lump sum vs pension

[trapperjohn]

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.

 

[aja8888]

How do you put the lump sum from the pension payout into your tIRA?

 

[trapperjohn]

According to the previous employer's literature that I just received, I would be allowed to "roll it over" into a traditional IRA.

 

[Running_Man]

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.

 

[Ticker]

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.

 

[trapperjohn]

Ticker, but you had to give up the pension? Are you better of with the lump sum or with the pension?

 

[trapperjohn]

Running Man, all of your assumptions are correct, and the pension does not rise with inflation.

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[big-papa]

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.

 

[Danmar]

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.

 

[Ticker]

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.

 

[Donzo]

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.

 

[robertf57]

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.

 

[Big_Hitter]

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.

 

[supernova72]

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.

 

[pb4uski]

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.

 

[pb4uski]

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.

 

[Big_Hitter]

'

Very helpful.

two points:

1) the static table is being projected beyond the annuity starting date for mortality improvement
2) gender blending

 

[pb4uski]

.....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.

 

[robertf57]

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.

 

[Big_Hitter]

.... 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)

 

[Big_Hitter]

Thanks, but not really helpful. He is already receiving a life annuity.

one other thing - we don't know if it is a life annuity, it could be a 50, 75 or 100% joint and survivor annuity. To take a lump sum the spouse he/she was married to at the original annuity starting date will have to reject a 50% J&S benefit at the new annuity starting date.


of course all this good stuff should be in the election packet, including the relative value of the ls vs the annuity options

 

[marko]

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.

DW just had that option and took the rollover as well. The paperwork, rigmarole, hassle and PITA required by the pension administrator only confirmed that moving the $$ was a wise choice.

At least 5, 10 or 15 years from now we know who has the money (DW), where it is (TRPrice) and, with a few clicks can access it. As you note, with all the churn these outfits go through nowadays, even finding where that $$ is could be a pain down the road.

 

[haha]

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.

Cool! On your 100th birthday you could go kitesurfing with a naked woman on your back Google how Richard Branson does it for pointers, and then try to remember.

Ha.

 

[robertf57]

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.

How each person assess the utility of their balance sheet and their cash flows is an individual determination. As Ha is humorously implying above, many don't see a balance in the bank at age 100 as particularly valuable.

For me, my major consideration is the money I can spend-- not the money that remains at my death or when I as unable to enjoy the benefits of the cash. A defined benefit plan or other annuity allows you to not have to be concerned with the risk that you will live a long life and for a given return maximizes the potential spend. Could you end up with more in the rolled over account? Of course. BUt, you could also end up with less. And even if you end up with more were you able to spend more during your retirement? This is why I am glad that I have some funds that will come to me from a generous defined benefit plan. I certainly am glad it is not all of my assets; but, I agree with many financial gurus that having some floor of income that is annuitized is a good thing for most circumstances. Perhaps your SS is enough....

It is a more complicated decision than the expected value of the asset.

 

[trapperjohn]

Thanks to all who have responded so far, and to those who will respond.

In an effort to avoid letting this thread go down a rabbit hole, I just wanted to explain my comment about calculating my account balance out to age 100.
I didn't extend the Calc out to age 100 to somehow plan for passing on my wealth to family or charities. Rather, the spreadsheet had to stop extending the calculation at some pount. Age 100 simply seemed like a nice round number.

The emphasis of my question was to ask for collective thoughts and wisdom on which way to go ... not on how much money I'd make.

Again, thanks for all of your thoughts.

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