Pension Question

[mdsmith1]

Retired a year ago from 20 year career. Took another position with less stress and will work 2-3 more years and retire at 60-61.

I have a pension with prior company currently at $240k earning 3.8 % per year. If I took the monthly payment now it would be ~$1100 per month for life for both me and the bride.

Question is do I take the pension, lump sum and invest or buy an annuity? I'm concerned the annuity carries high fees.

If I take the monthly pension should I wait until I retire or start now?

Suggestions please.

 

[gauss]

Why would you consider buying an annuity if you already have a monthly payout for life option available?

-gauss

 

[pb4uski]

It depends on how it fits into your whole retirement plan (how much of a nestegg you have, whether you have other pensions, how much your SS is, how much your living expenses are, how much risk you care to take, etc.).

If $1,100/month is what you would get if you took your pension today, that is a pretty good rate. If you bought an immediate annuity for $240k for two 58 year olds the payment would be about $975/month per immediateannuities.com.

3.8% is a pretty good interest rate if the pension plan is solid.

Another factor is how well funded the pension plan is and how financial stable the sponsor (employer) is. If the funding is poor or the sponsor is not financially stable, then that might skew it to the lump sum and rolling the lump sum into an IRA.

 

[mdsmith1]

Thanks for the responses.

We have $2.1M with the majority in 401k's. Wife will have a pension of ~30k per year for both us for life in addition.
Kids are gone and house is paid for. I have savings outside the numbers above for weddings, car replacements in a few years and other misc expenses to retirement.

Expect spending to be in the $110k to $120k range in retirement.




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[mdsmith1]

We are also contributing $24k each in our 401k's to retirement. We will retire at the same time.


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[mdsmith1]

Oops thought of one more thing. Pension plan is well funded and company is solid. Of course who knows what tomorrow brings with US based corporations.

I don't know how pensions work if a company has issues. Are pensions protected or are you out of luck if a company has problems? The company has been around for 65 years and is a megacorp.


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[Gotadimple]

MD:
Do you need the money now? If not, the pension amount will increase, and you'll get a bigger benefit later when you retire. In today's interest rate environment, lump sum's are not the greatest choice. But if there is an issue with megacorp's finances, or you don't expect to live out a normal life span, that might be a good reason to claim a lump sum early.

To determine the health of your pension, check out the Pension Benefit Guarantee Corp (Pension Benefit Guaranty Corp - PBGC Protects America's Pensions). You can search for your company to see if they are insured and they should also be issuing an annual statement telling you the financial strength of the pension you are vested in.

-- Rita

 

[pb4uski]

I think with your other assets that the pension would add some diversification to your sources of retirement revenues so I would probably lean towards letting it grow and then start drawing when it is best for you, probably after you stop working because to start it now you would pay through the nose in taxes. That assumes your and DW's health is good.

 

[Big_Hitter]

I doubt you will be able to get an $1100 a month immediate joint life annuity from an insurer for two 58 year olds with $240K AFTER TAX


If you do, let me know if you find one.

 

[Big_Hitter]

Lump sums are basically a coin flip assuming the lump sum is the true actuarial equivalent of the immediate annuity. If you die before expected (in this case you and your spouse) you get to live in a castle and eat prime rib every night. If you live past expectancy, you get to live in a tent by the river and eat cat food every night.


This is the value proposition of the defined benefit annuity; it's very difficult to retire without one.

 

[big-papa]

We were faced with a similar question. Wife had access to a pension (we weren't drawing on it) from a megacorp she worked at for 10 years that she left almost 15 years ago. No COLA. Best case scenario was around $17K per year if we waited until she was 70 (She's 54 now). They had a cashout offer which also included the possibility of an IRA rollover. I compared it with an annuity and it was actually slightly better. But at the end of day, these things have to be around and able to pay out for an awfully long time and, frankly, I'd rather have more, rather than less, control over our money - we rolled it over.

 

[pb4uski]

I doubt you will be able to get an $1100 a month immediate joint life annuity from an insurer for two 58 year olds with $240K AFTER TAX.....

Why emphasize AFTER-TAX? Taxes generally have nothing to do with it in that someone would roll the lump sum into an IRA and then have the IRA buy a SPIA that would then make the benefit payments to the participant.

So either way the benefits would be taxable when received by the retiree.

 

[pb4uski]

.....This is the value proposition of the defined benefit annuity; it's very difficult to retire without one.

Probably half or more of the retirees on this forum do no have a defined benefit pension or a payout annuity, so it is NOT difficult to retire without one.

 

[Big_Hitter]

"on this forum" - I think I posted some facts/stats last time we discussed this issue

 

[Big_Hitter]

Why emphasize AFTER-TAX? Taxes generally have nothing to do with it in that someone would roll the lump sum into an IRA and then have the IRA buy a SPIA that would then make the benefit payments to the participant.

So either way the benefits would be taxable when received by the retiree.

If he can do that through an IRA great, I'd like to see if it's possible to do it with 240K.

 

[Big_Hitter]

Pricing actuaries at the insurance company are going to load the crap out of that product - adverse selection, expenses, updated mortality tables, etc. The lump sum is probably a cash balance (I'm guessing here) which accretes at some treasury or other indexed benchmark but when it's converted to an annuity it's done using IRS segment rates and mortality, assuming this is a corporate DB plan. When that's done, there are no loads and it's done using a monthly average corporate bond spot curve.

 

[Big_Hitter]

That was the theory anyway, when GATT mandated the use of the 30 year treasury rate back in 1994, those who chose to take a lump sum could do so and go buy a SPIA and get an equivalent immediate annuity out of it. PPA changed that to spot rates.


My bad on the after-tax thing.

 

[Big_Hitter]

OP: how old is your spouse and is the $1100 a 100% J&S?

 

[pb4uski]

If he can do that through an IRA great, I'd like to see if it's possible to do it with 240K.

Huh? Why couldn't anyone do it through an IRA, even if they don't already have one. $240k or $1 million, the amount it doesn't matter. It would be foolish to take it in cash and pay tax on it all at once.

 

[pb4uski]

"on this forum" - I think I posted some facts/stats last time we discussed this issue

I seem to recall that and many posters challenged your erroneous assertion.

 

[mdsmith1]

The $240k is cash balance. I can leave my pension until 65 and it will continue to grow. Not sure of the interest rate past this year but assume it will be in the same range.

Wife is 57 and can take her pension at 60. If she decides to work longer it could grow but don't think that will happen.


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[mdsmith1]

And yes the $1100 and her $30k are 100% for us both for life.


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[Big_Hitter]

Huh? Why couldn't anyone do it through an IRA, even if they don't already have one. $240k or $1 million, the amount it doesn't matter. It woudl be foolish to take it in cash and pay tax on it all at once.

I agree - I'm just saying if he can get a 100% J&S $1100 monthly annuity for 240K good deal...depends on the spouse age

 

[Big_Hitter]

OP: one other thing to consider regarding the cash balance annuity - if your plan was "converted" from a traditional DB plan part of that annuity is based on the old plan (i.e. protected), so you could be getting a better deal from the annuity side that way. Did they give you any "relative value" disclosures on your packet?

 

[mdsmith1]

I don't know the answer to your question big hitter. As far as I know there have been no changes to the plan during my 20 years.


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