Unexpected Lump Sum (Pension) Offer

[ownyourfuture]

Retired June 2015 @ age 53 (will be 58 in January) ‘Single’
Have been living comfortably with my private sector pension & investment income.
We had a different pension for a short period early in my career at the company.

Because I didn’t have a full 30 calendar years in when I retired, I will only become eligible to draw from ‘that’ pension when I turn 62 in 2024.
At that time, it would be $283.00 per month.

Now I've been offered a lump sum payment. According to the company, this will only be offered once, & if I choose either option 1 or 2, I have to have the paperwork postmarked by October 31, 2019


Option #1: A one time lump sum payment of $35k

Option #2: Begin receiving a ‘single life annuity’. Not sure if I could begin drawing that now, or have to wait until I'm 59 1/2 ?
Talked to a woman at the company today but forgot to ask her this. I'm pretty sure I could begin it now, but because I'd be starting it much earlier than age 62, the amount would only be $191.92 per month.

*This pension has no guaranteed payments, regardless of when I chose to start it. If I pass away before I start it, it's gone. If I pass away after being on it for 2 months, it's gone*

Option #3: Do nothing. Wait until I'm 62 years old in 2024 & start collecting the $283.00 per month at that time.



My plan would be to take the lump sum & roll it all into an existing IRA

The lump sum payment ‘seems’ like a slam dunk to me for several reasons.

1: I don't need the income now.

2: If I take the $35,124.97 & divide it by $191.92, (the single life annuity) I come up with 183 months. Divide that by 12 & you have 15.25.
If my math is right, this means that by taking the lump sum, they’re pre-paying me 15.25 years of monthly payments

3: If I waited until the year 2024, when I'd be 62, I'd have to collect the $283.00 per month for 10.33 years just to equal the amount they're willing to pay me today. Although we're both doing fine now, there's no ‘guarantee’ that the company, or myself will be around in 2024.

4: Once it's rolled into my IRA, there's a beneficiary in case something happens to me. This is the most important one to me. As mentioned above, if I died before that age, or died one year after starting the pension at age 62, that would be it. No further payments made to anyone.
The money would also have a chance to grow.



Summary: I can't think of a single reason not to take the lump sum payment, & that makes it seem too obvious, like I'm missing something ?
One more thing. The rollover scares me a little bit. Last year I went over the income cliff related to healthcare by $305.00
While I was able to pay the big penalty, I definitely don't want to do that again.

I want to be sure that the entire amount is eligible for rollover.
When I mentioned this to the company associate, she really couldn't make any guarantees. She told me to consult a tax professional.
I talked to 2 people, one is an accountant, & the other, a financial advisor.

They both told me that I have nothing to worry about, the company wouldn't offer me a lump sum like this, if the entire amount wasn't eligible for a rollover. When I said I'd like peace of mind, the accountant basically said “I’m just trying to save you some money”

Translation: Hiring him just to look over these papers would be a waste of my money.

If I decide to have him look it over anyway, he won't be able to get to it until the 15th.

So just for my own curiosity, I’m going to scan & upload the 3 pages regarding the tax implications of plan payments (rollovers)

Appreciate any input.

 

[rk911]

i would without hesitation take the lump sum and roll it to an IRA...assuming the pension ends with the beneficiary's death. even if it survives you can likely do better in terms of ROI.

 

[jazz4cash]

Take your lump.

 

[Jerry1]

Hopefully the amount is small enough that either choice you make will not impact your financial independence or your ability to retire and live well. I guess I’m the contrarian here. $35K times the 4% rule is $116 per month. You can receive $192 with option 2. I’m thinking that’s guaranteed beer money for the rest of your life. I took the annuity on a small amount that I had and get about $225 per month. It all adds up.

Think of your AA in retirement. This annuity seems similar to even a bit better to cash (a CD) so that just means you can go a little bit higher on your equity percentage. Again, it’s probably small enough in the big picture that it won’t change your life either way. Did I mention beer money?

 

[jimandthom]

Take the lump sum-- mostly because you are single and so nobody to inherit it.

I have a small 200ish per month pension that was in effective for the first 2-3 years I worked for a company. They switched to a 401K around 1990.

Went out of business in 2002 so the PBGC has it now. Would love to have had that money to put in the IRA back then.

 

[gwraigty]

Option #4, for the reasons you state. There should be no immediate tax consequences that I can see.

 

[Dalmore]

I had a very similar offer from my first employer last year for a similar amount of money when I hit 62 (currently 54). I figured that I could do better with my investments than they were, and make the 40K worth more in the end. Additionally, the company is a lot smaller than it was when I worked for them.

I took the lump sum as an IRA.

 

[pb4uski]

....$35K times the 4% rule is $116 per month. You can receive $192 with option 2. ...

WADR you're comparing apples to oranges.... the $116/month is inflation adjusted and the $192/month is a fixed benefit.

There is not a bad decision... OP could take the pension and have $192/month posted to their bank account for life... or roll the lump sum into their IRA.

 

[street]

Lump sum you have control and since no guarantee on pension, it seems like the best option to me. Getter and run babe.

 

[Jerry1]

WADR you're comparing apples to oranges.... the $116/month is inflation adjusted and the $192/month is a fixed benefit.

There is not a bad decision... OP could take the pension and have $192/month posted to their bank account for life... or roll the lump sum into their IRA.

Fair enough, but hopefully the $192/month will still cover his beer money for life, which was the main point.

 

[OldShooter]

I vote with the herd on this; take the lump.

but (comment #1) like many of these questions it comes without context. If the lump is a relatively small fraction of the OP's assets, then I would take it just in the interest of financial simplification. If it is half of his investable assets, maybe some more discussion is needed.

#2: I have little interest in detailed calculations because the input variables are unknown, most prominently: "When will the OP die?" Less so: "What rate of return will the OP achieve on the lump?" and "What wil the OP's personal inflation rate be?" So it is basically a garbage-in, gospel-out type exercise.

 

[Dtail]

I would take the lump sum. I have a similar choice at 65 y.o. for 54k lump sum or annuity.

 

[38Chevy454]

Had a very similar offer, and similar amounts. I took the lump sum. The monthly benefit was not enough to worry about and having the lump sum to add to pretax was easy. Plus mine was from GE and I am happy to get out of their financial position and concern for the stability

 

[Buckeye]

Why is the lump sum eligible for rollover into an IRA when monthly pension payment is taxable income? Just how it works with a lump sum payout?

 

[Starsky]

Had a similar situation, took the lump. Easy decision.

(They want you to take it too, to eliminate the liability and administrative O/H.)

 

[Buckeye]

My letter is waiting for me to get home to review! Hope it's better than their awful offer about 3 years ago. That was easy to turn down.

 

[gwraigty]

Why is the lump sum eligible for rollover into an IRA when monthly pension payment is taxable income? Just how it works with a lump sum payout?

Yes. The income isn't being constructively received yet. When DH was given the option of a lump sum payout vs. keeping the pension that his employer was offloading to a yet-to-be-determined insurance company, he chose the lump sum. It was deposited into his 401k, a non-taxable event.

 

[ownyourfuture]

From the OP
I'm only going to respond to the posts where there was a question, and/or a disagreement with my taking the lump sum, but I appreciate ‘all’ of the replies!

Jerry1
Hopefully the amount is small enough that either choice you make will not impact your financial independence or your ability to retire and live well. I guess I’m the contrarian here. $35K times the 4% rule is $116 per month. You can receive $192 with option 2. I’m thinking that’s guaranteed beer money for the rest of your life. I took the annuity on a small amount that I had and get about $225 per month. It all adds up.

It is a small amount & not having it now will not impact my financial independence or my ability to retire, as I already retired in 2015.
When I mentioned that I don't need the income now, I should've been more specific. I ‘don't want’ any more income now. I'm on a HD health care plan & have to watch my income very closely so I don't go over the cliff like last year. FYI: I do like beer!

OldShooter
If the lump is a relatively small fraction of the OP's assets, then I would take it just in the interest of financial simplification. If it is half of his investable assets, maybe some more discussion is needed.

As of August 17, it's approximately 3.05% of assets.

Buckeye
Why is the lump sum eligible for rollover into an IRA when monthly pension payment is taxable income? Just how it works with a lump sum payout?

Great question, & in a roundabout way, the same thing I was asking for in the original post. You just stated it better.

 

[pb4uski]

Why is the lump sum eligible for rollover into an IRA when monthly pension payment is taxable income? Just how it works with a lump sum payout?

....Buckeye
Why is the lump sum eligible for rollover into an IRA when monthly pension payment is taxable income? Just how it works with a lump sum payout?

Great question, & in a roundabout way, the same thing I was asking for in the original post. You just stated it better.

Because both a pension and an IRA are qualified retirement vehicles.... once the money leaves one or the other and gets into your greedy little hands to be available for spending then it is taxable.

Similarly, you could have the pension plan cut you a $35k check for the lump sum in which case it would be taxable.... it has to go into the IRA to keep its tax-deferred status.

 

[rk911]

...Similarly, you could have the pension plan cut you a $35k check for the lump sum in which case it would be taxable.... it has to go into the IRA to keep its tax-deferred status.

pretty sure you could take a check from the pension plan as long as you then deposit the funds in a qualified retirement account within 60-days. a direct rollover simplifies the process. i've done this in the past on several occasions when there was a fee to do a direct rollover.

 

[pb4uski]

^^^^ I suspect that you are right but was trying to stay out of the weeds...

 

[Animorph]

A rollover to an IRA could be used for a QLAC deferred annuity within the IRA. The buy-in amount doesn't count when calculating RMD's, and you can defer monthly (taxable) payouts until age 85. Didn't seem like they were priced any better than regular immediate annuities, but might be a useful planning device for some.

 

[Perryinva]

Lump sum for that amount. I wish my plan would offer a buy out. That’d be like $900k according to immediateannuity.

 

[pb4uski]

Lump sum for that amount. I wish my plan would offer a buy out. That’d be like $900k according to immediateannuity.

You could always sell your pension benefits to J.G.Wentworth or Peachtree Financial.

 

[CRLLS]

I had the same offer (for a bit more $$) and chose the rollover to an IRA. This way:
1) My monthly benefit can be chosen to start when I decide to
2) It will be inflation adjusted annually
3) It doesn't simply disappear when I die (it has listed beneficiaries),
4) I don't have to worry about the company running off with my investments, and if they do, hope that the PBGC doesn't reduce the monthly benefit as they have already done in some circumstances. (I don't think this is a one time and done occurrence)
5) I have many more investment opportunities with virtually no buy/sell delays. And I can track the gains/losses live online.

For this, I have a lower than possible monthly benefit for the first x years after which, it will be higher. In my case there was no question but to leave the company's plan and rollover to an IRA. It is a personal decision.