Need some help with Pension

[crispus]

My wife's company is closing there local branch sometime this year. She will receive 2 years severance pay and a full pension. We are both going to be 55 this year and my wife is going to pursue a new employment as a manager.

Her pension offers the choice of a lump sum payment or non-cola monthly payments. Her estimate for lump sum is 387k and her life annuity for her only is $2277 per month. We would like to have some guidence on which one to take. Obviously if we choose lifetime payments to her and I the amount will go down, but I do not have the estimate on that amount.

Our only debt is our home $96k. Also her company will continue full health insurance till age 65.

Thanks Jeff

 

[ziggy29]

Her pension offers the choice of a lump sum payment or non-cola monthly payments. Her estimate for lump sum is 387k and her life annuity for her only is $2277 per month. We would like to have some guidence on which one to take. Obviously if we choose lifetime payments to her and I the amount will go down, but I do not have the estimate on that amount.

4% a year off of $387,000 is $1290 a month versus $2277 from the pension (of which I'm very envious, I might add).

From a cash flow standpoint it would seem to make sense to take the pension (is there any COLA to it?) -- with the downside that it leaves nothing to your heirs if that's a concern. But I'd also want to see the joint-and-survivor payout amount. For a female pensioner I'd imagine the payout for survivor income is higher than it would be for a male pensioner.

 

[REWahoo]

You might want to take a look at Immediate Annuities - Instant Annuity Quote Calculator or some similar website, plug in the $387K figure for her particular circumstance and see what monthly number you get. That will give you some idea of how reasonable the $2277 number might be.

Also, if you are uncomfortable in the slightest with how viable the pension fund might be over the next 30-40 years, I'd lean towards taking the lump sum.

 

[TeeRuh]

With similar numbers last summer I took the lump sum. (Big factor was that DW will have a state pension to use as our "base".) With conservative Vanguard based investing I am currently down 28%. i.e.; I have lost over 1/4 of the nest egg that is to last me 30 years. YMMV.

P.S. There are no "do-overs".

t.r.

 

[ziggy29]

Also, if you are uncomfortable in the slightest with how viable the pension fund might be over the next 30-40 years, I'd lean towards taking the lump sum.

This is a good point, and one I forgot to mention. If it's a private company (i.e. not government) and they are struggling financially, then a bird in the hand may be worth more than two in the bush.

 

[MasterBlaster]

Well one can never know the future of inflation, interest rates, equity markets, and (perhaps even) Annuity insurance insolvency, However... There are some ballpark guides to help you.

For a non cola-indexed pension/annuity take the annual payout and multiply it by 16.

For a cola-indexed pension/annuity take the annual payout and multiply it by 25.

I assume that your pension doesn't increase with inflation, so if you take the monthly payout of $2277 and multiply it by 12 that gives you a yearly payout of $27324. taking that number and multiplying by 16 gives a rough lump sum equivalent of $437,184.

Based on that, I would say that they are being a bit stingy on the lump sum payout.

I would also say (again) that maybe you could invest the money and come out ahead, And then maybe you would spend it all before your demise and be hurtin'. Maybe if you live along time you would come out ahead with the monthly payout (and vice versa).

Also for what it's worth, I read that people who have a regular monthly check are happier than those that have to invest and fund their own retirement lifestyle.

There really is no best answer here.

Good Luck - You have some decisions to make.

 

[crazy connie]

You tell us her options without the full picture. What kind of wages and savings do you have outside of this? What may be the best choice depends on other assets and income not disclosed. Is your job secure and what benenfits do you have? Do either of you have a IRA, ROTH, 401K and or after tax savings? What about health insurance for both of you is that covered in full? Is the company stable enough to count on the health coverage for 10 years? Do you folks get the cost increases or will they cover it?

I tend to be a bird in the hand type but that is not right for someone who is not intrested in learning to invest and managing the process.

 

[crispus]

We have about 400k in retirement accounts. Her company is secure largest in the world in its field, so I would think that the medical insurance is secure. My coverage is through her company also. Company pays about 80% and we pay the other 20%.
We could pay our house off with her severance package.

 

[jug]

Take the pension, it's steady income, and an annuity with a 30 years payout at 4% growth, comes to 2190 per month.

The lump sum is a bit stingy, I would go for the cash flow.

jug

 

[crazy connie]

crispus, if you pay off the home you may be paying a big penalty. Almost always a lump sum goes into an IRA. From the IRA at age 55 all you can do is a 72T (periodic payments) or take the lump sum and in addition to normal income taxes due on that and wages along with a 10% penalty on early withdrawl from the lump sum. If she is going back to work and drawing wages on top of the severence... I might just be inclined to put the severance on the mtg as it comes in. Is that in a lump sum as well as the pension lump option? Some companies pay bye-bye monies in a lump and some pay on regular payday schedule.

 

[crispus]

Serverance is a lump sum. We would deposit all of the pension lump sum in an IRA.

 

[FIRE'd@51]

According to the SS actuarial table, the average life expectancy for a 55 year-old female is 28 years. If you plug the numbers into a financial calculator:

PV = 387K
FV = 0
PMT = 12 x 2.277 = 27.324 per year
N = 28 years

and calculate the IRR, you get 5.5%

Doesn't seem like a particularly good rate of return to me, especially being non-cola'd over such a long period of time. You could take the lump sum and get a better rate of return with an investment grade bond mutual fund.

 

[W2R]

OK, I am *not* an expert so take this with a grain of salt! But I just have to add my opinion, OK?

Since you already have $400K in retirement accounts, and since you believe the company is very secure, I would take the pension. Then if/while she is working, I would not spend that $2277/month, but instead I would invest every penny of it (or finish paying off the house).

I would continue to invest around half of it even after she stops working, since it is non COLA and you will need for it to grow at least enough to combat inflation. This way, the investment accounts arising from this pension will gradually grow larger and larger as time goes by. The objective would be to have large enough investment accounts by the time the buying power of it has lowered substantially, to make up the difference.

 

[Moemg]

I'd go with the pension .During this recent meltdown I was so happy to have a pension. It was a life raft in the sea of financial disaster . All my investments took major hits but my pension is still the same. Plus a lot of times the medical coverage is tied to the pension .

 

[lucija]

The $2200+/mo is for her only, right?

Not trying to be morbid here, but how would your finances be impacted if she gets hit by a bus within 6 months of starting the pension?

Unless (the two of) you have significant savings (relative to "her only" pension) or you have your own pension coming to you in the future, I would be comparing the joint annuity vs. lump sum...

 

[ziggy29]

The $2200+/mo is for her only, right?

Not trying to be morbid here, but how would your finances be impacted if she gets hit by a bus within 6 months of starting the pension?

Unless (the two of) you have significant savings (relative to "her only" pension) or you have your own pension coming to you in the future, I would be comparing the joint annuity vs. lump sum...

If there is an option to take joint and survivor income within the pension, that would be a third choice.

 

[Gotadimple]

As long as you are certain that the market will not drop 20% in the next 30 years, take the lump sum. However, if you feel that a market drop is likely, then take the pension, use it to fund housing expenses and know you have a steady stream of income that covers your basic necessities.

Beyond that, look at your other investments and assure yourself you will have enough to last you. FIRECALC let's you plug in your investments and pensions to determine if you have enough.

-- Rita

P.S. I was in your situation about a year ago. While I felt I could earn more in a bond mutual fund on the lump sum, when it came time to sign the papers, I elected the monthly pension. Given what's happened since then, I'm glad I did. I have a few years before I can claim social security, so a steady income to cover housing costs was/is a priority for me.

 

[Notmuchlonger]

I would love to see the responses if the market was in bull mode.


Oh and take the pension

 

[tmm99]

I would take the lump sum. I would take a lump sum over a pension any day (unless someone can convince me otherwise). Money in my pocket is my money, and the pension is, well, not so much, not matter how secure the company may be at one point in time.

 

[Alan]

I would take the pension. Secure income and covered by the govmint backed insurance program PBGC

You are young enough where term life insurance should be cheap so you can look at taking the maximum (no, or reduced survivor benefits) to cover yourself if your wife dies soon after starting payments.

Full disclosure - have already made a similar decision myself - will be taking non-cola pension early next year at age 55 with 25% survivor benefits, DW has insurance on my life which allows me to take pension higher payments over 100% or 50% survivor options.

 

[SarahW]

At a retirement seminar, the presenter had this advice: "Tell me when you're going to die, and I'll tell you which to choose."

 

[MasterBlaster]

At a retirement seminar, the presenter had this advice: "Tell me when you're going to die, and I'll tell you which to choose."

Let me Guess....

The presentation was from an insurance company rep, who had this amazing product called an annuity where you will never run out of money.

 

[BigBob]

It is good to take your time and chew over the options, like you are doing, and solicit others for their opinions. One thing I would add is for you to check to make sure there are no contingencies of one option or the other, such as taking the Lump Sum results in you being ineligible for discounted Medical insurance through the company - an effect that I might be up against in a few years.
Sounds like a good deal either way.

 

[Running_Man]

I will assume that the joint and survivor option should decrease the payment by about 10 percent. The $387,000 will buy a 55 year old woman and man an annual non-colla annuity of $2,060.58, or $2,280 for a 55 yr aold woman only. So the cash looks pretty close to me to fair value.

 

[SarahW]

Let me Guess....

The presentation was from an insurance company rep, who had this amazing product called an annuity where you will never run out of money.

Wrong. The presenter was a company HR rep advising us of our options. Nothing to sell and no direct recommendations made.