Lump Sum Vs. Monthly Pension

[deserat]

It depends - I had this decision thrust upon me at the age of 53 - I took the non-COLA pension. However, my situation was:

- Recent divorce, thrust into paying health insurance at a much higher level
- No job - minimal consulting
- Mother with terminal cancer who needed me to pay her living costs at the end of her life
- Took a 6 figure hit to portfolio due to said divorce
- Calculated payback age for pension now (reduced), pension later (at age 65) and lump sum (with assumed return - would be rollover, so would also need to look at RMD's and/or Roth conversions) - turned out the crossover age was 85 for when taking the pension later would equal what I was paid now (53) for 22 years
- I was eligible for another COLA'd pension in seven years

I did it for cash flow reasons at the time and the analysis gave it an extra push

If it had been COLA'd, that would have been even nicer; if I hadn't gotten divorced, I would have probably either let it ride until age 65 or taken the rollover. I had gotten offers before, however, I had decided to defer.

So, it depends what is going on in your life at the time and how the numbers calculate out.

 

[Kathe555]

I would definitely see if any medical benefits are tied to your pension before making the decision.

 

[skipro33]

With $680,000 invested to earn 4%, a withdrawal of $2,800 a month will last for 500 months. (500/12=41 years) So, conservatively speaking, a draw of $2,800 a month will last you until age 91. Draw only $2,200 at the onset of retirement and let the remainder grow and you'll have a COLA of sorts built in.

I'd take the lump sum.

 

[latexman]

If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?

A) Lump Sum of $680,000
B) Monthly Pension of $2200

$680,000 x 4% / 12 = $2267 / month

$2200 x 12 / 680,000 x 100 = 3.88 %

For me, I’d take the lump sum, and roll it over into my IRA.

 

[skipro33]

$680,000 x 4% / 12 = $2267 / month

$2200 x 12 / 680,000 x 100 = 3.88 %

For me, I’d take the lump sum, and roll it over into my IRA.

This preserves the entire $680,000 lump sum with zero draw down. The author will end up with either a large estate to be inherited by their heirs or can increase their withdrawal amounts over time to cover COLA perhaps.

 

[indiajust]

Pension crunch is just starting. I never advise leaving money on the table for others to promise a return. Roll the lump sum and start investing the proceeds.

 

[SnowballCamper]

Given those assumptions, I would say take the pension.

The folks I know who had good corporate jobs and are now near poverty in retirement all cashed in their pensions for lump sums.

I think they were not very financially sophisticated and let financial advisors do what they wanted with the money because they thought the advisors knew best.

-gauss

I think this is a very insightful response. Being at retirement without any other savings is indicative of someones propensity and aptitude to manage a lump sum to payout for the remainder of their life--unsuccessfully.

 

[street]

Pension crunch is just starting. I never advise leaving money on the table for others to promise a return. Roll the lump sum and start investing the proceeds.

That is some great advise. I have doubled mine in 4 years (well over 1M) and can control my investments and have complete ownership on my money not depending on someone else.
The other factor with a pension is we don't know how long we will live. If both of us die the money is gone, nothing to leave no one. Pensions are not my style even if they figure out to be better, I will take the hit and just to have complete ownership/control.

 

[Gearhead Jim]

A Verizon pension. Pretty secure (as of now) It is funded at 90%.

Nobody ever expected United Airlines to go bankrupt and have their pensions grabbed by the PBGC in 2004, but it happened.

Less than a year before the pension dump, my pension was funded at 90% or perhaps even higher. When the PBGC takes over and does their funny math, suddenly we were only funded about 50%.
That still left us with what many people would consider to be a reasonable monthly pension, and fortunately we also had a really big defined contribution plan.

You can expect further reductions if you are less than 70 years old.

The mission of the Pension Benefits Guarantee Corporation is to Guarantee that they never have to pay and of their own money into Pensions.

Of course some people make bad investment decisions and ruin themselves. But my general attitude is "take the money and run".

 

[kcowan]

We were offered the same deal at age 49. We took 100% joint survivorship immediate payment with ongoing medical, drugs and dental coverage (not available with lump sum). Non-COLA. It provided a safety net for me to take on speculative executive positions for the next 10 years. Fortunately inflation has been low.

I am now 78 and the pension is a minor part of our net worth/income. I have collected $1.65 million so far. And many dental and drug claims.

But the true answer is "It depends"! There is no right answer....

 

[jim584672]

That seems like a very big lump sum for that amount of annuity.

 

[almost there]

Too low. Int rates I would guess?. No idea. 4 yrs ago I took $1520 monthly rather than 310k at 55. So far so good. Look online at annuity calculators. Will make the decision easy.

 

[JeKa]

If you can live off of $2200 a month, I would take the pension. If you have no other savings or equity at this point in your life, I don't believe that you would be financially responsible enough to manage a lump sum payment. JMHO

 

[I am He]

What kind of asset allocation are you guys plugging in to project the 4%-ish returns required for him to stay disciplined?

 

[seraphim]

I’ve not read all the responses, but I’m curious if you’re planning on working for additional income, or you plan to retire completely at this stage in your life? We also don’t know you’re expenses or situation.

If you need the income, go with the pension. I’m not sure it will be enough for one to live on - and I live in a low-cost state. If you’re going to work enough to cover cost of living, and you’re secure in your ability to do so, I’d Invest the lump sum - if you have a 7 - 10 year investment horizon, retiring completely at 57 or 60.

It wasn’t the question you asked, but I’m concerned you’re not financially set for retiring completely.

 

[stephenson]

Let's see - Social Security feels like a pension.

Going to get SS when the time is right, right?

Lump sum - control that part of your destiny.

 

[CardsFan]

OP appears to be MIA.

While I would take the lump sum, and did, OP appears to not have any savings. Which suggests, as others have noted, he/she is not an investor.

Therefore, take the pension.

 

[hanginthere]

Ordinarily I would too, but am I not right that if he has no savings he needs income now so would either have to wait till 59 to withdraw from traditional IRA or pay huge amount in taxes to convert to a Roth?

 

[hanginthere]

Couldn't agree more. Verizon stock is one on the best on the market and if the dividend payout was a little better would buy in a heart beat. But a companies finances and the safety of the pension plan are different animals. Corporate pensions are a dinosaur today. The only other thing I would suggest before making a decisions would be to make an appointment with the SS office and find out what my projected SS and medicare benefits based on what I've paid in would be at different age levels, keeping in mind that SS could be technically bankrupt by about 2033 unless changes are made including reduced benefits or longer age withdrawal levels.

 

[atmsmshr]

For any multi-employer pension plan (as opposed to single employer plan) take the lump sum and run away. PBGC expects multi-employer plans to become insolvent in a few years.

 

[target2019]

Appraising the future of the company and its pension plan might be a good idea. Then assign a risk factor of your choosing and use it as part of your calculation.

As noted by others, some lump sum amounts seem very generous, some very stingy. That gets one thinking about how the organization views its future. Do they want you taking small monthly bites? If so, then the lump sum is unattractive.

 

[cat4ever]

Same question with these (not as good as OP's) lump sum numbers:

Age: 56.5
Lump sum now: 403K (FWIW lump sum at 65: $457k)
50% Surviving Spouse Pension, starting immediately: $28416/year (monthly installments) NON COLA

I tried the calculator, but I don't understand what to enter for Interest Rate, and different values give very different answers.

I am comfortable doing my own investments, but the draw down rate from the lump sum works out to about 7% I think. However I wonder if the fact that the pension is non cola would still make taking the lump sum a better choice? I don't need the monthly payments now, so am looking for best long term answer. I (of course) do expect to live a long time, and my genetics and currently health back that up (knock on wood).

 

[pb4uski]

What people often do is to compare their lump sum and payout numbers at immediateannuity.com. However, they don't offer 50% joint life online so you would probably have to get a quote from an agent... but looking interpolating the monthly benefit for single life and 100% joint life it looks like the relationship between your lump sum and your pension benefit is pretty fair.

We took the 100% joint life monthly benefit to augment our SS for "guaranteed" income sources... however, my employer's lump sum/monthly benefit relationship was very unfair so that was part of the decision too... and my pension was only about 20% of our spending so it wasn't a big decision.

 

[Big_Hitter]

Same question with these (not as good as OP's) lump sum numbers:

Age: 56.5
Lump sum now: 403K (FWIW lump sum at 65: $457k)
50% Surviving Spouse Pension, starting immediately: $28416/year (monthly installments) NON COLA

We need spouse age to opine with that form of paymet

 

[cat4ever]

We need spouse age to opine with that form of paymet

53. After some thought I'm thinking the interest rate on that form would be analogous to expected inflation, and interestingly enough the calculated value seems to track to using the expected draw down rate of 7% as well. e.g. entering an Interest Rate of 7% and a payment amount of 28k/year calculates a lump sum value of 400k. Coincidence? I think not! (sorry, movie quote, name that movie )