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Pension vs. Lump Sum
Old 12-10-2012, 05:05 PM   #1
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Pension vs. Lump Sum

First post here, just joined... Be nice please!

I am about to retire at age 62 and have the choice of a pension that pays about $70k/year or take a $1.2 Million lump sum.

Based on a 4% draw down rate the pension seems to be the better option.

My company is financially strong. The pension is over 100% funded. But still I hear about formerly great companies going broke and defaulting on their pensions.

I'm not worried about leaving money for the kids. They are doing fine.

Any advice? Pension or lump sum?
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Old 12-10-2012, 05:14 PM   #2
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Better cash flow with the pension. I had a similar choice to make and took the pension.
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Old 12-10-2012, 05:29 PM   #3
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I would lean towards the pension assuming: good health, good longevity in the genes and other sources of retirement funds (401k, IRAs or whatever). If there is a DW to consider, is there a joint life option to consider?
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Old 12-10-2012, 06:17 PM   #4
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I had a pension offer recently also, smaller #s but similar as far as %. I would take the pension leave the risk on them.
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Old 12-10-2012, 06:22 PM   #5
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At least your options are basically a wash as they should be based on the Immediate Annuities - Income Annuity Quote Calculator. quote below, not knowing your joint payout terms/needs. But you should get a few quotes to verify.

I would take the lump sum (and did 17 months ago), invest it conservatively, and buy an annuity (much) later if necessary, likely when they're cheaper due to higher interest rates - this is a bad time to buy an annuity/take a pension if you can avoid it. Even if I change my mind and wish I'd taken the pension, I can just buy an annuity whether it's a year later, 20 years or anything in between - seems like 'having my cake and eating it too.' If you take the pension, the lump sum option is gone forever.

But there's no universal answer. Some people can't sleep at night until they have some (floor) income nailed down, so they take a pension/buy an annuity and forego the future potential (for fear of the historically lesser but real downside). Some notable financial planners recommend nailing down floor income, to avoid risk once one has retired and returning to work may be less likely.

Best of luck. At least in your case there's no bad choice, basically a wash at least at present. And welcome to the forum...
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Old 12-10-2012, 07:12 PM   #6
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Welcome to the board!

We faced a similar decision last fall - we took the lump sum and rolled it into our 401(k). However, ours was different in that it was a GM pension, being "transferred" to Prudential, so we were losing our PBGC guaranteed benefit.

I'm still not sure I made the right decision - I'll probably question myself for ever. But that new & improved 401(k) balance sure does rub some salve on the wound.
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Old 12-10-2012, 10:15 PM   #7
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Originally Posted by pb4uski View Post
I would lean towards the pension assuming: good health, good longevity in the genes and other sources of retirement funds (401k, IRAs or whatever). If there is a DW to consider, is there a joint life option to consider?
The pension number includes my wife at 100% survivor. My ancestors blessed me with great genes and my health is excellent. And I have a nice 401K that I figure I'll invest in a 'couch potato' IRA.
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Old 12-10-2012, 10:22 PM   #8
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At least your options are basically a wash as they should be based on the Immediate Annuities - Income Annuity Quote Calculator. quote below, not knowing your joint payout terms/needs. But you should get a few quotes to verify.
Hmm. Since the quoted pension includes my wife I seem to be doing a bit better than the site offers. Thanks for the link.
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Old 12-11-2012, 06:07 AM   #9
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.... But still I hear about formerly great companies going broke and defaulting on their pensions...
Check this out:
PBGC in Plain English
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Old 12-11-2012, 06:55 AM   #10
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First post here, just joined... Be nice please!
Welcome to the forum

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Originally Posted by winzoid View Post
I am about to retire at age 62 and have the choice of a pension that pays about $70k/year or take a $1.2 Million lump sum.

Any advice? Pension or lump sum?
At first glance the pension looks to be less risky and better financially than taking the lump sum. Do you have any other retirement assets or pension income?
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Old 12-11-2012, 07:48 AM   #11
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Welcome, I was faced with a similar situation seven years ago when I retired. I decided on the lump sum which I rolled into a traditional IRA. No regrets and I sleep very good at night knowing I have control of my funds.
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Old 12-11-2012, 08:08 AM   #12
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I almost always vote pension but in this case I'd go with the lump sum as that is some serious $ you could invest (yes, easily dazzled here by the 7 figures) and also have in your estate.
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Old 12-11-2012, 08:08 AM   #13
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The pension number includes my wife at 100% survivor. My ancestors blessed me with great genes and my health is excellent. And I have a nice 401K that I figure I'll invest in a 'couch potato' IRA.
Sounds like you are golden to me. As you can tell from the posts, there is diversity in views and there is no right answer unless you know when you and DW will pass and what investment returns will be between now and then.

One thing that you need to consider is whether the pension is COLAd or not. Most are not, however the "4% rule" that you are comparing to would have COLAd withdrawals since under the 4% rule the withdrawals are increased each year for inflation - so you are somewhat comparing apples with oranges in comparing your fixed annuity payout to 4%.

The comparisons to immediate annuities is a better comparison.

Since I've been retired and been a participant on this forum I have come to appreciate diversification of sources of retirement income and diversification of tax attributes (taxable, tax-deferred and tax-free retirement funds) in addition to asset diversification.
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Old 12-11-2012, 08:34 AM   #14
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Sounds like you are golden to me. As you can tell from the posts, there is diversity in views and there is no right answer unless you know when you and DW will pass and what investment returns will be between now and then.
+1

Given that there is 100% survivor benefits and you say you have a very nice 401k sum as well, then if the pension helps you sleep better at night that is the way to go imo.
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Old 12-11-2012, 09:12 AM   #15
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If you can live with the possibility that your plan could fail and be taken over by PBGC which probably would pay you a lower $ amount, I'd say take the pension (especially if you have a good 401K and SS to supplement).

As for me, I took the lump sum at 54 (mega-corp was a Fortune 25 company at that time), because I didn't trust my mega-corp and the PBGC max payout would have been much lower than my pension amount. Nine years later the mega-corp sold off its pension obligation to Prudential and thereby the PBGC guarantee went out the window.
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Old 12-11-2012, 09:46 AM   #16
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It sounds like you will be fine either way. I do have one question - if you take the lump sum and predecease your wife, would she be able to handle the finances? Or would she be a candidate for some shyster? With a pension, she would be immune to the possibility of losing everything to a fast talking shill.

DH had to make the same decision (although not with a sum that large). He took the pension with 100% survivor benefits. Having the security of a pension allows us to be more aggressive with our investments.
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Old 12-11-2012, 10:42 AM   #17
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Welcome, I was faced with a similar situation seven years ago when I retired. I decided on the lump sum which I rolled into a traditional IRA. No regrets and I sleep very good at night knowing I have control of my funds.
+1 - I faced a very similar situation earlier this year too. I took the lump sum and rolled it into traditional IRA(s). No regrets.
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Old 12-11-2012, 02:48 PM   #18
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Welcome to the forum

At first glance the pension looks to be less risky and better financially than taking the lump sum. Do you have any other retirement assets or pension income?
Yes, both a 401K and Social Security. I could live without the pension, it just wouldn't be as much fun.
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Old 12-11-2012, 02:52 PM   #19
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One thing that you need to consider is whether the pension is COLAd or not. Most are not, however the "4% rule" that you are comparing to would have COLAd withdrawals since under the 4% rule the withdrawals are increased each year for inflation - so you are somewhat comparing apples with oranges in comparing your fixed annuity payout to 4%.
I'm guessing that COLA is cost of living adjustment, or similar? No, that is not included. The 2 downside risks on the pension are (1) my company defaults and (2) hyperinflation makes it worth the cost of a coke anyway.

That said, I'm not sure what investment offers protection against hyperinflation.... Gold, maybe. But I'm not going there.
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Old 12-11-2012, 02:55 PM   #20
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.....As for me, I took the lump sum at 54 (mega-corp was a Fortune 25 company at that time), because I didn't trust my mega-corp and the PBGC max payout would have been much lower than my pension amount. Nine years later the mega-corp sold off its pension obligation to Prudential and thereby the PBGC guarantee went out the window.
You keep saying this as if it is some horrible thing but the reality is that you're probably better off with the Prudential annuity than with the PBGC guarantee.
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