Pension Buy-Out Option

[Delaney]

I received a limited time offer by my previous MegaCorp to buy out my pension. The offer seems quite low. I'm estimating that the value of the Lump Sum payment to be 60-70% of the value of my pension.

To avoid taxes, I'd have to accept as a rollover to my IRA.

Another option would be to basically start monthly payments 5 years early at 50. If I live a normal life span, the money I would get would be half of what I get if I take the pension at normal retirement age at 65. (The value is also much lower than I would get if I take my pension at 55.) AND I would have to pay taxes, but the amount would be small.

I see no need for money before normal retirement age and my old MegaCorp's pension and the company itself does seem very stable. I'm not really counting on my pension at all, but I thought it would be a bit of a safety net in case I live a long time.

In conclusion, it seems like I should turn down the buy out offer. Any other thoughts? Am I missing anything?

 

[NgineER]

Is your pension COLA'd?

There are some other factors that come into play as well... Are you healthier that the rest of the population? If you think you’ll beat the averages, a lifetime of pension income will always beat the lump sum.

If wealth transfer is an important factor, a lump sum may be a better option.

 

[FIRE'd@51]

I would start by looking at the price of an annuity that would give you the same income as your pension at the age it would begin.

IOW, if your pension were $X per year at age 50, what would an annuity cost that would provide $X, then discount that amount back to today and compare with the lump sum.

 

[pb4uski]

...I'm estimating that the value of the Lump Sum payment to be 60-70% of the value of my pension. ...

How did you develop this estimate?

 

[2B]

I would start by looking at the price of an annuity that would give you the same income as your pension at the age it would begin.

IOW, if your pension were $X per year at age 50, what would an annuity cost that would provide $X, then discount that amount back to today and compare with the lump sum.

+1

I had a similar offer from one of the companies I have a small pension due me. The offer was about 60% (or so) of what I could have bought an annuity for the amount of the pension that I could start that day. My analysis was made easy since I could start my pension then or let it increase slightly as I get older.

 

[marko]

I had the same option. I took the money and ran!

As it turned out, within a few years, what had been a fully funded pension ran out after the old company was acquired and leaving those left out in the cold. They eventually closed the pension giving those left with pennies on the dollar.

 

[SumDay]

Like marko, my DH was given the option and ran with the cash. That was in 2011. That chunk of change did wonders for our 401(k) balance.

 

[travelover]

I had a similar option and stuck with the pension. I couldn't buy an annuity to pay as much and my pension is covered by the PBGC, plus former employer seems to be stable.