Need sanity check on when to take pension

[DayDreaming]

A lump sum from a pension would have to be converted to an IRA, not after tax. That would completely negate the tax issues you were mentioning. Any income would be eventually taxed at his bracket when withdrawn. Plus the withdrawals would be forced by RMDs.

Having said that, I'm still in favor of taking the lump sum. Better control. more chance of keeping up with inflation, etc. Also, is there anyone you would like to leave money to? You could start gifting when you are forced to withdraw the RMDs. If not, maybe the pension is the better choice.

I doubt if I'll have anyone to leave the money to when I'm gone. Some close relatives that I've offered to help financially have flat out refused any assistance.

 

[pb4uski]

Have you calculated and the compared the present values of each option? Easily done in Excel. ....

Especially if you know your date of death and the investment earnings rates between now and then.

 

[pb4uski]

Call me crazy...

Ray, you are crazy.

 

[pb4uski]

$54,445 you would receive if you start your pension at 60 less the $43,556 you would receive if you start at 55.

By giving up $217,780 (5 years at $43,556 a year) you get $10,889 a year MORE for the rest of your life.

Plus I think 75 is his (OP) breakeven age...($43,556 x 5 yrs = $217,780. $217,780/$10,889= 20 yrs.).....

Yes, taking it at 60 gets me $10k more per year, but it then takes 20+ years to make up for not collecting the pension from age 55 to 60. The break-even point is around age 79.

FIRECalc show me coming out better in the long run with the pension at 55, but then FIRECalc doesn't consider Roth conversions and tax brackets. .....
Thanks for the comments, everyone, I have a lot to think about - especially tax brackets.

I think PERSonalTime has a sensible breakeven calculation but the 20 years needs to be added to 60 rather than 55, so it is the 80 you are getting rather than 75.

I would tend to agree with those advocating the lump sum except your OP indicated that there is very good longevity in your genes and investment returns for the near future are uncertain and many people expect that they will be modest. If it was not for the Roth conversion tax savings, then I think the lump sum would be a winner... but saving 10% of more of Roth conversions for 5 years in tax may mitigate the lump sum's attraction.

For example, if you had no other income you could convert $47,750 in 2015 and would pay $5,160 (about 11%) in tax according to Taxcaster (assumes single with standard deduction) vs an almost for sure 25% ($11,938) later. So over 5 years your savings would be ~$34k but they would actually be more because tax brackets, standard deductions and exemptions will increase with inflation allowing you to convert and save more.

 

[unno2002]

I, am a pessimist.



What do you believe is happening in the “big picture”? Do you trust the economy, and the source of the pensions are stable? If not, is there some physical investment you would like to make now, that would improve your setting in a collapsing economy?

 

[Aeowyn]

I guess I'm an optimist. There is always someone saying the sky is falling. And when I invest money when they are the loudest - my money grows the most.

If it were me, I would 100% take the lump sum at 55 and roll it into a Traditional IRA. I have high confidence (> 95%) that my investments are going to have an IRR for for the next 20+ years greater than 4% (Nun calculated an IRR of less than 4% for your annuity payments). Additionally I calculate that if you take the lump sum at 60 vs. 55, the IRR is less than 3% to get from $703,293 to $804,364 in 5 years.

What is your risk tolerance? If you are going to sit the lump sum in CASH, you may as well take the annuity payments. But it sounds like you are already invested in the market (you said you have been living off savings and still have more now than before the crash of 2008). So it sounds like you've experienced the some rough patches in the market and know that if you don't sell at the bottom you are going to be OK.

Besides the better return I expect (not every year, but long term) by investing myself vs. the really crappy IRR from the annuity payments, I would also have complete control until age 70 of when I was taxed on the money.

I would be super aggressive in Traditional to Roth conversions - including the pension lump sum received at age 55.

Something I've been playing with to attempt to even out the tax bill through retirement is this: Based on current tax laws and my current situation - I calculate what my marginal tax bracket would be if I were 70 and having to take RMDs and collecting SS (in today's dollars). I then make Roth conversions this year to max out that tax bracket. If the market does really good, your Traditional IRA may still grow through the years and keep you in that tax bracket (good problem to have). But depending on your balances and if the market has some negative or even low return years, eventually you might fall into a lower bracket when the predicted taxes at age 70 is done. I would take that as a sign that I may have reached a good balance between Roth and Traditional accounts.

I'm also planning to delay SS (if i is still around) until I am comfortable with my split between Traditional and Roth accounts (or until 70).

One more note: it is somewhat deceiving to look at the lump sum with a 4% withdrawal rate (some will argue the safe withdrawal rate should be lower or higher - but we'll just assume it is good for now) - and note that it only produces an annual income the first year of $28,132 vs. the pension payment of $43,566. But the 4% initial SWR assumes annual increases for inflation. So the IRR the SWR is based on is greater than 4%. I don't know the IRR off hand, but it is probably more like 6-7%. I think there is a good chance the market will exceed even this (depending on what the investments are).

Inflation risk is real. I believe the least risky plan is take the lump sum and invest it in a well diversified portfolio that has at least (preferably more) 60% stock mutual funds (or ETFs).

 

[DayDreaming]

Thanks for the analysis, Aeowyn, much appreciated.

My risk tolerance - right now I'm 60% stocks.and probably wouldn't be comfortable straying too far from that. I have managed to stay the course during market downturns, but it was a bit scary at times. I guess that's why I liked the idea of taking the pension as a monthly annuity. I was thinking that with the monthly pension check coming in, I might then be more aggressive with my investments.

FYI, my pension is from a big pharma, well funded, and I'm pretty confident that the pension will be there for me - but I know that a lot can change if I live another 40 years.

That said, there are some things I really need to reevaluate.
Thanks again, Aeowyn!

 

[Aeowyn]

Of course one thing for sure you should do before taking the pension payments, is check to see if it is competitive with a lump sum life time annuity (I don't know - I don't really like annuities so I don't keep up). If you can get the same or better in the open market, you might consider doing that. Then you can decide how much of the lump sum you want to annuitize to balance the stability of fixed payments with the higher return of the market. You could also put an inflation rider on the annuity so the value of your monthly payments would keep up with inflation (of course this means your starting payments would be less). You might also look into a variable annuity - again I'm not too familiar with them but you can get some downward protection on your market investments that way (of course at the cost of lower overall returns).

It doesn't sound like the IRR for your pension is anything special (but I don't know with today's rates), check out your options in the open market before you decide.

 

[nun]

I don't understand your last sentence - giving up IRA to Roth conversions now would increase future RMDs, not reduce them - no?

If you take the lump sum you'll be greatly increasing the eventual RMD amount as by 70.5 you probably won't have spend down by an amount equivalent to the life time pension. If you take the pension you will probably not want to do big IRA to ROTH conversions because of tax so you'll have to do the maths to see which is better. However, these calculations have so many what ifs and assumptions that I would emphasize your current requirements when making the choice.

My current savings are already a pretty nice lump sum and will provide more than enough to offset inflation later. Thanks for the comments, everyone, I have a lot to think about - especially tax brackets.

Your spending needs are important. If the pension will cover those and you have enough invested elsewhere to deal with inflation and possible large one time expenses, then I'd take the pension.

 

[nun]

Bond funds are probably going to have negative real returns for a while. The pension gives you a return if 3.7% (so maybe 1% to 2% real) assuming you live an average life span. So why not take the pension and think of it as the fixed income part if your portfolio and go 100% equities with the rest of your money.

 

[nun]

Of course one thing for sure you should do before taking the pension payments, is check to see if it is competitive with a lump sum life time annuity (I don't know - I don't really like annuities so I don't keep up). If you can get the same or better in the open market, you might consider doing that. Then you can decide how much of the lump sum you want to annuitize to balance the stability of fixed payments with the higher return of the market. You could also put an inflation rider on the annuity so the value of your monthly payments would keep up with inflation (of course this means your starting payments would be less). You might also look into a variable annuity - again I'm not too familiar with them but you can get some downward protection on your market investments that way (of course at the cost of lower overall returns).

It doesn't sound like the IRR for your pension is anything special (but I don't know with today's rates), check out your options in the open market before you decide.

An IRR of 3.7% and a payout rate of 6.2% (using the quoted lumps sums and payouts starting at 55 and assuming an average life span) is better than you will find on the open market. Inflation riders are very expensive and if you believe the Pfau models the OP has a nice opportunity to implement a very efficient strategy by using the pension and an aggressive stock portfolio to fund retirement. Given the likelihood of very poor bond returns for a while I like the 3.7% IRR of the pension.

 

[Marketwatcher]

Of course one thing for sure you should do before taking the pension payments, is check to see if it is competitive with a lump sum life time annuity (I don't know - I don't really like annuities so I don't keep up). If you can get the same or better in the open market, you might consider doing that. Then you can decide how much of the lump sum you want to annuitize to balance the stability of fixed payments with the higher return of the market. You could also put an inflation rider on the annuity so the value of your monthly payments would keep up with inflation (of course this means your starting payments would be less). You might also look into a variable annuity - again I'm not too familiar with them but you can get some downward protection on your market investments that way (of course at the cost of lower overall returns).

It doesn't sound like the IRR for your pension is anything special (but I don't know with today's rates), check out your options in the open market before you decide.

Agree with this. I think you'll be surprised to see how much your income stream is worth on the open market. My mega was offering me a lump sum of under $1MM. But when I looked at annuities in the open market, I saw that I would have to pay over 20% more to get the same income stream.

I'm going to take my pension of $62k starting next year and treat it as a bond. All my investments are 100% in various Vanguard stock index funds.

You need to consider the pension a large fixed income asset and allocate the rest of your portfolio accordingly.

Sent from my SM-T230NU using Tapatalk

 

[nun]

Agree with this. I think you'll be surprised to see how much your income stream is worth on the open market. My mega was offering me a lump sum of under $1MM. But when I looked at annuities in the open market, I saw that I would have to pay over 20% more to get the same income stream.

I'm going to take my pension of $62k starting next year and treat it as a bond. All my investments are 100% in various Vanguard stock index funds.

You need to consider the pension a large fixed income asset and allocate the rest of your portfolio accordingly.

Sent from my SM-T230NU using Tapatalk

+1. I like this

 

[DayDreaming]

...
You need to consider the pension a large fixed income asset and allocate the rest of your portfolio accordingly.

I like that line of thinking. Thanks!

 

[pb4uski]

I just sketched out my 2015 Roth conversion this morning since I did the cash portion of my rebalancing a week or so ago. It looks like I'll be able to convert more in 2015 than in 2014 because my 2014 capital gains will be lower and the federal tax on the converted amount will only be 8.5%... a far cry from the 25% marginal rate that I "enjoyed" when I deferred that income. I like saving 16.5%!

 

[Aeowyn]

An IRR of 3.7% and a payout rate of 6.2% (using the quoted lumps sums and payouts starting at 55 and assuming an average life span) is better than you will find on the open market.

Thanks for confirming the reason I hate annuitization. IMO the only one that makes out on that transaction is the insurance company.

 

[nun]

Thanks for confirming the reason I hate annuitization. IMO the only one that makes out on that transaction is the insurance company.

Well going with the pension rather than the lump sum is effectively taking an annuity. If you took the lump sum you couldn't buy an lifetime SPIA with better terms, but you would have all the usual options available of how to invest that money. Personally I'd lock in the guaranteed income from the pension in the expectation of living an average lifespan and getting 3.7% annual interest and invest the rest if my portfolio in something like Vanguard Total Stock Market and maybe even se riskier areas