Would you take guaranteed 6.5% returns for 30 years (pension buyout)

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zesty

Recycles dryer sheets
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... with the stipulation that if you died early, the money was gone?


That 6.5% over 30 years is effectively what my pension buyout would need to earn in order to equal the pension payments.


Either I take $14000 lump sum now and roll it into my IRA, or I keep the pension and wait 30 years to get paid $4500 a year in nominal dollars, regardless of inflation.


Pros for keeping pension:

- the pension is a guaranteed return
- the pension is like longevity insurance



Cons for keeping pension:
- if I die before 65 I get nothing
- if I die before early 80s it probably wasn't worth it
- no money for heirs (though no spouse or kids so not a big deal)

- pension will make taxes a little more more complicated
- $375 a month probably won't mean much in 30 years anyway


Right now I'm leaning towards rolling it into the IRA and being done with it, but am looking for any what-ifs that I might be missing.
 
I'd take the chance with S&P500 index fund. Its traditional return over long term (30 years would definitely qualify as "long") return has been better than 6%. If I die early or late, the money will still go to my spouse and my heir. I can dip into it if there is a finance crisis you have not foreseen. Other benefits outweigh the risk/reward of the other option. But that's me talking.
 
At 2.5% inflation over 30 years the $375 is worth $179.
 
Is the pension inflation adjusted? Wasn't sure what you mean by "nominal dollars."

If the benefit is not COLA'd, roll it over. Agree you'll do better in an index fund, as robn suggests, and will have control of the asset for the next thirty years.
 
who is guarantying the the pension money if you take 6.5%?
 
I actually made a similar decision back in 2014. Back in the 1990s I worked at McDonnell-Douglas, and then Boeing once they took them over, and put in just enough years to get vested in their pension. Once I turned 65, which would be in 2035, it would pay $349.21 per month, not adjusted for inflation.

In 2014, they offered a pension buyout, valued at around $14,000. I figured this was a harbinger of things to come, and I'd better take it before the offers got worse and then the pension failed, or something. So, I took it and rolled it into an IRA.

I won't know whether I made the right decision, I guess, until my death bed. But, I figured $349.21/mo wasn't that much money when I severed from Boeing back in 2000 (I had a car payment at that time of $347.66). It's not much today. And it sure as heck isn't going to be much by the time I'd be eligible to start collecting in 2035! I figured I'd rather take my chances and invest it.
 
With such a small amount over such a long time period, it won't matter much either way.

I'd probably just take the $14k now.
 
Roll it into a Roth IRA. Pay the taxes out of pocket.

Then after 30 years, you will have a lot more, tax free.
 
Senator said:
Roll it into a Roth IRA. Pay the taxes out of pocket.

Then after 30 years, you will have a lot more, tax free.
Click to expand...

I don't think we know enough recommend Roth vs. tIRA. It's a matter of current vs. future tax rates (amongst other current situation decisions, like is the money hanging around to pay the taxes now, etc.).
 
Andre1969 said:
I actually made a similar decision back in 2014. Back in the 1990s I worked at McDonnell-Douglas, and then Boeing once they took them over, and put in just enough years to get vested in their pension. Once I turned 65, which would be in 2035, it would pay $349.21 per month, not adjusted for inflation.

In 2014, they offered a pension buyout, valued at around $14,000. I figured this was a harbinger of things to come, and I'd better take it before the offers got worse and then the pension failed, or something. So, I took it and rolled it into an IRA.

I won't know whether I made the right decision, I guess, until my death bed. But, I figured $349.21/mo wasn't that much money when I severed from Boeing back in 2000 (I had a car payment at that time of $347.66). It's not much today. And it sure as heck isn't going to be much by the time I'd be eligible to start collecting in 2035! I figured I'd rather take my chances and invest it.
Click to expand...

Some notes from the department of hand-waving and fuzzy math...

In 2013, my first employer (I left them in the 1990's) offered me a $53K buyout for a pension that would have paid something like $900 a month at age 65 in 2032. I asked myself "if I was 65 today, what would such an annuity cost me?" and the answer was something like $160K (for 10 years term certain and no survivor benefit, maybe, forgive me if the details aren't perfect but it's been a few years). Let's say that same annuity is available in 2032, at the same price. if I took the $53K buyout in 2013 and grew it 6% a year for 19 years, I'd have that same $160K. So I took the buyout.

A much more important revelation from that exercise was that back then, I had nearly $2M earmarked as retirement savings. It would grow for another 19 years also. If $140K at age 65 can buy a $900/mo pension, what will ($2M + 19 years growth) be able to do? The pension buyout was so far down in the noise that it didn't matter at all.

I hope this makes sense. I didn't find any good resources back then to help with my decision either, so this is how I analyzed it.
 
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zesty said:
... with the stipulation that if you died early, the money was gone?


That 6.5% over 30 years is effectively what my pension buyout would need to earn in order to equal the pension payments. ....
Click to expand...

You are confusing the payout rate with the rate of return... the rate of return is about 2% or 2 1/2%.... you can get a fair idea of rates of return by looking at the IRR of longer period certain annuities... the other 4 1/2% or 4% is simply a return of principal.

Below an example of a 65 yo female in CA with a $100,000 premium.

Note that the benefit for a 10 year period certain annuity is $909/month... for a $100,000 premium that equates to a 1.76% rate of return... so if you put $100,000 into a savings account that earned 1.76% APR and withdrew $909/month after 10 years your money would be gone.

For a life annuity, the payout is $509 per month so the payout rate is 6.1% ($509*12/$100,000). The return depends on how long the annuitant lives... if they die early the return is negative... if they live long at the most the return is the payout rate of 6.1%... if they live 30 years (to age 95) the return is 4.6%.

Below are the year by year returns deoending on how long you live:
Lump Sum100,000
Monthly benefit509
AgenIRRp (death)
650
661-98.3%0.780%
672-80.4%0.840%
683-59.8%0.894%
694-44.2%0.943%
705-33.1%0.990%
716-25.1%1.038%
727-19.3%1.095%
738-14.8%1.163%
749-11.4%1.241%
7510-8.7%1.330%
7611-6.5%1.428%
7712-4.8%1.533%
7813-3.3%1.639%
7914-2.1%1.743%
8015-1.1%1.850%
8116-0.3%1.967%
82170.4%2.096%
83181.1%2.231%
84191.6%2.367%
85202.1%2.509%
86212.5%2.662%
87222.9%2.823%
88233.2%2.978%
89243.5%3.122%
90253.7%3.258%
91263.9%3.394%
92274.1%3.526%
93284.3%3.638%
94294.5%3.723%
95304.6%3.779%
96314.8%3.801%
97324.9%3.785%
98335.0%3.723%
99345.1%3.611%
100355.2%3.445%
 

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pb4uski said:
You are confusing the payout rate with the rate of return... the rate of return is about 2% or 2 1/2%.... you can get a fair idea of rates of return by looking at the IRR of longer period certain annuities... the other 4 1/2% or 4% is simply a return of principal.
Click to expand...

+1 This is what you should be considering. I am usually for retaining pensions, but in your case I would take the lump sum and invest it for the future.
 
LRDave said:
I don't think we know enough recommend Roth vs. tIRA. It's a matter of current vs. future tax rates (amongst other current situation decisions, like is the money hanging around to pay the taxes now, etc.).
Click to expand...

Do you really think tax rates are headed lower? The current tax rates are set to expire in 2025. Then go up.

For that matter, we really do not know enough about where the market is headed either. And nothing about inflation.

If you do not have enough money to pay taxes on a 14K rollover, you are a LONG ways from retirement. It can even be done over multiple years.

LRDave said:
^^^^^ What makes a Roth a better choice than a tIRA? ^^^^^^^
Click to expand...

Tax-free withdrawals of both principle and earnings after your 30 years of letting it grow.
 
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Senator said:
Do you really think tax rates are headed lower? The current tax rates are set to expire in 2025. Then go up.

For that matter, we really do not know enough about where the market is headed either. And nothing about inflation.

If you do not have enough money to pay taxes on a 14K rollover, you are a LONG ways from retirement. It can even be done over multiple years.



Tax-free withdrawals of both principle and earnings after your 30 years of letting it grow.
Click to expand...

I, for one, do not. My plan includes starting Roth conversions in 2020 running until at least until the expiration of the current tax rates. There is no way that I will be able to keep our income as low as some people on this board, but do want to reduce the tax torpedo which will hit with DH's SS (postponed until 70) & the mandatory withdrawals.
 
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MarieIG said:
I, for one, do not. My plan includes starting Roth conversions in 2020 running until at least until the expiration of the current tax rates. There is no way that I will be able to keep our income as low as some people on this board, but do want to reduce the tax torpedo which will hit with DH's SS (postponed until 70) & the mandatory withdrawals.
Click to expand...

I am doing the same MarieIG as it makes sense that tax rates will likely be higher after the current rates expire.

VW
 
zesty said:
....That 6.5% over 30 years is effectively what my pension buyout would need to earn in order to equal the pension payments.


Either I take $14000 lump sum now and roll it into my IRA, or I keep the pension and wait 30 years to get paid $4500 a year in nominal dollars, regardless of inflation.....
Click to expand...

How are you getting the the 6.5%?

Also, are you sure that if you die before 65 you get nothing? My understanding is that some plans work that way but most do not.

That said, given the relatively small amount of the lump sum I would rollover the lump sum into an IRA.
 
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I would take the buy out. Control your own future. It's also one less thing to keep track of...
I did this with both my own and my DW's pensions when the offer came.
 
Yes only b/c if DH passes or if pension fund fails in the future, we have the $.
 
The OP's personal tax rate may be lower in the future. As LRDave said, we don't have enough information to advise Roth vs. tIRA. OP might be high income now, and will be much lower in retirement. Spouting off that one should put it in a Roth without knowing any details isn't sound advice.

When I ran the immediateannuities.com calculator on buying a annuity that I wouldn't start collecting on for 30 years, I got $229 as the highest payment, so that would indicate taking the pension is better. It's a pretty small amount though, and you might be able to do better investing on your own, so I don't think it matters that much.
 
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