Employer pension or lump sum rollover of pension?

[PawPrint53]

Regarding enhanced early retirement at a megacorp, we're exploring the pros and cons of taking the employer pension as a monthly annuity or getting the lump sum rolled over into an IRA. We'd have to start taking distributions of the pension now to get the 100% survivor benefit. The pension amount does not have any inflation adjustment, and when we die any $ goes back to the company, assuming there's a company. Rolling it into an IRA will also guarantee that the surviving spouse gets 100% plus any $ left over after death of both goes to beneficiaries. We can also convert some yearly to a Roth to avoid RMD. However, getting the IRA to generate as much income as the pension does for a lifetime sounds challenging. I remember my sister having a colleague who took a lump sum rather than the pension. My sister still has money rolling in; her colleague had to go back to work. One of us is 61 years old, BTW, the other is 59 1/6.

The hope is that my DH will get a job at some point so next year we can start contributing to the Roth again at the very least.

Thanks for any thoughts on the subject.

 

[Htown Harry]

One gut-check to complete is to see whether the lump sum amount and the annuity payout are comparable, based on the current marketplace. I believe most Megacorps keep the numbers fair, but if the lump sum appears to be a low-ball offer you'll want to ask why.

Quotes are easy here: Immediate Annuities - Instant Annuity Quote Calculator. Fidelity and Vanguard also make it easy to get a quote online, apparently without too much risk of releasing a pack of annuity salesman hounds. (no promises - I haven't tried them.)

Do some searching for old ER.org threads as well. There have been several discussions on this topic.

HH

 

[pb4uski]

Suggest that you price out the monthly benefit of immediate annuities with 100% survivorship where the initial premium is equal to the lump sum. This will tell you how fair the annuity option is.

In my case, the annuity benefit offered by mega was significantly better than what I could buy at the time with the lump sum.

 

[PawPrint53]

Interests rates are so low, and the megacorp has always offered higher rates, which is especially good during the early years. No inflation protection, however. I'm not even considering purchasing an annuity--just rolling it over or taking megacorp's annuity. I will check other ER threads.

 

[Katsmeow]

DH faced this decision a couple of years ago. We opted for him to take the lump sum for several reasons:

1. The pension was high enough that if the company ever went broke and the pension guaranty fund stepped in DH would receive less than this pension. That is, his pension would have exceeded the cap.

2. Since I am 7 years younger than DH and have no pension we were only considering the 100% survivor option. Had we taken that and the company went broke, the pension guaranty fund would only pay a survivor a 50% survivor option.

3. If you take a lump sum, you can always go out and buy an annuity later on if you really want one. If you take the pension you can't change your mind and get a lump sum.

 

[pb4uski]

Interests rates are so low, and the megacorp has always offered higher rates, which is especially good during the early years. No inflation protection, however. I'm not even considering purchasing an annuity--just rolling it over or taking megacorp's annuity. I will check other ER threads.

I realize that you are not considering purchasing an annuity but that was a way of evaluating whether mega's annuity is a good deal or not. Sounds like you know it is a good deal (compared to current market rates) so the key question becomes whether you are willing to take the risk that you can do-it-yourself and do even better.

 

[PawPrint53]

Thanks for suggesting searching the forum. I did find some great information that will be useful in making this decision.

 

[Midpack]

One gut-check to complete is to see whether the lump sum amount and the annuity payout are comparable, based on the current marketplace. I believe most Megacorps keep the numbers fair, but if the lump sum appears to be a low-ball offer you'll want to ask why.

Quotes are easy here: Immediate Annuities - Instant Annuity Quote Calculator. Fidelity and Vanguard also make it easy to get a quote online, apparently without too much risk of releasing a pack of annuity salesman hounds. (no promises - I haven't tried them.

By all means check to see if the pension and lump sum seem to be comparable as HH suggests.

I faced the same decision 11 months ago and took the lump sum, it was a no-brainer to me. The pros and cons have been discussed extensively, so your search here should be helpful.

With interest rates/yields low, lump sums are relatively high right now. Taking the lump sum is having your cake and eating it too IMO. You can invest the rollover IRA funds as you wish - and buy a pension if/when you want, in 5 years, 20 years or never (a SPIA is basically a pension that you buy). Many companies actually buy an annuity on your behalf in fact, the company isn't sending you monthly pension checks.

If you buy an annuity in the future, odds are it will be cheaper, in any case it will NOT be more expensive.

I can fully understand why you wouldn't take the lump sum and buy an annuity right now (might as well just take the pension), but why not have that option later?

 

[eytonxav]

When I left megacorp back in 2003, I took the lump sum. However they did allow one to split between both options (lump sum and annunity) and in hindsight, I kind of wish I took maybe 25% as annuity. Does your company allow for a combo of the two options?

 

[2B]

One factor to consider is whether you have any other pensions coming to you. I personally don't like annuities and a pension is just like an annuity but supplied by a non-insurance company. I also have a few small pensions coming in that will provide a base income. Some people claim to have a higher comfort level knowing a steady income stream is there.

Another factor to consider is when you would start receiving the pension. You indicate that your DH will look for continuing his employment. An option to delay the pension may exist to let it build up a little more.

By the way, are you currently employed? It seems only fair that if DH is being forced to look for work you should also be contributing to the Roth accounts.

 

[Lancelot]

I took the lump sum and rolled it over to Vanguard. Personally I like to actively manage my portfolio and a lump sum gave me that option

And yes by all means checck to see if the lump sum amount is fair, as suggested by HH and other posters.

 

[Midpack]

...a pension is just like an annuity but supplied by a non-insurance company.

Sometimes true, but always? When I retired last summer with a small (frozen in 1994) pension from a Fortune 500 Megacorp previous employer, I was offered a non COLA pension or a lump sum. I checked and the lump sum was almost exactly the same as a cost of an annuity on the open market for equivalent pension income & benefits. When I talked to the Megacorp admin, she told me if I chose a pension, they would actually just buy an annuity from an insurance company on my behalf and rid themselves of future liabilities. That's why the amounts matched and why Megacorp could care less what I chose, their liability would be exactly the same. I assumed many companies do so these days.

Ever since I've wondered how often companies actually make pension payments to former employees versus just buying an annuity for the former employee. I've searched online many times, but have come up empty handed every time.

 

[Gonzo304]

I was in the same predicament as PawPrint 53 and ended taking the annuity from megacorp. My financial planner said that he was unable to even come close to the monthly payout by purchasing an annuity with the lump sum (just for comparative purposes). Additionally, since I was only 55 when I retired and had a 401 k we decided that I could take the monthly income and be a bit more aggressive with the 401 k. The opposing point of view is that we could take the lump sum, manage ourselves and leave an inheritance if we die earlier than projected. Since we are blessed that longevity runs on both sides we opted for the monthly payment. If I had been older when I retired I probably would have gone for the lump sum. At the end of the day you can do all of the calculations but you also have to do what will let you sleep at night which will be different for everyone.

 

[PawPrint53]

By the way, are you currently employed? It seems only fair that if DH is being forced to look for work you should also be contributing to the Roth accounts.

Sadly, no. I'm on disability for one of those rare neurological disorders you never think you'll get. It pains me greatly that I can't contribute more. That's actually one of the reasons that taking a lump sum makes me nervous. I have some loss of cognitive function, although I hate admitting it, and my DH has no interest in anything financial. I'm forcing him to be aware and not rely on me for all the financial decisions. If we take a lump sum, I don't know that I'll be able to manage it as well as I'd like. We do have a manager for the IRA (not the Roths, though), but I hate paying a 1% fee.

I did check and the monthly pension amount is greater than what we could buy with the lump sum amount. We cannot delay the pension because if something happened to DH, then I'd only get 1/2 the amount. Other pension cons are what happens if megacorp goes belly up, what happens if the pension guaranty corp goes bankrupt. On the other side, what if we can't manage the lump sum in such a way as to get a return that will eventually get us more $ should be decide to buy a SPIA. The lump sum/annuity split option might be an interesting way to go if it's offered.

Obviously I have a lot of anxiety around this, mostly because I don't have the option of going back into the workforce so this is it.

 

[EvrClrx311]

I'd be most concerned about inflation diminishing a pension or annuity payment. We've already seen a huge recession, and though the markets are likely not roaring back anytime soon... losing everything in bonds/stock mix is less of a risk now IMO, and if inflation hits hard equities tend to ride the wave, even if delayed by a year or two.

We'd like to think that government would be on top of things and not allow inflation like we saw in the 70's (averaging like 8% a year)... but say that decade repeated itself now. Here is what would happen comparing Annuity vs. Lump Sum

Lets assume...
DH - 62
DW - 59
Lump Sum: $500,000
Annuity: $2717 per month ($32,604 a year)

If the 70's inflation repeated... as well as the 70's stock market
That $2717 today, would have a diminished purchasing power of just $998.25 in 2025. The lump sum option invested in 30% bonds and 70% equities would have given the same payment as the annuity while leaving a lump sum of $465,277 at the end of 2025... of course the purchasing power of that lump sum would be reduced too, but you'd essentially get to 2025 with the same payments and maintaining the initial lump sum. At that point could purchase an annuity with the remaining $465,000 and get $3656 a month.

I know models and numbers can be presented to favor either case... but in my opinion that would be the absolute worst case (well unless the lump sum were bet at the racetrack... or in Facebook) and I'd want to protect against it if this payment were a substantial part of my retirement income (over 50% of it)

Lump sum gives more options (Example: you can draw less in down years and more in up years to maximize its potential)... and you can always switch to annuity if it makes more sense in the future.

( not advice... just thinking out loud )

 

[Midpack]

I did check and the monthly pension amount is greater than what we could buy with the lump sum amount. We cannot delay the pension because if something happened to DH, then I'd only get 1/2 the amount. Other pension cons are what happens if megacorp goes belly up, what happens if the pension guaranty corp goes bankrupt. On the other side, what if we can't manage the lump sum in such a way as to get a return that will eventually get us more $ should be decide to buy a SPIA. The lump sum/annuity split option might be an interesting way to go if it's offered.

The blue statement is not likely true by itself for two reasons:

1) All else equal - a given lump sum amount will buy more $X/yr income every year you delay. Every year you wait, is one less year the annuity has to generate income.
2) All else equal - the upfront cost of the annuity depends on prevailing (and predicted) interest rates/yields. When interest rates are very low, as they are now, the cost of an annuity for $X/yr income is relatively high. Interest rates can't really go lower from here, so annuity costs will decline when rates increase and they most definitely will. When interest rates increase, your lump sum amount will buy more $X/yr income. But no one knows when, could be years, some say a decade or more.

However, if the blue statement is due to the red statement and/or your reluctance to manage investing the lump sum, only you can assess that situation. It may indeed be an issue.

Best of luck, you are dealing with quite a lot...

 

[Gearhead Jim]

DH faced this decision a couple of years ago. We opted for him to take the lump sum for several reasons:

1. The pension was high enough that if the company ever went broke and the pension guaranty fund stepped in DH would receive less than this pension. That is, his pension would have exceeded the cap.

2. Since I am 7 years younger than DH and have no pension we were only considering the 100% survivor option. Had we taken that and the company went broke, the pension guaranty fund would only pay a survivor a 50% survivor option.

3. If you take a lump sum, you can always go out and buy an annuity later on if you really want one. If you take the pension you can't change your mind and get a lump sum.

The PBGC does not actually cap pensions, they have a guarantee based on a rather complicated formula and will pay more than the guarantee if there is more money in the fund when they take it over. That's my own situation.

But, the formula they use to work out your pension or the guarantee is pretty awful.

I would be heavily inclined to take the lump sum.

 

[Katsmeow]

The PBGC does not actually cap pensions, they have a guarantee based on a rather complicated formula and will pay more than the guarantee if there is more money in the fund when they take it over. That's my own situation.

But, the formula they use to work out your pension or the guarantee is pretty awful.

I would be heavily inclined to take the lump sum.

I was paraphrasing a bit...bottom line was that I didn't feel comfortable with the PBGC guaranty and its sufficiency

 

[Gearhead Jim]

I was paraphrasing a bit...bottom line was that I didn't feel comfortable with the PBGC guaranty and its sufficiency

I agree fully.

 

[rescueme]

Employer pension or lump sum rollover of pension?

I won't give you any suggestion/opinion based on the info you have given, but I will give you my actual experience when faced with the same situation upon my retirement.

I retired in early 2007 after 28+ years with a major manufacture who had a defined benefit (e.g. pension) program that was eliminated three years after I started, with a "replacement" of a 401(k) plan - along with a minimal match, along with a "cash balance" plan which was to take the value of the existing pension credits and add an annual cash adjustment to the balance.

The cash balance plan was designed to be taken as an annuity (read "pension") at retirement, with the option of a lump sum.

In my (our, since DW was involved in this decision) we looked at current income (based upon the annuity option offered by the company) along with other annuity providers, along with the idea of investing on our own.

We decided for our situation that we had substantial retirement assets that we would be responsible for investing, and we wished to disburse our possible retirement income sources. We also were concerned with the basic assumptions (life, with 50% remainder) of the product that my company offered (via a third party - my company would have no impact on my decision, which is different than your situation) that did not necessarily fit our "desires".

A few months before I actually retired and "signed off" on any option, I decided to get annuity (e.g. SPIA) quotes from Vanguard, Fidelity, and other companies as offered from Immediate Annuities - Instant Annuity Quote Calculator.

As it turned out, we purchased our initial SPIA that maximized our ER income, which in turn allowed us to delay our respective SS, along with giving us an income stream that will not be reduced by either of our passing (if we both pass earlier than our expected lifespan, the annuity continues and gets added to our estate, for the benefit of others). This was far superior than the "boilerplate" plan offered by my employer for the annuity option.

In your case? I will not tell you, nor suggest what you should do. I'm just offering a "real life" scenario of what actually happened in our life.

Good luck to you, regardless of your decision in this case...

 

[Achiever51]

This just came across the news wire:

General Motors Co. today announced that it will provide select U.S. salaried
retirees a lump-sum payment offer and other retirees with a continued monthly
pension payment securely administered and paid by The Prudential Insurance
Company of America, a Prudential Financial, Inc. company.

 

[Hud3]

I took the lump sum and rolled it over into an IRA with Vanguard, along with my 401k. Vanguard's financial analysis predicted we could live comfortably with a very small probability of running out of principal. We retired at age 56 in 2001. In spite of a few butterflies in the stomach at first, it's worked out fine. Having that extra lump-sum principal to invest seems to make much more sense to me than having a pension in which the company owns the principal.