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lump sum vs pension
Old 06-29-2015, 07:39 PM   #1
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lump sum vs pension

A few years ago, I took an "enhanced" offer to retire early from my previous employer. I accepted the offer, started receiving a very nice monthly pension, and found another j*b. I'm now almost 60 years young, and about ready to retire for good.

My wife also works and will retire 7 or 8 years from now with a small pension. Our combined tIRAs are just over 7 figures. Our combined Roths are a bit over $100K.

Just today, I received an offer from my previous employer to pay out a lump-sum amount and then discontinue the monthly pension payments. The lump-sum amount is based upon my current yearly pension amount multiplied by a "factor". I won't know the actual lump-sum amount for a few weeks, when they send out the individualized lump-sum information. For now, I'm estimating that the lump-sum amount will be between $400K and $500K.

Like many in this forum, I've created several different spreadsheets with various "what if" scenarios. Up to now, all of my scenarios took my pension and social security into account. But as near as I can tell, if I add what I consider to be a conservative estimate of the lump-sum amount to my existing tIRA balance, and remove my monthly pension payments, at age 100, I will end up with considerably more in my savings than if I just keep getting my pension.

Obviously everything will depend on the actual lump-sum amount which I won't know specific to my situation for a few more weeks. But I'm wondering if I'm forgetting or missing some consideration.
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Old 06-29-2015, 07:55 PM   #2
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How do you put the lump sum from the pension payout into your tIRA?
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Old 06-29-2015, 08:07 PM   #3
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According to the previous employer's literature that I just received, I would be allowed to "roll it over" into a traditional IRA.
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Old 06-29-2015, 09:07 PM   #4
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Originally Posted by trapperjohn View Post
A few years ago, I took an "enhanced" offer to retire early from my previous employer. I accepted the offer, started receiving a very nice monthly pension, and found another j*b. I'm now almost 60 years young, and about ready to retire for good.

My wife also works and will retire 7 or 8 years from now with a small pension. Our combined tIRAs are just over 7 figures. Our combined Roths are a bit over $100K.

Just today, I received an offer from my previous employer to pay out a lump-sum amount and then discontinue the monthly pension payments. The lump-sum amount is based upon my current yearly pension amount multiplied by a "factor". I won't know the actual lump-sum amount for a few weeks, when they send out the individualized lump-sum information. For now, I'm estimating that the lump-sum amount will be between $400K and $500K.

Like many in this forum, I've created several different spreadsheets with various "what if" scenarios. Up to now, all of my scenarios took my pension and social security into account. But as near as I can tell, if I add what I consider to be a conservative estimate of the lump-sum amount to my existing tIRA balance, and remove my monthly pension payments, at age 100, I will end up with considerably more in my savings than if I just keep getting my pension.

Obviously everything will depend on the actual lump-sum amount which I won't know specific to my situation for a few more weeks. But I'm wondering if I'm forgetting or missing some consideration.
For 400 to 500K you must be getting 1600-2000 a month at your age, I assume the pension must not be indexed for inflation and your estimate must be estimating an inflation rate and a real return. Of course how well you estimate those is the key.
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Old 06-29-2015, 11:24 PM   #5
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my payout was not nearly as good as I had anticipated. the lump sum
option was severely discounted. Took it anyway, rolled it over, and
have made a little ground in recovering the discount.
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Old 06-30-2015, 05:18 AM   #6
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Ticker, but you had to give up the pension? Are you better of with the lump sum or with the pension?
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Old 06-30-2015, 05:46 AM   #7
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Running Man, all of your assumptions are correct, and the pension does not rise with inflation.

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Old 06-30-2015, 05:46 AM   #8
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My wife had a similar thing. After doing the analysis, we ultimately decided to roll it over into her rollover IRA. I think in the long run we can do better, but more importantly, it is now under our control and we no longer have to wonder if some years down the road, the pension plan would find itself in trouble. Of course we can still make stupid investing decisions with the money.
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Old 06-30-2015, 06:11 AM   #9
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I had a similar decision to make when I retired. I had the option of rolling my "retirement allowance" into an enhanced deferred pension. Didn't think too much about it at the time but almost ten years later I am receiving the enhanced pension and very happy I am. Could I have done better with the lump sum? Maybe, but having a secure very low risk enhanced pension is a very good thing in retirement. Unless the figures are clearly significantly in your favor, stick with the pension. Risk is a bad thing in retirement.
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Old 06-30-2015, 08:32 AM   #10
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Ticker, but you had to give up the pension? Are you better of with the lump sum or with the pension?
yes, I gave up the pension for the lump sum. Big Papa listed some of my concerns, and another concern I had was the monthly distributions. I want to control my monthly withdrawals to coordinate my IRA/Roth conversions and maximize my tax advantages. I have not touched the lump sum, it's growing in an IRA, but I have started the Roth conversions. I really like having control over the withdrawals rather than getting a monthly check.
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Old 06-30-2015, 09:53 AM   #11
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Had the same concern/decision. Thus far I have left it as the pension. I'm quite sure I will receive another offer down the road as I don't plan to take the pension until age 65. It increases 8% every year I leave it alone. It's a tough decision with good arguments on both sides. I like the different streams of income that a pension will offer opposed to just having before and after tax investments to draw from. My employer is a very solid mega, mega parma. So I'm not very concerned with default.
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Old 06-30-2015, 10:32 AM   #12
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Just a reminder, the company is not giving you a lump sum because they want you to prosper. They are reducing their risk and their expected costs. No doubt the pension was calculated on a mortality table that doesn't reflect today's improved longevity. Although it is possible that you would do better investing the money yourself, a pension has no volatility and provides an element of longevity insurance.

First step in analyzing this is to determine the health of the pension and it's funding. If it is shaky, take the money and run. Then see if the payout would buy you the same cashflow on the open SPIA market. Once you know these facts, you will be in a better place to assess the deal.
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Old 06-30-2015, 10:54 AM   #13
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No doubt the pension was calculated on a mortality table that doesn't reflect today's improved longevity.
For 2015 annuity starting dates, the mortality table used to calculate a statutory minimum lump sum is the RP2000 table projected to 2022/2030 blended 50% male and female.
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Old 06-30-2015, 11:06 AM   #14
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Broken record here but in previous posts the employer typically gives the lump sum a 30% "haircut" vs. what a lifetime annuity would provide at the same income stream.


It's all about reducing the pension liability on the balance sheet and they are counting on a certain % taking the lump sum offer---IMHO.
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Old 06-30-2015, 05:19 PM   #15
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For 2015 annuity starting dates, the mortality table used to calculate a statutory minimum lump sum is the RP2000 table projected to 2022/2030 blended 50% male and female.
'

Very helpful.
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Old 06-30-2015, 05:20 PM   #16
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Originally Posted by trapperjohn View Post
According to the previous employer's literature that I just received, I would be allowed to "roll it over" into a traditional IRA.
That is typical.
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Old 06-30-2015, 05:23 PM   #17
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'

Very helpful.
two points:

1) the static table is being projected beyond the annuity starting date for mortality improvement
2) gender blending
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Old 06-30-2015, 05:24 PM   #18
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.....First step in analyzing this is to determine the health of the pension and it's funding. If it is shaky, take the money and run. Then see if the payout would buy you the same cashflow on the open SPIA market. Once you know these facts, you will be in a better place to assess the deal.
+1 If you can buy a SPIA that provides the same benefit with the lump sum from a good insurer I'd rather have the credit risk of a good insurer and the backstop of state guaranty funds than the credit risk of most pension plans.
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Old 06-30-2015, 05:31 PM   #19
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For 2015 annuity starting dates, the mortality table used to calculate a statutory minimum lump sum is the RP2000 table projected to 2022/2030 blended 50% male and female.
Thanks, but not really helpful. He is already receiving a life annuity. My point was the plan's experience may not be what they had projected given an older mortality table and their liability may be larger that they planned . I don't know which table they initially used for his annuity nor do I know how they projected mortality improvement. I do know that all of these buyouts I have heard about involved a haircut to the retiree.... I have a plan that has the mortality table fixed at the time I opened the account to a 1983 table.
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Old 06-30-2015, 09:57 PM   #20
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.... I have a plan that has the mortality table fixed at the time I opened the account to a 1983 table.
maybe for general actuarial equivalence but not for lump sum distributions, if the plan is subject to irc 417(e)
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