Take the Payout?

[Penny6]

My husband and I were discussing this topic last night. He has 15 years with his company at 34yo the plan is to RE at 50 or 51(maybe earlier depending on assets). In his pension structure he has a lump sum option or several payout options. If he retires early and waits til 65yo he will get 100% benifit. The earlier he collects the benifit reduces. If he would collect at 58yo it would be 51.1%. The plan has a primary payout and spousal payout for life upon his death. Another option would be to cash out the value which may be about 650k, invest and draw on interest for income. I dont know what the tax implications would be to take the lump sum. We discussed taking the lump sump and letting it grow for 15-more years on our own while we convert his 401k and live off our brokerage and Roth accounts. We could always buy anither annuity if we desired later. There is always a chance they could stop the pension plan- its a major oil company- so i hope this never happens. There is such a wealth of knowledge here, ty for weighing in.

 

[MBAustin]

It's really hard to plan at that level of detail 15 years out, especially because, as you noted, the probability of something changing in the pension plan by then is quite high (IMHO). Since you don't have to make a decision on this anytime soon, I suggest you focus on things you can control such as managing your expenses, maxing out 401K, and investing wisely above and beyond that.

For taxes, lump sum pension payouts are generally rolled into a traditional IRA, so there is no immediate tax due, however the money is not accessible without penalty until age 59.

 

[Koolau]

The info I have seen is that the "annuity" payout of a pension is usually the best way to go as opposed to a lump sum. Naturally, you have to do your homework and it may be difficult to get all the info. In any case, it sounds like you have some options and that you are "on your way." Good luck. Others may have more concrete ideas, but I too would wait a while to make any decisions. YMMV

 

[DrRoy]

In my own case, I chose to take my pension as a payout, but without spousal extension. We felt that the extension would likely just reduce how much we would collect in total. I already had substantial investments, so to have the payout was a form of diversification, and I could not have bought the same amount of income as an annuity with a lump sum.

 

[Scuba]

Another vote to stick with the traditional pension rather than cashing it out. It sounds like you already have substantial assets outside of the pension, so one benefit of the pension is that it would diversify your cash sources in retirement. Also having a nice steady income will help you avoid having so sell securities in a down market cycle. I'd recommend asking your husband's company about tax treatment. Pension income is ordinary income so my experience is that when you cash out a pension benefit, that is also ordinary income. A bug payout will put you in the maximum tax bracket that year.

 

[FlaGator]

It's really hard to plan at that level of detail 15 years out, especially because, as you noted, the probability of something changing in the pension plan by then is quite high (IMHO). Since you don't have to make a decision on this anytime soon, I suggest you focus on things you can control such as managing your expenses, maxing out 401K, and investing wisely above and beyond that.

This, plus +10

You're wise to understand your options, but I see no purpose in psychologically committing yourself today to a course of action 15 years down the road. Your perfect plan will not go exactly as you expect, and keeping your options open (as well as creating new ones along the way) will give you the ability to adapt.

A friend once told me "don't make any decision before you have to". I have found that to be among the best advice ever received.

 

[bada bing]

I also work for an oil major and have an active pension - called a RAP (retirement accumulation plan) from my employer. Yours may be similar, but it is useful to understand the mechanics of your plan.

In my case, the RAP plan is a cash balance plan, which is different from a defined benefit plan. I had a couple small pensions with previous employers (also oil majors) which were defined benefit plans. You should find out which type your pension is - defined benefit or cash balance.

While employed and before payout begins, the different plan types change in different ways with changes in interest rates. The basic difference is that a cash balance plan has a cash balance (duh) that is used to buy an annuity at whatever rates prevail when the annuity payout is selected. A defined benefit plan has a benefit that is defined (duh) and it doesn't change with prevailing interest rates. The big difference is what happens to your lump sum or annuity payment when interest rates change. Generally, rising rates are good for a cash balance plan because rising rates will increase the annuity payouts when/if you decide to annuitize. Falling rates are good for a defined benefit plan because they cause the lump sum option calculation to increase.

My employer's RAP is managed by Fidelity. My RAP (cash balance plan) grows at the 30 year treasury rate or 5%, whichever is higher. My employer puts a percentage of my monthly salary into the plan, the percentage is based on my age+years of service. It is employer only funded and entirely separate from the 401K. In my previous employer's defined benefit plans, you received a percentage for each year of service of the best continuous 36 months of earnings you had.

When I retire in the next few years my intention is to let my RAP continue to grow until I take SS, either at full retirement age or at age 70. My RAP has what I consider very good return rates (greater of 30 year treasury or 5 %) and I also think that rates will continue to rise, which is good for the eventual annuity calculations. I intend now to take my RAP eventually as an annuity rather than a lump sum, but it is available as a lump sum to my heirs until I annuitize it. In the intervening years I will consider the cash balance part of my portfolio bond allocation.

You can see how it takes an understanding of the mechanics of your particular pension to choose the best options for your situation. Pensions can be quite different in how they work.

I also wouldn't count on the pension staying active for the next 15 years. Oil majors are some of the last employers in the private sector to have active pension plans, but even a couple of them have frozen their plans in the last few years. My employer recently changed the pension rules for new hires, but they didn't totally freeze them out or alter the plan for grandfathered employees. Private sector pensions are a dying breed.

 

[Penny6]

I also work for an oil major and have an active pension - called a RAP (retirement accumulation plan) from my employer. Yours may be similar, but it is useful to understand the mechanics of your plan.

In my case, the RAP plan is a cash balance plan, which is different from a defined benefit plan. I had a couple small pensions with previous employers (also oil majors) which were defined benefit plans. You should find out which type your pension is - defined benefit or cash balance.

While employed and before payout begins, the different plan types change in different ways with changes in interest rates. The basic difference is that a cash balance plan has a cash balance (duh) that is used to buy an annuity at whatever rates prevail when the annuity payout is selected. A defined benefit plan has a benefit that is defined (duh) and it doesn't change with prevailing interest rates. The big difference is what happens to your lump sum or annuity payment when interest rates change. Generally, rising rates are good for a cash balance plan because rising rates will increase the annuity payouts when/if you decide to annuitize. Falling rates are good for a defined benefit plan because they cause the lump sum option calculation to increase.

My employer's RAP is managed by Fidelity. My RAP (cash balance plan) grows at the 30 year treasury rate or 5%, whichever is higher. My employer puts a percentage of my monthly salary into the plan, the percentage is based on my age+years of service. It is employer only funded and entirely separate from the 401K. In my previous employer's defined benefit plans, you received a percentage for each year of service of the best continuous 36 months of earnings you had.

When I retire in the next few years my intention is to let my RAP continue to grow until I take SS, either at full retirement age or at age 70. My RAP has what I consider very good return rates (greater of 30 year treasury or 5 %) and I also think that rates will continue to rise, which is good for the eventual annuity calculations. I intend now to take my RAP eventually as an annuity rather than a lump sum, but it is available as a lump sum to my heirs until I annuitize it. In the intervening years I will consider the cash balance part of my portfolio bond allocation.

You can see how it takes an understanding of the mechanics of your particular pension to choose the best options for your situation. Pensions can be quite different in how they work.

I also wouldn't count on the pension staying active for the next 15 years. Oil majors are some of the last employers in the private sector to have active pension plans, but even a couple of them have frozen their plans in the last few years. My employer recently changed the pension rules for new hires, but they didn't totally freeze them out or alter the plan for grandfathered employees. Private sector pensions are a dying breed.

Thanks for this well rounded response. We are definitely not relying on the pension at all as we aggressively save. I do like the idea of gathering information to be able to make a more informed decision. As all have stated 15yrs is a long way out with no guarantees but many possibilities.

 

[Starsky]

As others have said, it's a little early to worry about the pension decisions, but it's good to be prepared. The fine print of the plan, and the long-term viability of the pension plan itself may have a lot to do with your final decision. Given that old-school pensions are out of step with modern corporate benefit plans, it's probably safe to assume that the pension formula will not get better over the long run.

A couple of quick comments. You don't have to pay taxes on a lump-sum payout right away. Pension payouts can taken as cash [which is taxable]; or they may be rolled over directly into a tax-deferred account so that you can invest the entire amount, and pay taxes as you withdraw. The amount of the lump sum payout may or may not be worth it vs. monthly payments depending on the assumptions they use to calculate the offer. They may offer a higher payout to you as an incentive to take it early, or get it off their books. (I know at different times my company offered better-than-average early retirement plans to vested management age 55+ to manage staff payroll and reduce their long-term pension obligations.) You should try and do a rough Net Present Value calculation to determine the value of the monthly pensions payments vs. a lump sum.

 

[Scuba]

This, plus +10

You're wise to understand your options, but I see no purpose in psychologically committing yourself today to a course of action 15 years down the road. Your perfect plan will not go exactly as you expect, and keeping your options open (as well as creating new ones along the way) will give you the ability to adapt.

A friend once told me "don't make any decision before you have to". I have found that to be among the best advice ever received.

+1, great advice