Another pension vs lump sum thread.

[rodi]

I am a fan of the 3 legged stool approach to retirement, but unfortunately, my 3rd leg of pension(s) is pretty short.

I have two frozen pensions. One was frozen in 2000 when my company was acquired by a bigger company. That was a defined benefit pension. Since I only had about 6 years with the company back then - it's pretty darn small.

The bigger company had a "portable pension" - you could roll the lump sum out when you separated - or take it as monthly payments anytime after you separated.

That bigger company froze the pension in 2009 during the economic downturn.

Then the company split into 2 in 2011 - with the pension going to the other half of the company. Even the former frozen pension (from 2000) went with the other half - even though the vestiges of the acquired company stayed on our half. So both my pensions are held by the other company.

They just announced that they're moving the pension obligations to Prudential. They're supposed to be offering lump sums to former employees - which we already could get since we were separated.

The current lump sum buys about 64% of the pension that is offered. (I compared the monthly payout using immediateannuities.com and plugging in my lump sum value.)

Questions for those that have been through this.

Will they shrink the pension amount?
Will they shrink the lump sum amount?
Is there any way I can come out of this without losing something?

The corporation is supposedly going to save BILLIONS on this. So I figure I'm going to lose out somehow.

 

[Jack_Pine]

I can't answer your question but agree it is probably good for them and not for you.

I just got the second offer to buy out my small pension. It will pay me 1,079/month at 65, non-cola. They are offering me 106,000 in an IRA today.

DW has same deal but smaller amounts. I am leaning toward not taking buyout as the rest of the portfolio is in good shape and this will be a nice guaranteed cash flow. May not make the most financial sense, not sure.

 

[Jack_Pine]

Bump for any thoughts from the day shift.....................

 

[Donzo]

I went back and forth when faced with the same decision. my company was offering a buyout lump sum in an IRA. Considered rolling the IRA lump into Wellesley or Wellington (IRA) and letting grow over time... I finally decided to keep the pension. I don't know where the market will be in 7 or so years when I start to take the pension and cash flow could be a very nice addition to the portfolio. SS and the pension should pretty much cover my expenses - can't imagine that not being comforting.
Good luck with your decision!

 

[Jack_Pine]

Thanks Donzo, thinking the same.......

 

[clifp]

Pretty much impossible to answer the question about what will happen in the future.

But I would say that the odds of you coming out ahead in the process are very slim. So my sympathies in advance.

I would also say stick with the pension over the lumpsum if it only buy 64% of what you can get on the open market.

 

[Jack_Pine]

Sympathies?

 

[ERD50]

...
The current lump sum buys about 64% of the pension that is offered. (I compared the monthly payout using immediateannuities.com and plugging in my lump sum value.) ...

What is your comparison for that 64% number? A lump sum effectively provides 100% survivor benefits, so it should be compared to a 100% survivor benefit pension - not sure how much that reduction would be for you.

A lump sum also could leave an amount to heirs, that won't happen with the pension.

Questions for those that have been through this.

Will they shrink the pension amount?
Will they shrink the lump sum amount?
Is there any way I can come out of this without losing something?

The corporation is supposedly going to save BILLIONS on this. So I figure I'm going to lose out somehow.

I don't think they can shrink the pension amount, that is regulated by the Fed/PBGC. And if they go bankrupt, it doesn't sound like you'll be affected by the PBGC caps.

I think they can shrink the lump-sum amount, since it is an offer, and you can decline it.

I don't see where you are losing if you stay with the pension?

Are you sure they are saving BILLIONS? I think the main idea of lump-sum offers is to offload unknown risks (market, group life expectancy). Corporations hate those as much as people do. And if some people jump at what may be low-all lump-sum offers, that can only make your future pension look more stable. I'm not sure this is all dark cloud.

-ERD50

 

[Lancelot]

Hi Rodi,

I took a lump sum of my defined benefit pension in 2002 when I Er'd. I rolled the proceeds, along with my 401k to Vanguard and I'm happy with the outcome.

As others have said, I too have no idea if your company's offer is in your best interests or not; however, you will be in control of your lump sum, if you choose that route, and I for one feel that is a positive move. If your pension is not COLA adjusted, then you also have a better chance to keep pace with inflation with equities that you manage.

Best,

Lance

 

[Car-Guy]

I can't answer your question but agree it is probably good for them and not for you.

That's about 99.9999% for sure.

 

[ERD50]

I can't answer your question but agree it is probably good for them and not for you. ...

That's about 99.9999% for sure.

Of course it is good for them. Why would they volunteer to offer something that was bad for them? I'd also say it is irrelevant.

Whether it is good/bad for you is all that matters. Someone with a terminal disease and no heirs would jump at even a low-ball lump sum. Should the company then question their motives? No need, it is a financial decision, just like the company is making with their offer.

I just got the second offer to buy out my small pension. ...

I'm very curious about this. Is it fairly typical for companies to make an offer, and then raise it later if they don't get enough takers? Of course, we probably can't get close to knowing when 'enough' is.

-ERD50

 

[SunnyOne]

I have a few questions if someone could chime in to assist -

I have a pension that will provide me with $1500/month when I turn 65, several years from now. Can someone point me to a calculator that would help me get an idea of what the lump sum value of that number should look like?

Is it common (or not) for companies to come back with subsequent lump sum offers, if earlier offers are declined? do they even negotiate?

Thanks, Tres

 

[ziggy29]

I have a few questions if someone could chime in to assist -

I have a pension that will provide me with $1500/month when I turn 65, several years from now. Can someone point me to a calculator that would help me get an idea of what the lump sum value of that number should look like?

Is it common (or not) for companies to come back with subsequent lump sum offers, if earlier offers are declined? do they even negotiate?

I don't know about negotiating, but yes, companies sometimes will keep putting offers out there to cash out your DB pensions because they (and shareholders) prefer the certainty.

It's hard to point to a calculator because risk tolerances differ. I guess the usual response would be to see how much it would cost someone your age to purchase an SPIA (single premium individual annuity) offering $1500 a month starting at age 65 and comparing it to their offer (keeping in mind other variables like survivor income if any, particularly if you are married and that consideration is on the table).

I'll give you an example. About 3-4 years ago my first Megacorp, with whom I have a puny vested pension after 11 years of service early in my career, offered me a buyout of something like $24,000. My pension now would be about $630 a month with 100% survivor income in 2030 when I turn 65. But when I looked at annuity calculators (admittedly while interest rates were pathetic, even slightly lower than now), they suggested it would take closer to $45,000 to buy that level of income. That helped to convince me to pass. (The other factor is that I believe in the "three legged stool" of retirement, and we had enough in regular savings and investments and more than enough in 401K/403B/IRA investments that we wanted to keep what little of the third leg of the stool we had.)

Maybe some will negotiate, but I don't have any knowledge of it. I do know that at the right price, businesses are eager to get DB pension liabilities off their books.

 

[Lancelot]

I have a pension that will provide me with $1500/month when I turn 65, several years from now. Can someone point me to a calculator that would help me get an idea of what the lump sum value of that number should look like?

Tres, I would get some quotes on the purchase price of an immediate annuity online. Then I would compare those sums to the Present value of your pension, at current interest rates.

Ziggy gave a good example about comparing the lump sum amounts.

 

[SunnyOne]

I ran the $120K lump sum offer for a female, age 65 through a few online calculators - they all came back in the low $600/month range - $605 - $640.

Since the previous employer's plan will provide $1500/month, staying with the pension seems like the better deal.

The downside risk is the declining value of the non-cola adjusted pension,
but a pension does diversify my overall portfolio.

At the end of the day, I suppose compelling arguments could be made in either direction.

Tres

 

[CRLLS]

I took the cash buyout of my pension this last year. Considering my 800/month pension(@65) was not required to fill my base needs; was before any reduction for 50% or 100% survivorship benefit; had no COLA provision. I looked at various scenarios. The bottom line was that I could take the cash today, roll it into an IRA and let it grow a few years. By the time I start to withdraw those monies, I'll have a lower cash draw per month to start, but it will be have 100% survivorship benefit. With some modest annual inflation adder, I think the breakeven point was around age 72 for us. At that age we would have the same $$ as the old pension would have paid. We both plan on reaching that age and more based on family health. Anything left over will be included assets to our heirs.

If I am not mistaken, the PBGA would not cover your new Prudential payouts. I may be wrong here.

Your goals and risk tolerance may differ. I'm still not 100% certain that I made the right choice. But I don't dwell on that.

 

[ERD50]

I ran the $120K lump sum offer for a female, age 65 through a few online calculators - they all came back in the low $600/month range - $605 - $640.

Since the previous employer's plan will provide $1500/month, staying with the pension seems like the better deal. ...

Are you sure this is apples-apples? I have not seen any answer in this thread to my earlier questions on this. To repeat myself:

A lump sum effectively provides 100% survivor benefits, so it should be compared to a 100% survivor benefit pension - not sure how much that reduction would be for you.

A lump sum also could leave an amount to heirs, that won't happen with the pension.

-ERD50

 

[dnorton50]

rodi,

I was offered the same thing. I think we may have worked for the same company. You don't have to take the lump sum if you don't want to. I am choosing to wait until I retire in 2.5 years. They are offering this to save themselves money.

 

[Bestwifeever]

I imagine the lump sum payouts, the entire "lump sum" of the lump sums as it were, is probably actuarially the same to the megacorp as the total anticipated payout of the pensions.

 

[ERD50]

I imagine the lump sum payouts, the entire "lump sum" of the lump sums as it were, is probably actuarially the same to the megacorp as the total anticipated payout of the pensions.

I made that assumption at first, and then modified my thinking.

This is an offer, they aren't converting everyone. So if you don't like the offer, don't take it - no harm, no foul. So that means they could (and I assume will) low-ball it. Some people will take it - those who know they have a below average life expectancy, some who will just be tempted by 'one in the hand'.

If they were converting everyone, I do think regulations would demand that it be some equivalent. But not so with a limited time 'offer'. And they could always run a better offer later if they didn't get the uptake they expected. Like an auction.

-ERD50

 

[CRLLS]

This is an offer, they aren't converting everyone.

If it anything like mine from a different employer, they are converting everyone. It is probably a choice to accept the lump sum payout; to accept the same defined benefits at retirement age but now paid by and guaranteed by an insurance co; or to accept earlier (lower) monthly benefits paid by that same insurance co.

There was no choice to let things ride with the company's plan. If I took no action, it would be converted for me.

The limited time offer most likely coincides with their approved conversion timeframe.

 

[ERD50]

If it anything like mine from a different employer, they are converting everyone. It is probably a choice to accept the lump sum payout; to accept the same defined benefits at retirement age but now paid by and guaranteed by an insurance co; or to accept earlier (lower) monthly benefits paid by that same insurance co.

There was no choice to let things ride with the company's plan. If I took no action, it would be converted for me.

The limited time offer most likely coincides with their approved conversion timeframe.

They may be moving everyone to Prudential (I'm not sure), but the lump-sum offer is a limited-time offer, from what I understand. Retirees moved to Prudential must be provided the same pension as before, if they do not accept the lump-sum offer.

Here's my guess as to motivations:


1) No corp likes uncertainty. When someone accepts the lump-sum, it becomes certain, $X this year, no future obligation for the corp.

2) Repeating my earlier statement, even a low-ball offer will be attractive to some people. The corp will save money and gain certainty. A win for the corp, and and assumed win for the retiree (or they would have rejected the offer).

I'll further assume that this was part of the negotiations with Prudential (if they are moving everyone to Prudential) - trade some uncertainty for a below-par offer.

-ERD50

 

[Lancelot]

I ran the $120K lump sum offer for a female, age 65 through a few online calculators - they all came back in the low $600/month range - $605 - $640.

Since the previous employer's plan will provide $1500/month, staying with the pension seems like the better deal.

The downside risk is the declining value of the non-cola adjusted pension,
but a pension does diversify my overall portfolio.

At the end of the day, I suppose compelling arguments could be made in either direction.

Tres

This is from 'Income Solutions' that I accessed through Vanguard's site. I ran it two different ways, the first:

Female, age 65, $1,500 monthly income

Cost of annuity was $278,543.20- Single Life

Female, age 65 $120,000 lump sum

Monthly income was $645.91- Single Life

Looks like keeping the pension is a better deal

 

[rodi]

I was comparing payout from an annuity purchased with the lump sum to the annuity option. The lump sum purchased annuity only paid 64%. Both used joint survivorship.

Sent from my Nexus S 4G using Early Retirement Forum mobile app

 

[ERD50]

This is from 'Income Solutions' that I accessed through Vanguard's site. I ran it two different ways, the first:

Female, age 65, $1,500 monthly income

Cost of annuity was $278,543.20- Single Life

Female, age 65 $120,000 lump sum

Monthly income was $645.91- Single Life

Looks like keeping the pension is a better deal

Are survivor benefits being considered (if there is a spouse or heirs)?

Lump sum provides 100% survivor/heir benefits, pensions provide nothing to heirs, and are reduced for a beneficiary (typically ~ .75x for 100% to surviving spouse?). That might make these numbers much closer.

-ERD50