Thoughts on this company pension buy out offer?

[doneat54]

I have 27 years of service with my employer right now, and am eligible for a full pension in 4 more. I'll be 55, and I plan on retiring then. According to the pension administrator estimator, at 55 I'll be eligible for about $1630/mo until I'm gone.

In addition to the pension monthly amounts, they will give me $600/mo more between 55 and 62 as a buffer until I can get SS.

They recently changed the plan, there is no more survivor benefit and they are offering a lump sum buyout. For me, they estimate $380k for the lump sum, and I will be off their books.


My gut now is take the buyout, because 1) I can manage the money and 2) I don't trust many institutions that I will actually GET the monthly pension payments.

I estimate my portfolio to be about $1.3M in 2017 when I am 55, without including this pension, close to $1.7M with it.

Thoughts? My Fidelity guy thought that was a pretty generous monthly payment by today's standards, but again, I would rather have control of all of my money.

 

[Running_Man]

I am going to make the following assumptions:
1) This is a non-cola pension
2) The buyout offer is not today but in 4 years when you turn 55.

The net present value of the payments assuming a life to 87 years old based on 3 percent inflation is 465K at 3.5% is 437K and at 4% is 357K. Your actual buyout will be adjusted in the meantime by whatever the prevailing interest rates are, could be quite significant depending on what interest rates do.

In general at this point to me it is fairly close in value the difference is much of the present value is paid up in the first 8 years (190K@ 3%) so the risk of loss may not be as high as you think while you are able to buy an annuity in essense for very cheap. If you assume you have 190K returned to you by age 62 the remaining of 190K that you would have left from the buyout (380K - 190K present value paid out age 55 to age 62)would buy an annuity for a male at age 62 of 1,000 per month today versus the 1630 you would be receiving. This is where your fidelity guy is seeing a generous monthly payment.

i notice that your pension payout is reduced by a couple hundred dollars per month and the 55-62 amount by $100 per month from what you posted back in March, is there something that occured to reduce this?

In general company buyouts are usually structured by companies so that they will be able to record income as the accrual for pension expense will be greater than the buyout offered, resulting in net income to the company as buyouts are taken. Individuals on the other hand usually are willing to give that percentage of the pie up in exchange for control.

 

[RetireAge50]

In addition to the institution, the pension is most likely insured/guaranteed by the state.

Might also check what pension would be without the SS bonus. My plan has SS adj as an option also but was not a good deal (especially if I plan on living a long time).

I always thought I would take the lump sum but the older I get the more I think the base pension is a good mix as part of overall portfolio.

 

[doneat54]

Running man's assumptions are correct (non cola and I won't draw from it until 55). Yes my numbers have changed a bit, and I think in March I was looking at retiring at 58. Now with this payout (which decays about 12k/yr for every year that keep working after 55... see the message here?) I am certain that I will leave this company at 55/2017.

I don't think that there is an option for a pension calc when not taking the SS adjustment, but I will look.

The wildcard here is that my wife, who also works for the same company, is 3 years older than me, but will work until 62 (that is what she says now anyway... loves her job). My hope is to be able to bridge my 55-62 years with the SS adjustment, and her salary, and not tap into our investment portfolio... it all works on paper right now.....

Thanks for the replies...

 

[hlfo718]

If we assumed that you are 55 now and looking to receive the pension, the amount that is needed to buy the same payout will be approx. 331k. That's according to Immediate Annuity website. Since your employer is throwing in an add'l 600/month for 7 years, that is worth around 50k. So the offer from your employer is about market rate.

Offcourse things and rates can change 4 years from now. Do you have to make the decision now or can you wait until you are about to retire?

 

[doneat54]

I can most definitely wait until 2017 to make the decision.... just trying to fill in the blanks in my spreadsheets! And of course a LOT can change in 4 years, but so far I like what I am seeing.....

 

[GandK]

The wildcard here is that my wife, who also works for the same company, is 3 years older than me, but will work until 62 (that is what she says now anyway... loves her job). My hope is to be able to bridge my 55-62 years with the SS adjustment, and her salary, and not tap into our investment portfolio... it all works on paper right now.....

Does your wife get a pension too? Two pensions coming from the same company is a heck of a risk, IMO. That alone would make me lean toward a lump sum for one of you, at least.

 

[doneat54]

No actually she doesn't, at least not a monthly pension payment. She took time off when our kids were young and lost her "continuous service" status. She is carrying some smaller value lump sum pension however.

 

[Cooked]

Running man's assumptions are correct (non cola and I won't draw from it until 55). Yes my numbers have changed a bit, and I think in March I was looking at retiring at 58. Now with this payout (which decays about 12k/yr for every year that keep working after 55... see the message here?) I am certain that I will leave this company at 55/2017.

I don't think that there is an option for a pension calc when not taking the SS adjustment, but I will look.

The wildcard here is that my wife, who also works for the same company, is 3 years older than me, but will work until 62 (that is what she says now anyway... loves her job). My hope is to be able to bridge my 55-62 years with the SS adjustment, and her salary, and not tap into our investment portfolio... it all works on paper right now.....

Thanks for the replies...

I personally prescribe to the principle of 'enough'. For instance, our SS decision is to wait for FRA (66) because we have enough that we do not need it at 62. We do not try to predict death dates and make NPV comparisons to pick the 'optimal' SS date. Likewise, applications of the 4% 'rule' are fun to plug into spreadsheets to determine an 'optimal' solution. But the principle of enough says if you have enough then just start enjoying.

At 55 you expect that you will have 1.7M and when your wife retires at 62 you will be 58 and the 1.7M may be larger. If you spend 100k per year then (very) simplistically you can do nothing for 17 years. A lot is going to change in 17 years. Probably enough to invalidate most of our spreadsheet assumptions.

If you feel that you will have enough and like to control your investments then the lump sum sounds rational.

Many brain cells perished making far to many spreadsheets to finally figure out that enough is enough.

 

[gerntz]

^ I think the opposite. If you have enough, then why not optimize the return with the better option? Don't kill yourself over figuring it out, but if one looks better at quick glance, then go for it since you know you have enough already.

 

[Cooked]

^ I think the opposite. If you have enough, then why not optimize the return with the better option? Don't kill yourself over figuring it out, but if one looks better at quick glance, then go for it since you know you have enough already.

I believe that we are pretty much on the same page. Maybe you made you point a bit more concisely.

 

[Donzo]

I like the idea of different streams of income. If the market tanks having monthly checks coming in will be nice and help minimize WR.
I had a similar situation and decided to go with monthly payout down the road. I can get survivor payments tho.