Monthly checks vs cashing out a pension:

[JP.mpls]

I'm sure this topic has been covered in detail, but I wasn't having great luck searching the forum. If you know of a good previous post on this topic, please forward it to me.

My friend is trying to decide if she should take a cash out offer for her pension. Her finances are not great, so this is a very important decision for her. She asked for my advice on this. I recommended that she discuss it with a financial professional, but I don't think she is going to do that. I'm also concerned that a "professional" will suggest taking the cash out, so she will invest the money with them. (Okay, I don't trust them.)

I'm interested in any comments or thoughts of how to determine which path makes more financial sense.

Without the exact numbers, I'm just looking for general guidelines.

What have others done, and did it work out? Would you have done it differently in hindsight?

My initial thought is that the company is trying to save money by offering a cash buyout. I don't even know what a reasonable offer should be.



Thanks for your replies in advance.


JP

 

[hnzw_rui]

Pension from where? If it's a life annuity with COLA, it's going to be hard to beat the monthly checks.

 

[gauss]

For somebody who is not financially sophisticated and does not want to be, I also think that it would be hard to beat the monthly checks in any responsible way.

My dear MIL went through this recently and is satisfied with her decision.

 

[RetireBy90]

I would suggest that it will take some little bit of work to come to a good answer. Check to see what monthly income she could get with a Single Payment immediate annuity. That will be somewhat of a gauge of to what alternatives are available.


My personal opinion on pension vs lump sum mostly lean to lump sum transferred to an IRA. The problem right now is that to figure what monthly payment they are willing to pay, they look at interest rates and project how long can they pay out that pension compared to her life expectancy. With interest rates so low right now the payout would be low. However, if she isn't willing or able to learn how to manage a lump sum, she may be better served with the monthly payments, even though she could do better after becoming educated on how to manage retirement savings. It doesn't have to be hard.

 

[Big_Hitter]

For somebody who is not financially sophisticated and does not want to be, I also think that it would be hard to beat the monthly checks in any responsible way.

My dear MIL went through this recently and is satisfied with her decision.

Agreed - taking the lump sum is a huge coin flip, especially for those that can't afford to create risk where none previously existed

 

[Mulligan]

You didn't mention why she is not in good financial shape. If its because she is a spenderina having a wad of cash is putting the whiskey right in front of the alcoholic.
Members here aside, most people are poor investors. With a pension it is professionally managed, but more importantly if you get caught in a 10 year market down cycle, you get to live off of other peoples contributions until the market recovers thanks to pooled resources. Assuming it is a decently funded pension system of course.


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[marko]

But does the calculation change if it is NOT COLA'd?

If I had a non COLA'd pension and/or in good health, I'd opt for the cash in hand.

 

[supernova72]

I found this thread very useful. Typically in a lump option they give it a "haircut" of sorts so it's good to compare what the reduction is to what one could buy in an annuity.


http://www.early-retirement.org/forums/f28/pension-lump-sum-distribution-or-not-74108.html

 

[racy]

... trying to decide if she should take a cash out offer for her pension. I'm interested in any comments or thoughts of how to determine which path makes more financial sense. ...I'm just looking for general guidelines.
JP

Here's a quick pros & cons article: Pros and Cons of Lump Sum and Annuity Pension Plans

I chose the lump sum, but that choice isn't necessarily the best for everyone, as the article points out.

 

[pb4uski]

To me it depends on why her finances are not great and what the deal is. If her finances are not great because she hasn't been able to save, then if the pension numbers are close to fair I think she would be better off with the pension.

While I think with discipline that one can come out ahead with a lump sum, not all people have the requisite discipline. Some will see that huge pot of money there and periodically raid it and later lament that they don't have enough money.

If it is a non-COLA pension, you can look at pension quotes on immediateannuities.com to see if the deal is fair or not.

 

[hnzw_rui]

But does the calculation change if it is NOT COLA'd?

If I had a non COLA'd pension and/or in good health, I'd opt for the cash in hand.

Same. After inflation, I don't imagine the non COLA'd pension would be worth much in 10-20 years.

 

[JP.mpls]

It is not a COLA pension, but it is from a mega corp.

She is single, and didn't start saving for retirement until later in her career (50?). She is my wife's best friend, and I convinced her to start investing, and to get the company match at that time. She is 65 now, and has under $100K in her 401K rollover account at Vanguard.

She is talking about paying off her <$100K mortgage with the money. I'm assuming this money is tax deferred, and she will pay taxes as she withdraws it. Is that true?

She isn't a big spender. She also didn't purchase a home until later in life, so she has a small house payment (est. $800/month) with at least 20 years left on the mortgage.

She can pay all of her existing monthly bills and expenses, and probably save a little each month if she is collecting SS and her planned pension payout.

She does have diabetes, but her mother lived into her 80s with the same condition.

I will check the rates for immediate annuities that was suggested.

Thanks for the links to earlier posts.


JP

 

[hnzw_rui]

What's the interest rate on the mortgage? If it's a low fixed rate, might be better to just keep the mortgage and keep IRA/401k funds invested.

And yep, unless she rolled over to a Roth account, it's likely she'll face a hefty tax bill on the 100K. Withdrawing lump sum is probably gonna put her in the 28% bracket. If she wants to eliminate the mortgage, my suggestion is making extra principal payments every year instead of one big lump sum.

 

[pb4uski]

What's the interest rate on the mortgage? If it's a low fixed rate, might be better to just keep the mortgage and keep IRA/401k funds invested.

And yep, unless she rolled over to a Roth account, it's likely she'll face a hefty tax bill on the 100K. Withdrawing lump sum is probably gonna put her in the 28% bracket. If she wants to eliminate the mortgage, my suggestion is making extra principal payments every year instead of one big lump sum.

Whoa! Rolling it over into a Roth would also create a tax bill. She can only roll it into an tIRA to avoid paying tax on it.

Given the additional background the OP provided, unless the relationship of the monthly benefit and the lump sum are really unfair, I think the monthly benefit is a better choice.

 

[travelover]

I'd add that, IMHO, people that are "not good with money" are generally better with a monthly payout.

 

[hnzw_rui]

Whoa! Rolling it over into a Roth would also create a tax bill. She can only roll it into an tIRA to avoid paying tax on it.

Sorry, I meant if she had already done a Roth conversion when she first rolled over her 401k to Vanguard (so current money is already after tax). Not that she should do a Roth conversion now.

 

[Mulligan]

I'd add that, IMHO, people that are "not good with money" are generally better with a monthly payout.

Without question! And as an additional measure the math will then be easier to determine if she even afford to retire.


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[Running_Man]

She is 65 and has less than 100K, so one could reasonably assume she is not great with financial dealings, this strongly hints that the annuity portion might be best. The difference that the extra funds will make when she hits her mid 70's to late 80's will be tremendous.

My father who also was not great with money took his 1800 a month pension as a lump sum instead of as annuity and spent the 200K (this was back in 1990's) by age 72. First paid off the house then later sold the house to maintain lifestyle in an apartment, then spent last 15 years of his life with only SS.

An additional value is that most of the pension will be tax free if the pension and SS are her only income sources. $2,000 a month Social Security and $1,000 a month pension if those numbers are in the ballpark is a very makable and budgetable retirement. Any extra money when you are close to living on only SS is very valuable.

 

[JP.mpls]

RunningMan,
I'm concerned she will do the same as your father with a cash out, and end up trying to live on just SS.

Her numbers are less than your estimates. I'm guessing $1500/mo. SS, and $750/mo. pension. She has been living on about $2000/month.

I didn't mention that she got caught in a layoff around the age of 60. She has been living on a large severance, unemployment checks, part time work, and drawing down on her 401K to survive.

Started SS about a year ago, and has still been spending some 401K money each month. She can stop touching the 401K to meet monthly expenses with the monthly pension check.

Regarding the mortgage. It is at a very low interest rate. She got some type of low income refinancing.




JP

 

[jazz4cash]

RunningMan,
I'm concerned she will do the same as your father with a cash out, and end up trying to live on just SS.

Her numbers are less than your estimates. I'm guessing $1500/mo. SS, and $750/mo. pension. She has been living on about $2000/month.

I didn't mention that she got caught in a layoff around the age of 60. She has been living on a large severance, unemployment checks, part time work, and drawing down on her 401K to survive.

Started SS about a year ago, and has still been spending some 401K money each month. She can stop touching the 401K to meet monthly expenses with the monthly pension check.

Regarding the mortgage. It is at a very low interest rate. She got some type of low income refinancing.




JP

Given these details........ definitely pension.

 

[Running_Man]

RunningMan,
I'm concerned she will do the same as your father with a cash out, and end up trying to live on just SS.

Her numbers are less than your estimates. I'm guessing $1500/mo. SS, and $750/mo. pension. She has been living on about $2000/month.

I didn't mention that she got caught in a layoff around the age of 60. She has been living on a large severance, unemployment checks, part time work, and drawing down on her 401K to survive.

Started SS about a year ago, and has still been spending some 401K money each month. She can stop touching the 401K to meet monthly expenses with the monthly pension check.

Regarding the mortgage. It is at a very low interest rate. She got some type of low income refinancing.




JP

Then anything you could do to have her take the pension and stop spending what savings she has left to let grow would be doing her a retirement favor. Even if a few years from now she wishes she had more to spend the extra $750 locked in is worth so much more than straight SS alone, as that $750 is tax free from federal.

 

[daylatedollarshort]

There are many pros and cons as other have discussed. A big reason for us to choose the monthly payments was to have additional diversified retirement income streams, and a steady income when we are older (SS plus the pensions checks) we could live of if we ever lost our portfolio income through fraud or loss of mental capacities.

 

[JP.mpls]

Running Man,
You mention the monthly pension check being tax free from the Federal government.
Is that correct? I'm assuming it will be considered income, and she will have to pay taxes.
Are you referring to the fact that her monthly income will be low, and she will pay relatively low taxes?
If she takes the cash out, I see her taking a big chunk for the house, and paying high taxes on it.


My wife told me that she is now leaning toward the pension at this time.
I do appreciate all the comments. I hope it works out for her.




JP

 

[almost there]

The only pensions that are COLA these days are Gov. type pensions.
Private Co's cant take on that much risk as it may not be sustainable.
I would steer her towards the pension as there isn't much out there at this time with little risk.
I used to be 100% lump sum, until the past few years. Now I see the annuity option as diversity. As she already has her 401k invested I would say the monthly is best for her. I would advise her to live of SS and the annuity and lay off the 401k as long as she can.

 

[LinCella]

I get monthly pension checks, COLA'd and 100% medical paid. I am one of those people who like the security of that monthly check. I was never a seasoned investor and so would have major anxiety every month!