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Help with Pension payout
Old 05-16-2018, 12:39 PM   #1
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Help with Pension payout

Just got a package in the mail the other day about a a pension my wife has with a former employer. Her account didn't accrue much value during her time there, and as it is below a certain limit we are allowed to distribute the pension as a lump sum now, or as an annuity starting now (which I believe I'm not interested in), or leave it as is to be eventually claimed at 65. I had received similar info in the past as I wanted to roll this stuff into other existing retirement accounts just to consolidate but we never moved on it because like today I wasn't able to evaluate the options then. I don't know what prompted them to send us this package, but my first inclination is to think that the payout is a better deal for them than for me if they are promoting it, but I don't know.

Ive tried using online calculators for pension payouts or annuity payouts, but 1) I'm not familiar with these products and 2) it seems like most of the calculators assume you are comparing cashing out today vs taking pension payments today, rather than cashing out today vs taking payments 30 years from now.

Details are as follows:
  • pension benefit starting at age 65 is 313.83 per month, for the rest of her life
  • Lump sum payout today is 11,941.86
  • DW's current age is 35
  • They list this 11,942 lump sum payout as having a 121% value compared to the single life annuity option (which I believe I'm not interested in - the payments are only $40/mo and I don't want to start taking retirement benefits now)
  • no info on inflation adjustments or cost of living adjustments
  • no info on any percent rate the pension is 'earning' over the next 30 years
If I run an investment calculator and assume I take a lump sum and get 7% growth on that for the next 30 years I see I'd have $90,904. 313.83/mo = 3766 which is just over 4% of 90,904. Considering all this it seems to me like the pension is guaranteeing us the equivalent of 7% growth for 30 years, and then withdrawals equivalent to 4% of that amount for the rest of life. That seems better on the face then investing that money, assuming risk of less than 7% growth, and then withdrawing 4% of that as part of a larger portfolio. Am I thinking rightly here?

If the lump-sum is a slightly worse deal, I may still be inclined to take it just to consolidate resources so I don't forget about this pension and never claim it, and so we don't have to worry about the pension fund collapsing one day. The company in question is not going to cease to exist in the next 30 years, don't know if that's really relevant or not.

Will that payout amount change based on market conditions? I was thinking maybe if so I leave it as is until the next market crash, and then distribute when valuations are lower to be invested then. I guess that's the same as timing the market to buy equities from cash, but wasn't sure if the pension account grows at all while I'm waiting or what.

Clearly I really don't know what I'm dealing with here, any info, opinions, or resources to point me to are appreciated.
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Old 05-16-2018, 01:15 PM   #2
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Each payout offer seems to vary and our individual circumstances differ. I asked the same question last fall. You can find that thread here. As you mentioned, generally the buy out offer is made to benefit the employer. I elected to keep the monthly pension at FRA. But, many here prefer to have control of the money even if it is a discounted payout. I do not think it is a "one right answer" type of question. From a math standpoint, you can figure out how the lump sum offer compares to the pension by using a calculator like the one at immediateannuities.com. (solve for how much would it cost to purchase an annuity that would match the pension) Then you need to factor in your overall investment plan. But since she is 30 years from 65, I suspect most calculations will be a WAG.

As young as your wife is and since the amount is relatively small, I would be inclined to take the lump sum and invest it. Even if the lump sum is a discounted offer, you have plenty of time to make it up.
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Old 05-16-2018, 01:47 PM   #3
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I too had a modest pension from my last employer (worked there 11 years). I opted for the monthly non-cola'd pension (but 100% survivable for DW). I used a formula from Clark Howard as part of my decision. I'm very content with several hundred bucks hitting the credit union each month as long as either of us is on this side of the dirt.

Like others noted, probably no "correct" answer. A good first world problem to deal with.
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Old 05-16-2018, 03:08 PM   #4
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immediateannuities.com allows one to price out deferred annuities... with a delayed start date. Since their minimum is $30,000, I priced the monthly payout for a $119,419 premium paid today with payments deferred for 25 years (most allowed) and the monthly payout was $1,591. So $11,942 would be $159/month... another 5 years at 3% would get you to ~$185.... so the lumpsum is about half of what it should be given the age 65 benefit.

That said, if you take the lump sum you'll have 30 years of investment returns and then go buy you own annuity if you want.... that is probably what I would do given the amount involved.
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Old 05-17-2018, 02:18 PM   #5
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Quote:
Originally Posted by mrWinter View Post
Just got a package in the mail the other day about a a pension my wife has with a former employer. Her account didn't accrue much value during her time there, and as it is below a certain limit we are allowed to distribute the pension as a lump sum now, or as an annuity starting now (which I believe I'm not interested in), or leave it as is to be eventually claimed at 65. I had received similar info in the past as I wanted to roll this stuff into other existing retirement accounts just to consolidate but we never moved on it because like today I wasn't able to evaluate the options then. I don't know what prompted them to send us this package, but my first inclination is to think that the payout is a better deal for them than for me if they are promoting it, but I don't know.

Ive tried using online calculators for pension payouts or annuity payouts, but 1) I'm not familiar with these products and 2) it seems like most of the calculators assume you are comparing cashing out today vs taking pension payments today, rather than cashing out today vs taking payments 30 years from now.

Details are as follows:
  • pension benefit starting at age 65 is 313.83 per month, for the rest of her life
  • Lump sum payout today is 11,941.86
  • DW's current age is 35
  • They list this 11,942 lump sum payout as having a 121% value compared to the single life annuity option (which I believe I'm not interested in - the payments are only $40/mo and I don't want to start taking retirement benefits now)
  • no info on inflation adjustments or cost of living adjustments
  • no info on any percent rate the pension is 'earning' over the next 30 years
If I run an investment calculator and assume I take a lump sum and get 7% growth on that for the next 30 years I see I'd have $90,904. 313.83/mo = 3766 which is just over 4% of 90,904. Considering all this it seems to me like the pension is guaranteeing us the equivalent of 7% growth for 30 years, and then withdrawals equivalent to 4% of that amount for the rest of life. That seems better on the face then investing that money, assuming risk of less than 7% growth, and then withdrawing 4% of that as part of a larger portfolio. Am I thinking rightly here?

If the lump-sum is a slightly worse deal, I may still be inclined to take it just to consolidate resources so I don't forget about this pension and never claim it, and so we don't have to worry about the pension fund collapsing one day. The company in question is not going to cease to exist in the next 30 years, don't know if that's really relevant or not.

Will that payout amount change based on market conditions? I was thinking maybe if so I leave it as is until the next market crash, and then distribute when valuations are lower to be invested then. I guess that's the same as timing the market to buy equities from cash, but wasn't sure if the pension account grows at all while I'm waiting or what.

Clearly I really don't know what I'm dealing with here, any info, opinions, or resources to point me to are appreciated.


I like the idea of keeping pensions from companies. My wife has five small ones which total about 700 dollars a month. Company pensions tend to be better than immediate annuities. And I like the fact it is some form guaranteed income outside of your other money. And we donít really need it.
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Old 05-17-2018, 02:31 PM   #6
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Simply stated, the amount is fairly small. Even if you make the wrong choice, the effect is not large.

One thing to mention is that the FRA pension of $313 is probably not COLA'd. Nor is a basic SPIA or SPDA (deferred Annuity) unless you opt for riders which will lower the basic monthly payment. If you compare the pension to rolling into another deferred retirement plan (IRA or ….), the normal 4% "safe" withdrawal rate of an investment includes COLA increases. And it stay with your estate if you happen to pass early. The value keeps getting better to take it and invest yourself. That's what I did.
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Old 05-17-2018, 03:20 PM   #7
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Quote:
Originally Posted by Mark24609 View Post
I like the idea of keeping pensions from companies. My wife has five small ones which total about 700 dollars a month. Company pensions tend to be better than immediate annuities. And I like the fact it is some form guaranteed income outside of your other money. And we donít really need it.
The problem is, is it really guaranteed? My father-in-law-in-law lives entirely off of his UPS Pension. A couple years ago he was informed it was going broke, and that his benefit would be cut in half... there was some sort of lawsuit that put that cut in half on hold, and now it looks likely that it'll go totally broke within the next 3 years since not allowed to cut in half when it was supposed to.

I don't have any pensions coming my way, but if I did, I'd be inclined to take the buy out after his story... "Bird in the hand"...

I googled, and think this is actually a different UPS Pension crisis... but still makes the same point.

https://www.bna.com/ups-proposal-fix-n73014461711/

Side note, by some rule, the pension made it so that the workers didn't have to pay SS (either did the employer) so he doesn't really get a SS check to backup that pension check. It is a really sad situation when someone works for 30 years for a company thinking they've got a secure future... and blammo - poverty.

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Old 05-17-2018, 07:26 PM   #8
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I would be tempted to crawl through the maze and speak with someone who works in the accounting office managing this pension fund. Ask them if it is possible for a former employer to continue to contribute to this pension?

Worst thing they can say is 'no'.

My wife recently retired from a federal job, her pension is around $200/month. After all, we went led to think about federal pensions, it is rather disappointing.
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