First post - help with pension buyout

[dbwillis]

Ive been watching and reading threads for the past 2 weeks or so, ever since I received a letter from my previous employer regarding a pension buyout.

When I was 16yo, I worked for an insurance company (hint there icon was named Larry), during that time they put money into a pension for me.
I also contributed to a company stock purchase program (which bought at the lower of the beg or end of the quarter) and also put 12% into my 401k (8% before tax, 4% after tax)
I worked for them for 16yrs, there retirement rule was 'rule of 70' (age+yrs service have to = 70, which for me is 54yo, Im 41yo now)

Ive since moved on and now work for 'the mouse'
- Ive rolled over the 401k that was before tax to the new employer and put the after tax part into a different fund, no questions there. (still put 22% into the 401k now)
Recently the old employer sent a letter to me advising there is going to be a one time payout option from the pension plan,or it will change to an annuity, several of my old coworkers also got the same letter.
From what Ive found online, the pension is funded 100.2% and has 4.7B with only 4.3B liabilities.
The company managing the pension says Ill get $994 a month when I retire at 65yo.
Ive done the online calc's and the excel sheets to get some rough numbers, I think Ive done it right.
Can someone advise what a good amount for a buyout offer from them should be? I dont want to get raped if they offer me something too low and my numbers were wrong.
I plan to add the money to my current 401K or IRA, unless taking an IRS tax+penalty hit would make it worth it.

Cliff notes:
born Jan 1973
will be 65yo in 2038
worked for them for 16yrs
Pension shows as 994 monthly
(no insurance or medical is included)

 

[pb4uski]

According to immediateannuities.com, a 40 year old would pay ~$64,000 for a deferred annuity that makes payments of ~$994 a month for life beginning at age 65. If they are offering you less than a $64k lump sum, then they are lowballing it.

There would be no tax if you rolled it into your 401k.

Deferred Income Annuity
With Income Starting in 25 Years
Payment Options Company A Company B Company C
Single Life Only (No Death Benefit) (info) $1,011 $991 $971
Single Life with Cash Refund (info) $978 $958 $939
Premium $64,000 (Male 40 - ). These quotes are ESTIMATES and do change often and without notice.

 

[Midpack]

According to immediateannuities.com, a 40 year old would pay ~$64,000 for a deferred annuity that makes payments of ~$994 a month for life beginning at age 65. If they are offering you less than a $64k lump sum, then they are lowballing it.

There would be no tax if you rolled it into your 401k.

+1. The first overriding question is how the company lump sum compares to the cost of an equivalent annuity you could purchase. The choice may be obvious based on that alone.

If it turns out, as it should, to be close to a wash (company lump sum vs cost of deferred annuity), would you rather have the money or a "pension?" An annuity is much the same as a pension, the difference may only be who's paying out, and it might be a reasonable choice for someone who wants pension income and/or just doesn't want to manage funds for themselves.

However, if you take the current company annuity offer, the lump sum option is gone forever. If you take the lump sum, you can ALWAYS buy an annuity yourself next month, next year, or whenever you like (kind of like having your cake and eating it too IMO). Cost of an annuity may not come down, but it's unlikely to go up given current yields/rates - IOW annuities are expensive right now vs payouts. When yields/rates increase, you'll be able to get a higher monthly payout or pay less initial purchase price of annuity for the same payout.

FWIW, best of luck.

 

[2B]

I suspect you will only get offerred about 70% of the "value" of a commercial annuity. That's due to differences in how the IRS forces companies to calculate lump sum offers. I've seen that ratio in an offer I received for a pension and for some others.

Since you are so young, that $994 is going to look pretty small in 24 years. Also, the cash value is also pretty small in the grand scheme of things. I would suggest you look at taking the $40 something thousand you are probably going to be offerred. I would also roll it over to an IRA rather than paying taxes on it now.

 

[pb4uski]

+1. The first overriding question is how the company lump sum compares to the cost of an equivalent annuity you could purchase. The choice may be obvious based on that alone.

If it turns out, as it should, to be close to a wash (company lump sum vs cost of deferred annuity), would you rather have the money or a "pension?" An annuity is much the same as a pension, the difference may only be who's paying out, and it might be a reasonable choice for someone who wants pension income and/or just doesn't want to manage funds for themselves.

However, if you take the current company annuity offer, the lump sum option is gone forever. If you take the lump sum, you can ALWAYS buy an annuity yourself next month, next year, or whenever you like (kind of like having your cake and eating it too IMO). Cost of an annuity may not come down, but it's unlikely to go up given current yields/rates - IOW annuities are expensive right now vs payouts. When yields/rates increase, you'll be able to get a higher monthly payout or pay less initial purchase price of annuity for the same payout.

FWIW, best of luck.

If the buyout is close, then I would take the lump sum, plunk it in an IRA, invest it in a broad-based no-load, low-cost indexed equity or balanced fund for 25 years and then make the decision whether or not to buy the annuity when you are 65. Unless history turns totally upside down, you'll come out ahead of $994/month with that strategy.

 

[dbwillis]

Thank you for the info.
I believe the company sold the pension part of its business to another company, of course whatever they offer is in there best interest, I heard of 2 folks that also got the letters, I should have info in hand by Sept29 they say, and I have to decide by Nov12.

Hopefully they dont try to low ball too much

 

[pb4uski]

The other advantage of the lump sum given your long time horizon is that while the plan is currently well funded, a lot can happen in 25 years. Look at how Xerox, GM and AIG and some other big companies decayed in much shorter periods of time.

 

[Midpack]

If the buyout is close, then I would take the lump sum, plunk it in an IRA, invest it in a broad-based no-load, low-cost indexed equity or balanced fund for 25 years and then make the decision whether or not to buy the annuity when you are 65. Unless history turns totally upside down, you'll come out ahead of $994/month with that strategy.

FWIW, when confronted with the same question, lump sum or pension/annuity, that's what I did summer 2011 - took the lump sum and rolled it into an IRA. If I ever decide I want an annuity, I can always buy one with all or part of the lump sum.

I suspect you will only get offerred about 70% of the "value" of a commercial annuity. That's due to differences in how the IRS forces companies to calculate lump sum offers. I've seen that ratio in an offer I received for a pension and for some others.

And fortunately in my case, the lump sum was less than 2% different than the quotes I got to purchase an annuity offering the same monthly payout & terms.

 

[dbwillis]

OK, So I got the paperwork/info yesterday.

They had 3 options..
1 was to do nothing and then the Pension is changed into a ~$990 annuity at 65yo (2038)
2 was to take a 172 a mo annuity NOW, for the rest of my life, with 75% going to my spouse if I die
3 was to lump sum it all for $37k

 

[dbwillis]

An article yesterday with some more info.
Hartford Offers to Pay Ex-Employees to Give Up Pensions - Bloomberg

Nope, no new question, I guess Im going to roll it over to my current employers 401K under Fidelity.

 

[Midpack]

So is there a new question?