MegaCorp Pension Buyout - A Scenario for Advice

[Planner]

I retired from MegaCorp three years ago at age 54. I have a small pension I had accumulated until the plan was frozen years ago when it was replaced purely with 401K and matching. I started drawing my pension last year at age 56. I have now been offered a buyout that I am considering.


I've run the numbers and I think I understand my ROR if I leave it in place versus taking lump sum, but I'd like a math check and any other advice on this buyout option. I've normalized the buyout and monthly amounts to make math easier.


Assumptions & facts:
Age at buyout (wife same age): 58
Life expectancy for calcs: 85
Buyout amount: $100k
Current monthly gross income (100% spouse survival): $485

If we take the buyout, we would roll the lump sum into an IRA. We'd obviously have no pension payment going forward, and not begin any IRA withdrawals until at least 59-1/2. As I understand, the IRS would want the 10% early penalty recapture on the year and a half of pension payments we took up to the time of buyout. This is less that 1% of the buyout amount.


If my calcs are right, it looks like the ROR for this lump sum over 27 years (58 to 85) would be about 3.6%.....so if I can do better than 3.6% with my lump sum I would be better off.


Anything I'm missing here?
Appreciate any comments....thanks!

 

[stepford]

One thing I always like to do when this sort of question comes up is compare the buyout offer with the estimated market price of an annuity with the same monthly payout. Using the calculator at https://www.immediateannuities.com/annuity-calculators/
one gets a price of a little bit over $100K (details depend on exact age, start date of the annuity and some other things).

What this tells me is that the buyout offer is more or less fair. In such cases the choice is often based on one's particular situation: how much you trust the health of MegaCorp, your own health prospects, investment choices, etc.

In other words, it doesn't look like there's an obvious benefit one way or the other so you just get to pick.

 

[davebarnes]

Take the money and run.
When your [un-named] mega corp goes TITSUP , you’ll be glad you did.

 

[Planner]

Thanks stepford....I appreciate the link. That annuity calculator is helpful.


Dave....sounds good....I am leaning towards that. Was just wondering if I was missing something in the mix....thanks.

 

[bada bing]

Usually a pension plan gets a bigger annuity payment for a given lump sum
calculation than an individual can purchase on their own. There are two reasons
for this. The first is that a company pension plan has a bigger economy of
scale, with many individuals pooled, and gets better pricing. The second is that
there is an assumption that individuals purchasing an annuity on their own
know something about their individual longevity odds and probably live longer
than their general cohort in the population at large. Pension plans don't have
this selection bias.

Your ages on immediateannuities.com offers a retail annuity of $404 per
month for a 100% joint life immediate annuity. If you want some annuity,
the pension is better than you'll be able to find on your own. The downside
is the return on new annuities sucks now because of the low prevailing
interest rates.

JMO, but the general wisdom is that if a person chooses an annuity at all,
around age 70 is the sweet spot to buy. If it was my choice (and I have
already made similar choices with two small pension buyouts), I would roll
the money into an IRA and invest it until age 70. Then I would revisit the
annuity decision based on my health and needs at that time.

 

[ckelly78z]

If an annuity can perform at 4%, you will be ahead of the game taking the buyout, AND, you will have complete control of the $$ going forward, compared to trusting Megacorp, and it's bean counters to do the right thing for you, and DW.

Take the money !

 

[pb4uski]

Your 3.6% looks about right. The table below shows the IRR if you or your DW live until the age indicated. We are just a bit older and IIRC it is likely that one or the other of us will live until our early 90s... so that would suggest a ~4.6% IRR. Also, I presume that your pension would be fully covered by the PBGC if the plan ran into financial difficulties. YMMV.

The other thing to consider is diversity in sources of income.

Lump Sum		100,000
Monthly benefit		485
Payout rate		5.82%
Age	n	IRR
58	0
59	1	-98.4%
60	2	-81.0%
61	3	-60.7%
62	4	-45.2%
63	5	-34.1%
64	6	-26.1%
65	7	-20.1%
66	8	-15.7%
67	9	-12.2%
68	10	-9.5%
69	11	-7.3%
70	12	-5.5%
71	13	-4.0%
72	14	-2.8%
73	15	-1.7%
74	16	-0.9%
75	17	-0.1%
76	18	0.5%
77	19	1.1%
78	20	1.6%
79	21	2.0%
80	22	2.4%
81	23	2.7%
82	24	3.0%
83	25	3.3%
84	26	3.5%
85	27	3.7%
86	28	3.9%
87	29	4.1%
88	30	4.2%
89	31	4.3%
90	32	4.5%
91	33	4.6%
92	34	4.7%
93	35	4.8%
94	36	4.9%
95	37	5.0%
96	38	5.0%
97	39	5.1%
98	40	5.2%
99	41	5.2%
100	42	5.3%
101	43	5.3%
102	44	5.4%
103	45	5.4%
104	46	5.4%
105	47	5.5%
106	48	5.5%
107	49	5.5%
108	50	5.6%
109	51	5.6%
110	52	5.6%

 

[gauss]

Take the money and run.
When your [un-named] mega corp goes TITSUP , you’ll be glad you did.

Would he not want to first check to see if 100% of his pension is guaranteed by PBGC under current law? Especially if he already has many other market-based investments?

I suspect that few will agree with me, but then again we have been in a bull market for quite some time.

-gauss
p.s. Perhaps ask OP if he plans to delay SS to age 70 or take it at 62 as this could be looked at in a somewhat similar manner.

 

[Big_Hitter]

Would he not want to first check to see if 100% of his pension is guaranteed by PBGC under current law? Especially if he already has many other market-based investments?

I suspect that few will agree with me, but then again we have been in a bull market for quite some time.

-gauss
p.s. Perhaps ask OP if he plans to delay SS to age 70 or take it at 62 as this could be looked at in a somewhat similar manner.

good points

 

[Planner]

Thank you all for the insight and opinions


As far as the start of SS, we are at least 4 years out from earliest date so don't know yet as tax & SS laws and regs may change by the time we get there.


Assuming the PBGC pays 100% replacement, it looks like we would be covered as our monthly is nowhere near the 2019 max payment numbers....if I understand correctly.

 

[gauss]

Thank you all for the insight and opinions


As far as the start of SS, we are at least 4 years out from earliest date so don't know yet as tax & SS laws and regs may change by the time we get there.


Assuming the PBGC pays 100% replacement, it looks like we would be covered as our monthly is nowhere near the 2019 max payment numbers....if I understand correctly.

I thought that the amount of your pension might be below the limits, but note that the PBGC limits are scaled/reduced for age.

-gauss