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Mind bending *Pension (Cash Balance Account) question
Old 05-13-2015, 12:31 PM   #1
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Mind bending *Pension (Cash Balance Account) question

I retired a couple yrs. ago at 51. My killer pension in 1984 turned into a Pension / Cash Balance Account and was severely nurtured 1/2 way through my career. I kept it in place when I left mega crop as it has a 5% return. It has a cash balance of 273k today or the option of a 100% Contingent Annuity: of a flat $1250 per month. I was planning on letting it grow as I do not need the funds now but have been trying to figure out if there was an advantage to taking the annuity now and just banking it? I cant safely match the return but could bank 15k per year until I need the $1250 per month.
My thought is I could receive the annuity for a long time based on historical family longevity as well as a tax advantage spreading out a smaller amount long term. It would also possibly allow some of the funds to be available as inheritance if it was taken early and rat holed. I hope I described this in a way that can be understood. Not an easy thing for me to describe.
I was planning to taking the lump sum all through the years, but now feel the annuity has the advantage. So I plan to go that route. Am just trying to come up with a strategy on when to start taking it.
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Old 05-13-2015, 12:51 PM   #2
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I checked immediateannuities.com and for a 53 year old male, $273K buys you $1,209 in monthly income.

Playing with Excel's IRR function, internal rate of return doesn't turn positive until after 19 years collecting. Even then, IRR is a mere 5% after 50 years. In this case, I'd probably take the lump sum and roll over to traditional IRA doing partial Roth conversions every year to keep taxes manageable.
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Old 05-13-2015, 01:05 PM   #3
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That's an option. But as its paying 5% what's the advantage to rolling it into an IRA now? Everyone I knew at work that took the "package" was advised by there financial advisor to roll there lump sum pension in into an IRA. I just could not see walking away from a 5% return in this environment.
At $1250 the 273k would last 18.2 yrs. Am thinking we will possibly be able to receive this for 40 years. (Not that $1250 will be worth much in 40 years) How about putting the 15k per year into an IRA / Roth conversion.
We have both an IRA and two Roth IRA's at this time.
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Old 05-13-2015, 01:07 PM   #4
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Everyone I knew at work that took the "package" was advised by there financial advisor to roll in into an IRA.
of course. how else would he/she get any mgt fees?
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Old 05-13-2015, 01:08 PM   #5
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I checked immediateannuities.com and for a 53 year old male, $273K buys you $1,209 in monthly income.
is that a straight life annuity? OP got quoted 1250 for a 100% J&S, way more valuable
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Old 05-13-2015, 01:09 PM   #6
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I was planning to taking the lump sum all through the years, but now feel the annuity has the advantage. So I plan to go that route. Am just trying to come up with a strategy on when to start taking it.
one key question - how is the 1250 calculated? is it based on the cash balance converted to an annuity using 417e assumptions?
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Old 05-13-2015, 01:28 PM   #7
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is that a straight life annuity? OP got quoted 1250 for a 100% J&S, way more valuable
Single Life, Male, 53yo

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That's an option. But as its paying 5% what's the advantage to rolling it into an IRA now? Everyone I knew at work that took the "package" was advised by there financial advisor to roll there lump sum pension in into an IRA. I just could not see walking away from a 5% return in this environment.
At $1250 the 273k would last 18.2 yrs. Am thinking we will possibly be able to receive this for 40 years. (Not that $1250 will be worth much in 40 years) How about putting the 15k per year into an IRA / Roth conversion.
We have both an IRA and two Roth IRA's at this time.
So it will continue earning a fixed 5% a year? In that case, I believe you can delay distributions until age 70. Assuming you're currently 53, balance should grow to ~$600K by the time you turn 70. Will the fixed monthly annuity increase if you delay taking pension?
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Old 05-13-2015, 01:57 PM   #8
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Yes it continues. 5% is about as low as it has ever been. Its based on the "120% Federal Mid-term Rates" Yes the balance and monthly annuity rate increases every month. In 11.5 years at 65 the cash balance would be 475k at 5% or $2530 per month. But I would take the lump later in life and the annuity at a younger age. I have no interest in the lump sum now as I cant match the return. But am leaning towards the smaller annuity now and with any luck receiving it for a long time.
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Old 05-13-2015, 02:04 PM   #9
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one key question - how is the 1250 calculated? is it based on the cash balance converted to an annuity using 417e assumptions?
Yes, its based on the cash balance. Not sure on the 417e assumptions.
(Looks like I need to google 417e assumptions) I was not grandfathered to where my average 3 highest years of pay play into it. Just a straight calculation based on the lump sum. If that helps. I got screwed on that one. My average monthly of my 3 highest years was about 10k.
There is a benefit projection tool on the Co website where you punch in your age and the rate of return. I used the current rate of 5%.


I guess another way of looking at it, is I would be locking up 273k for 40 years at a 5 1/2% return.
And taking that 15k per year. With a zero balance in the end.


I can let this run till I am 65. Sep 2026. It ends at normal retirement age / 65.
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Old 05-13-2015, 02:50 PM   #10
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I have a cash balance also...

If yours is like mine then there is nothing to do with avg salary any more.... that was taken care of when they converted...

Mine pays 10 year Treasury +1% with a min of 4%.... so I am getting 4% right now... I did not look up your rate, but I would think that you have a 5% minimum...


I would not move it... I have left mine alone and treat it as a bond... but without any interest rate risk... IOW, if interest rates go up the value does not go down... but I might earn more.... with a bond, your principal goes down... heck, my cash balance is between 30 to 50% of my bond allocation...
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Old 05-13-2015, 04:28 PM   #11
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"The Mega Corp Retirement Plan is a non-contributory defined-benefit pension plan subject to the provisions of ERISA. The Retirement Plan was a traditional final average pay plan with a Social Security offset until April 1, 1999, when for most participants a transition to cash balance features was adopted.

If the eligible participant is “grandfathered” (at least age 50 or with 60 points as of the date the individual’s cash balance account was established), the employee also accrues benefits under prior plan formulas. Upon separation, the grandfathered participant will be eligible to receive the greater of the benefit calculated under the prior plan formulas (offset by any profit sharing account balance in the 401(k) Plan) or the value of the new cash balance account"


That was a bone job 15 years into a 30 year career. Caused me to save up and buy a rental / pay it off so I could leave when I wanted.


Still not sure if there is a tax advantage of taking a smaller monthly annuity now at a tax rate of 15% & banking it or Roth conv. V.S. taking larger distributions on a larger IRA if I add this lump sum to an IRA later. SS will add a little over 27k a year in 9 yrs and I plan to keep our taxable income for a married couple filing jointly in the 15% bracket.
Texas, do you plan to take the lump? And no, there is no min that I am aware of. It dropped last Sep to 4.96% from 5.25%. Mine is based on Corporate bonds but establishes the rate annually.
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Old 05-13-2015, 04:30 PM   #12
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I guess another way of looking at it, is I would be locking up 273k for 40 years at a 5 1/2% return.
And taking that 15k per year. With a zero balance in the end.
Once you start drawing funds, isn't your monthly pension fixed at $1,250? If so, that comes out to an internal rate of return of 4.58% at 40 years. With a 5.5% rate of return, you would never actually touch your capital.

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Yes it continues. 5% is about as low as it has ever been. Its based on the "120% Federal Mid-term Rates" Yes the balance and monthly annuity rate increases every month. In 11.5 years at 65 the cash balance would be 475k at 5% or $2530 per month. But I would take the lump later in life and the annuity at a younger age. I have no interest in the lump sum now as I cant match the return. But am leaning towards the smaller annuity now and with any luck receiving it for a long time.
I think this situation is pretty much similar to whether you should delay SS or not.

Given inflation risk, I'm inclined to either take lump sum now and roll over to tIRA (doing small Roth conversions every year) or delay until 65 for the higher annuity. You're looking at a 100% increase just by delaying ~10 years. If joint life expectancy is high, I think it's worth delaying for the increased benefit. Hmm, what's your pension if you delay 5 more years? That might make for a happy medium.

Still, this really depends on your other assets, other expected income sources and tax situation. I'm not sure if you can rollover pension/annuity distributions into IRAs, though. Might have to put the funds in a taxable account.

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Still not sure if there is a tax advantage of taking a smaller monthly annuity now at a tax rate of 15% & banking it or Roth conv. V.S. taking larger distributions on a larger IRA if I add this lump sum to an IRA later. SS will add a little over 27k a year in 9 yrs and I plan to keep our taxable income for a married couple filing jointly in the 15% bracket.
Texas, do you plan to take the lump? And no, there is no min that I am aware of. It dropped last Sep to 4.96% from 5.25%. Mine is based on Corporate bonds but establishes the rate annually.
Hmm, if I were you, I'd start doing Roth IRA conversions now up to the limit of the 15% tax bracket. With standard deduction for married filing jointly under 65, that should allow for MAGI of $92,150 for 2015. Maybe even consider delaying social security. That should help you avoid large RMDs down the line.

Try running i-ORP for your possible scenarios.
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Old 05-13-2015, 06:16 PM   #13
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"Hmm, what's your pension if you delay 5 more years?"


Based on 4.96%
353k lump or $1708 monthly on Sep. 2020


Or I could have $75k in the bank (before approx. 10% tax) and $1250 per month.


No plans to delay SS.
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Old 05-13-2015, 06:58 PM   #14
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Texas, do you plan to take the lump? And no, there is no min that I am aware of. It dropped last Sep to 4.96% from 5.25%. Mine is based on Corporate bonds but establishes the rate annually.

Mine was also a pension converted to cash value...

I do not know yet... I have not asked what kind of annuity I would get... but, I would bet that I would take a lump sum and roll it over...
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Old 05-13-2015, 07:02 PM   #15
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That was my plan when I thought normal interest rates would continue.
Not sure if we will ever see 4-5% on a 5 year CD again..........
They screwed us pretty hard this time around.
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Old 05-13-2015, 11:01 PM   #16
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That was my plan when I thought normal interest rates would continue.
Not sure if we will ever see 4-5% on a 5 year CD again..........
They screwed us pretty hard this time around.

The thing you need is real interest rates.... if inflation is low then a 4% CD is fine... if inflation goes way up, we will see much higher rates than we have now...


These low rates will not last forever... just like the high priced real estate could not... or the high priced dot coms.... the problem is how long does it take to correct... but I bet you in a decade the rates will be (or will have been) much higher than they are today...
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Old 05-14-2015, 07:36 AM   #17
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A bit off topic...
But I do not believe interest rates have much to do with inflation these days. More to do with Gov. debt and the stock market.
According to the powers we had a recovery 6 years ago. And 6 additional years of almost zero % interest? Now for 2 years they keep stalling a .25% rate increase. .25? Just not sure they could service there debt if we had normal / real interest rates that tracks actual/real inflation.
The Fed is afraid real interest rates will crash a stock market that was fueled for years by crazy low interest rates, stock buy backs and investors piling in to avoid safe/lousy interest rates. The Gov has more dependence than ever on the stock market as its own retirement plans are now more linked to the stock market.

Am sure someone will correct me on this. But that's how it looks to me.
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Old 05-14-2015, 12:13 PM   #18
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I'm in a similar situation and I've decided to keep my cash balance pension with megacorp (currently paying 4%) for the first 10 years of ER. By then I'll know my sequence of returns risk. If things look worse then anticipated I'll take the annunity starting at age 70 to ensure I don't end up as a homeless bag lady at age 80+.
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Old 05-14-2015, 12:24 PM   #19
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Not a bad plan. But at 70 I am not sure how long I would be able to collect the annuity?
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Old 05-14-2015, 03:22 PM   #20
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Not a bad plan. But at 70 I am not sure how long I would be able to collect the annuity?
Depends on your goal. I want to protect against Longevity risk. All the calculators say that I'm good to age 90 - assuming we don't experience conditions worse than in the past. At age 62 (10 years from now) I should know if my longevitiy risk is reduced enough to decide if I am going to take the money and spend it immediately or use it to offset the bag-lady risk. If you don't have longevity risk then your answer will be different.
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