevity will compare to the average.

Some things to think about...best of luck.
Thank you-just to clarify-the pension amount does not go to 0-it stays the same as long as your spouse lives because of 100% option. It goes down once-at 62 based on the estimated amount of social security you will get then. You do not actually have to file for social security but the pension still goes down that one time.
__________________
Bobby99 is offline   Reply With Quote
Old 03-08-2011, 01:33 PM   #11
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by Bobby99 View Post
You do not actually have to file for social security but the pension still goes down that one time.
So assuming you can live on the reduced pension, you could delay SS till age 66/70 and at that time get a slightly higher total payout anytime after the early SS age of 62.

These reductions in defined benefit (e.g. pension) program payouts are common in the SS reduction scheme as soon as you hit that age 62 date. It tends to make the plan look good, but the company providing the pension gets a break by not having to continue full benefits (COLA'ed or not) for the rest of your/survivor's lifetime.
__________________
rescueme is offline   Reply With Quote
Old 03-08-2011, 01:38 PM   #12
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Quote:
Originally Posted by rescueme View Post
So assuming you can live on the reduced pension, you could delay SS till age 66/70 and at that time get a slightly higher total payout anytime after the early SS age of 62.
Yes, for sure. By the way, I/m still working and plan to for a long time. No reason to take at 62 because of the income limits. If not working, I would take SS at 62 because I would have taken out $90,000 to invest by the time I turn 66 and 2 months, my full retirement age. There is no reason to wait. Any conservative return on the $90,000 will beat waiting for higher payout.
__________________
Bobby99 is offline   Reply With Quote
Old 03-08-2011, 01:42 PM   #13
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Quote:
Originally Posted by rescueme View Post
So assuming you can live on the reduced pension, you could delay SS till age 66/70 and at that time get a slightly higher total payout anytime after the early SS age of 62.

These reductions in defined benefit (e.g. pension) program payouts are common in the SS reduction scheme as soon as you hit that age 62 date. It tends to make the plan look good, but the company providing the pension gets a break by not having to continue full benefits (COLA'ed or not) for the rest of your/survivor's lifetime.
I don't think that's true. The payout continues for my life and my wife (she's 43 now). The higher early payout from 55 to 62 and then reduced payment after should be equivalent to other options from an actuary view point. I think.
__________________
Bobby99 is offline   Reply With Quote
Old 03-08-2011, 03:00 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Bobby a good way to analyze these things is to look at how large an annuity the lump sum would buy. So for instance if the lump sum you'd get is say $400,000 you can get an a quote from a company like Berkshire here or find others on the web.

Use that as basis of comparison to see if you are better off with a lump sum or the pension. Lately due to some accounting rules changes and the low interest rates I found that in most cases the pension payments are better than the lump sum YMMV.
__________________
clifp is offline   Reply With Quote
Old 03-08-2011, 06:19 PM   #15
Dryer sheet wannabe
 
Join Date: Mar 2011
Location: Freeport
Posts: 10
Quote:
Originally Posted by clifp View Post
Bobby a good way to analyze these things is to look at how large an annuity the lump sum would buy. So for instance if the lump sum you'd get is say $400,000 you can get an a quote from a company like Berkshire here or find others on the web.

Use that as basis of comparison to see if you are better off with a lump sum or the pension. Lately due to some accounting rules changes and the low interest rates I found that in most cases the pension payments are better than the lump sum YMMV.
Thank you. I don't know the amount yet but I'm sure the pension has a better payout. Vanguard lists the highest immediate annuity with the ins. companies they deal with is 2.75%. That to me is the only way to compare-"risk free" return and then go on to other factors. Someone with a longer horizon and both good expertise and other assets to fall back on might get a higher long term return. If I pass first will my wife be interested in managing this money or would she better off with a check every month-plus the checks form the other investments the pension checks will provide? No.
__________________

__________________
Bobby99 is offline   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
Help with pension payout options 4merKPer FIRE and Money 14 01-13-2011 04:31 PM
Comparing a military E-7 active-duty pension to an E-7 Reserve pension Nords Other topics 10 12-14-2010 11:34 PM
Annuity Payout SL or JL chinaco FIRE and Money 5 12-10-2010 10:25 AM
Take a lump sum or pension payout Rollie FIRE and Money 45 06-11-2006 07:54 PM
Pension Payout Option Calculator nwsteve FIRE and Money 3 11-07-2005 02:51 PM

 

 
All times are GMT -6. The time now is 10:28 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.