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Pension - Lump Sum Distribution ... or NOT
Old 10-21-2014, 02:35 PM   #1
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Pension - Lump Sum Distribution ... or NOT

I've read the various topics about taking a Pension Lump Sum Distribution or not and I'm having a hard time finding an "easy" way to decide which way to go on this.

First off, we're not talking much on this particular pension. The facts, I'm 55 (Dec birthday) and the pension can start next month or anytime up to about 1/1/2024 (non-COLA). If I start the pension next month it is worth about $520/mo for life up to about $840/mo if I wait until 2024. The buyout is a lump sum of about $85K. I plan to work one more year ... hopefully no more than that at which time the pension would be $553/mo. At that time I'll be 57.

I tend to assume 3.5% inflation and 5% growth on any investment should I take the lump sum and put it into an investment or into my IRA. If I do the IRA, I can't touch it until I'm 59-1/2.

Any thoughts on how to put this mess into perspective?
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Old 10-21-2014, 03:07 PM   #2
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You might want to do some searches on this board regarding this topic. It's come up a number of times in the recent past and has had a lot of good discussions.
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Old 10-21-2014, 03:34 PM   #3
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I recently had a lump-sum offer and agree with the OP that it's not easy to find the good threads on this topic - I kept getting the same threads multiple times in the search and it was a lot of work to get to some of the good ones.

What I concluded is that there is no one right answer. The factors that led me to decide to take the buyout were:
- My pension would be higher than the PBGC would guarantee and I'm not confident Megacorp will be around in 20 years.
- I was planning to start taking my pension next year (when it would no longer be reduced for early retirement, so I'd just be leaving money on the table if I didn't start then) but we really don't need the income at this point (and won't need it until I'm past 59-) and it would just drive our taxes up. By putting it into an IRA I can continue to do Roth conversions at a reasonable tax rate from our other IRAs for several more years.
- I can manage the taxes by only taking out what we need (if any) between 59- and 70 when RMDs kick in, rather than being stuck with a fixed amount each year.

Obviously the OP's situation is very different.
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Old 10-21-2014, 04:20 PM   #4
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I retired at 54 and took the lump sum as opposed to a pension for the sole reason I wanted control of the money. The amount was about $350K which I rolled into an traditional IRA along with my 401K. I set up a 72T distribution to eliminate the 10% early withdrawal penalty. That was over nine years ago and if I had it to do over again, I wouldn't change a thing. The bottom line still is, what fits your specific situation. I have compared notes with others that chose the pension and many regret the decision as they are pretty much locked into the pension agreement. I have been fortunate with my investments which with the exception of a couple of stocks are all low cost index funds.
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Old 10-21-2014, 04:40 PM   #5
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The general approach to figuring out which is the better deal is to compare the monthly amount to how much an annuity would buy.

There aren't as many online source of annuity quotes as there use to be. To answer forum questions. I go here https://www.immediateannuities.com/, plug in in 85K and 55 years old the best I could see was a $394/month payment much less than the $520 company was offering.

However if it was my money, I'd try places like Vanguard, berkshirehathway.com known for their low cost perhaps you could do better there.

Since the crisis I've noticed that most companies and almost all public employees offer monthly pension significantly higher than you can buy from an insurance company. Obviously insurance companies are in the business to make a profit, but I also think insurance companies are smarter than government and most companies when it comes to figuring these things out.

As a retired 55 year old, I'd leap at the chance to get an almost guaranteed 7.3% for life, but there are good reasons to not take an annuity.
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Old 10-21-2014, 05:19 PM   #6
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I elected the annuity option on my DB pension. Here's a link to my latest explanation.
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Old 10-21-2014, 05:37 PM   #7
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I elected the annuity option on my DB pension. Here's a link to my latest explanation.
I agree with your analysis completely. If investments (both stocks and bonds) perform as well as they have over the last 30 years, very few of us on the board will have much to worry about. (LYBM, good savers, above average incomes). The issue is what if it doesn't, in that case a pension even a modest $550-$840 one will be very nice to have.
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Old 10-21-2014, 05:44 PM   #8
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I read on one of these threads that one reason the company offer rarely equals which it would cost to buy a lifetime annuity is the whole lifespan element. Meaning---folks willing to "buy" an annuity are typically healthier than the average megacorp pension person.

So the megacorp is betting on the come that you won't outlive the income stream they would expect to pay over a lifetime. Kind of eery to think if it that way but it makes since.

Our company has also offered lump pkg to those eligible who have not started drawing. The discount offer is in the thread is referred to as a "haircut" Ha. All understandable however (thread attached below).

This thread may help you as well.

Pension Payout Opinions? -- BOEING
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Old 10-21-2014, 08:00 PM   #9
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Thanks to all who replied. I'm going to go chew on some of this ... I really can't imagine that this little amount would be worth anything as a flat non-COLA pension 20 years in the future. My general tendency is to grab the funds, invest in my IRA to avoid the taxes now and hope/plan to grow this into something usable. But that immediate tendency is what I want to avoid ... and thus why I started this thread.
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Old 10-21-2014, 09:37 PM   #10
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I too will be looking at your issue in about 18 months.I have decided to take the monthly annuity for a couple of reasons.
1. This monthly income will be my base income come hell or high water.If the market is up on my ira, I can spend acoordingly. When a couple of down years hit, I can shut down the spending out of my IRA and live off the monthly check.
2. Because DW has no interest in managing money, she will have the survivorship clause and can live off this and have someone manage the rest.
This is another "one size does not fit all" issue
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Old 10-22-2014, 04:22 AM   #11
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As a retired 55 year old, I'd leap at the chance to get an almost guaranteed 7.3% for life, but there are good reasons to not take an annuity.
I guess I don't understand this reference to a guaranteed 7.3% for life ... but then sometimes the obvious can escape me. Would you elaborate just a bit?
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Old 10-22-2014, 01:01 PM   #12
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Originally Posted by MBAustin View Post
- I was planning to start taking my pension next year (when it would no longer be reduced for early retirement, so I'd just be leaving money on the table if I didn't start then) but we really don't need the income at this point (and won't need it until I'm past 59-) and it would just drive our taxes up. By putting it into an IRA I can continue to do Roth conversions at a reasonable tax rate from our other IRAs for several more years.
So you are saying that payments from a pension count as income that would allow one to make IRA contributions when they otherwise could not? If so, I would presume that it could be to either traditional or Roth.
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Old 10-22-2014, 01:07 PM   #13
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I enjoy this pension lump sum discussions. They remind of the reverse thinking I went through when I bought more service years on my pension. I gave them a lump sum, and they gave me more $$'s each month. An interesting but different take in the same issue - pension versus personal money.
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Old 10-22-2014, 01:58 PM   #14
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So you are saying that payments from a pension count as income that would allow one to make IRA contributions when they otherwise could not? If so, I would presume that it could be to either traditional or Roth.
I believe earned income is required to contribute to an IRA.
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Old 10-22-2014, 03:19 PM   #15
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So you are saying that payments from a pension count as income that would allow one to make IRA contributions when they otherwise could not? If so, I would presume that it could be to either traditional or Roth.
No, they do not count as income for contributing to an IRA. But you can do a Roth conversion from an existing traditional IRA anytime (no age or income requirements or income limits AFIK).

Our income was too high to contribute to a Roth while we were working, so since ER I've been converting a modest amount from our existing traditional IRAs (mostly rollover from 401Ks) into Roths. You have to pay the taxes on it when you convert, but then it's like any other Roth - no taxes when you withdraw. [There are lots of threads about Roths out there if you want to search and learn more.]

If I took the pension, it would drive us into a higher tax break and make doing Roth conversions less attractive. By taking the lump sum and rolling it over into a traditional IRA, I can keep our taxable income lower for quite a few more years and thus get more money over into Roths which are not subject to RMDs.

Hope this makes sense, apologies for the confusion.
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Old 10-22-2014, 03:26 PM   #16
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I guess I don't understand this reference to a guaranteed 7.3% for life ... but then sometimes the obvious can escape me. Would you elaborate just a bit?
Simple math.

520/month * 12 months = 6240/year.

vs 85k lump sum.

6240/85k = 7.3%.
Basically a CD that pays 7.3% for life - but you never get the principal. back. (Kind of a big gotcha - that principal thing.)
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Old 10-22-2014, 07:20 PM   #17
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Simple math.

520/month * 12 months = 6240/year.

vs 85k lump sum.

6240/85k = 7.3%.
Basically a CD that pays 7.3% for life - but you never get the principal. back. (Kind of a big gotcha - that principal thing.)
Exactly right.I deliberately left out the word interest because that isn't an accurate description of what you are getting. I wish there was an agreed upon term.

A slightly more sophisticated analysis involves using a financial calculator or spreadsheet and solving for the interest rate for cashflow of N number of years with a $520 payment and $85,000 starting value.

The first approximately 14 years you are getting your principal back after that you are getting the equivalent of an interest rate. If you die at 70 (15 years) the rate is only 1.3% f you live until 85 the effective interest rate will be 6.3% if you make until 100 it is 7.0%

In today's interest rate environment all of those numbers look pretty attractive
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Old 10-22-2014, 07:37 PM   #18
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Exactly right.I deliberately left out the word interest because that isn't an accurate description of what you are getting. I wish there was an agreed upon term.

A slightly more sophisticated analysis involves using a financial calculator or spreadsheet and solving for the interest rate for cashflow of N number of years with a $520 payment and $85,000 starting value.

The first approximately 14 years you are getting your principal back after that you are getting the equivalent of an interest rate. If you die at 70 (15 years) the rate is only 1.3% f you live until 85 the effective interest rate will be 6.3% if you make until 100 it is 7.0%

In today's interest rate environment all of those numbers look pretty attractive
Ahhhh ... I understand. Makes sense. Thanks guys.
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Old 10-22-2014, 09:55 PM   #19
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If I took the pension, it would drive us into a higher tax break and make doing Roth conversions less attractive. By taking the lump sum and rolling it over into a traditional IRA, I can keep our taxable income lower for quite a few more years and thus get more money over into Roths which are not subject to RMDs.

Hope this makes sense, apologies for the confusion.
Thanks for that clarification. The confusion was my fault. I had misread your earlier post and was thinking that you did not take the buyout. Makes perfect sense now.
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Old 10-22-2014, 11:29 PM   #20
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Would it make sense to take the lump sum now and wait for rates to go up before purchasing an annuity, (e.g assumes cost of the annuity will fall when rates rise)?
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