I was expecting one of these... just not yet

[ziggy29]

Got a big packet in the mail from my first Megacorp, offering me a lump sum buyout of my tiny pension that I accrued before they froze it.

I was expecting this closer to when I turned 55 and would be eligible to start collecting. I was pretty sure I'd get one eventually, but I figured it would be closer to my eligibility age. (They must really want to get these off of their books!)

It's spreadsheet time for me. Right now my pension benefits (100% survivor option) are set to be about $251 per month at 55 (in November 2020) or $657 per month at 65 (in November 2030). The buyout offer is for $38,102, using an expected 5.35% overall expected interest rate over my lifetime.

They also have an option of taking a lump sum and immediately starting an annuity with monthly payments starting *now* for my lifetime. (This is $195 per month, no COLA kicker, for life starting in December 2012. I'm not inclined to go this route, but it's interesting that it's offered.)

This is a fairly tiny part of our overall retirement.

[Alan]

It should take care of the utility bills for while.

I never had a buy-out option from my first employer but I was able to start drawing £220 / month from age 52 (non-COLA). It has been very nice having that going in each month to pay towards our trips to the UK over the last 5 years.

[pb4uski]

Interesting to me that they told you the discount rate that they were using. Do you think you can beat 5.35% with little credit risk? (assuming your pension is stable).

[Alan]

Quote:

Originally Posted by pb4uski Interesting to me that they told you the discount rate that they were using. Do you think you can beat 5.35% with little credit risk? (assuming your pension is stable).

"assuming your pension is stable", aye, there's the rub.

This month I got my annual letter and report from the other UK firm that owes me a pension, starting at age 62. The funding level has now dropped to just over 80% and they project that the additional funds injection promised by MegaCorp over the next 3 years will not be enough to keep the fund from slipping further behind. The report also summarizes the coverage from the UK pension protection insurance and warns that the insurance does not provide 100% coverage. (in other words, plan on a much lower pay-out)

The pension plan itself was closed a good many years ago now so there are no remaining employees contributing to the plan, and the original Megacorp was bought by another Megacorp a few years ago so no huge incentive there to keep it solvent.

Just as well it is a pension that I'm not relying on, although it is COLA'ed and currently worth £600/month so it will be a shame to see it go. If there was a buy-out option I'd definitely look at taking it.

[pb4uski]

If MegaCorp is doing ok then it should be ok. No MegaCorp (or CEO of MegaCorp) wants the public humiliation of defaulting on a pension.

[ziggy29]

Quote:

Originally Posted by pb4uski Interesting to me that they told you the discount rate that they were using. Do you think you can beat 5.35% with little credit risk? (assuming your pension is stable).

They actually broke out how they calculated it:

1.85% for the first 5 years;
4.62% for the next 15 years;
6.02% for the remainder of my life expectancy beyond 20 years.

Sort of sounds like "buckets" to me...

[pb4uski]

It would be interesting to know the AA behind each of those "buckets"

[Shabby]

Tell me more about these things called "pensions". They seem amazing! I'll take 2.
(sarcastic grin)

[ziggy29]

For what it's worth, using the Berkshire Hathaway SPIA calculator, a $38,102 investment would buy a lifetime income stream of $138 a month, making the $195 seem pretty generous. Still not planning to go that way, though.

[W2R]

You know my financial point of view (cautious, conservative, etc). But anyway...

I think one option you need to seriously consider in your spreadsheet computations, is to take it at 65, *without* the 100% survivor's option. According to an online calculator I tried, this could bring it up considerably from $657/month - - perhaps to as much as $1200-$1300/month. Nice chunk!

Then take care of your DW's expenses after your demise another way, perhaps life insurance along with an SPIA to be purchased by her at that time.

[ziggy29]

Quote:

Originally Posted by W2R I think one option you need to seriously consider in your spreadsheet computations, is to take it at 65, *without* the 100% survivor's option. According to an online calculator I tried, this could bring it up considerably from $657/month - - perhaps to as much as $1200-$1300/month. Nice chunk!

With no survivor income, that rises to about $830.

Anyway, if I don't take any action on this offer now I still have until I'm 65 to make up my mind, and a lot can change with our financial situation in the next 18 years.

[Running_Man]

I do not understand why you would not immediately start the pension payments. Based on the $38,102 that is a 6.14% payout is much better than you would obtain at any annuity shop.

To me how it was calculated is not relevant, only the present value of the payment options, and I find it hard to believe taking the $195 per month is not the best present value available. Assuming you are at a marginal tax rate of 30% taking the payout and investing at only one percent would result in $15,300 in funds which would fund an additional 51 dollars per month or 246 per month with the $15,300 in funds in exchange for 5 dollar per month reduced payout at age 55

[W2R]

Quote:

Originally Posted by ziggy29 With no survivor income, that rises to about $830. Anyway, if I don't take any action on this offer now I still have until I'm 65 to make up my mind, and a lot can change with our financial situation in the next 18 years.

OK, then I think $830/month is a pretty nice chunk too, and that would be one option to consider. In 18 years, she might (knock on wood!) pre-decease you, for example; I sure hope not but one never knows. Or who knows what else could happen. You're the one with the spreadsheet, so whatever it says would probably be the way to go but this is one option I would definitely look into.

[HighRoller]

Ziggy, I got a "very similar" offer a few months ago from a "MegaCorp" that I wor*ked for almost 30 years ago. Sure seems like a lot of them are doing this. In the past 30 years, this particular corporation has gone through a number of mergers, divestments and name changes. I thought for sure my past employment records would be lost in all the shuffles and I'd never see a dime from their retirement package. In addition, their current stock price is about a dollar a share, so I'm not sure how long before another merger (or worse) will take place.

[Midpack]

Congratulations on having options, that a plus! I had to retire to take my (also relatively small) lump sum, I would have jumped at the chance to take it earlier since it was frozen in 1994. I've posted my thoughts on lump sum vs pension too many times, so I won't repeat myself yet again...