Pension question

[Packerbacker]

Hello all. I am new to this forum and have been reading it for some time. I have gained a lot of useful information from it. My long question is - I am going to retire in two months after 34 years. I work for a specialty insurance company that has undergone many many changes during the last few years. (Mostly negative, including taking away benefits) Our management team has taken it in a new direction that makes the employees nervous to say the least. We have gotten away from what our company was built on and are now catering to the almighty premium dollar at the expense of profitability. We have lost money since 2008 and have lost our superior A plus rating from AM Best (the leading insurance rating organization in the US). Our company has a premium volume of around $700 million - good sized but small compared to other big insurance companies. Rather than bore you with other facts, my question is, seeing how nervous we all are about where the company is headed, I have a decision to make about taking my defined benefit pension as a lump sum payment (about $520,000) or taking the monthly pension payments(about $2800 per month.) Most everyone is taking the lump sum that leaves the company. (In 2009 the company raided the pension to help pay losses. It went from a fully funded pension to 80%) They have also now gone to a cash balance pension plan and will discontinue the defined benefit plan as of 1/1/13. I like the thought of a check coming each month, but am worried about the health of the company and possible merger/take over, etc. I even had members of our corporate legal team tell me to take the money and run. I also have a 401K with a balance of as much as the pension lump sum. Any thoughts about taking the lump sum or monthly payments?

 

[pb4uski]

I would suggest that you check out the pricing of a single premium immediate annuity with a premium equal to your lump sum of $520,000 and see what the monthly benefit payment would be. You can check out Vanguard or immediateannuities.com.

If you select the annuity option, does the pension plan buy an annuity or do you just have a promise from the pension plan to pay you $2,800/month? In theory, you should be protected even if the pension plan were to go belly up since you are under the PBGC limit.

Did the corporate legal folks explain why you should take the lump sum? From what you have said, unless the pension plan's pension benefit is significantly better than the SPIA, I would lean towards having the lump sum rolled over to an IRA and having the IRA buy a SPIA.

You can rollover your 401k to an IRA once you leave so the 401k would be totally within your control unless you are less than 59 1/2 and your plan allows penalty free withdrawals after age 55.

 

[growing_older]

You need to know your age, guarantee pay period, spouse benefit and any inflation adjustment to really price out an equivalent annuity. Offhand it looks like the company knows people want to take the money and run and the lump sum offer seems low, but that could depend on the age and other factors that affect payouts.

 

[frayne]

Faced a similar situation myself about seven years ago and took the pension lump sum and my 401k and rolled it all over into a self directed IRA. My reason and logic was I didn't want to have to depend on anyone else and if I screw it up, I have no one to blame but myself. Not saying this is the best way to go for everybody but so far it has worked out better than I expected even with the hit we all took in 2008. Pretty much stay with low cost index funds via Fidelity and Vanguard.

 

[Running_Man]

The lump sum of $520,000 will provide $20,800 of income per year if you were to utilize a standard 4% withdrawal rate. This means if you chose the pension over that you should be investing $33,600 - $20,800 or $12,800 in the first year which you could invest to fund the later years of your retirement life from this portion of your retirement portfolio. I would assume a 3% inflation rate and a 1% real return on the investments, resulting in the portfolio that would meet inflation needs for 40 years - after which there would be a drop to only 50% of income available. 4% inflation cuts that to 30 years. The pension appears to be paying about 300-400 per month more than an annuity purchased from Berkshire.

The risk with the cash payout is early year bear market and later retirement senility resulting in poor portfolio management. The risk with the pension is even higher inflation than 4 percent, less opportunity for a large legacy and the possibility that both the pension fund and pension fund guarantees are not realized. In the end you must evaluate which course best fits your personal comfort zone. There is neither a good answer or a bad answer to either question, both have advantages and disadvantages that will play out over the next hopefully 40 years or so for you. Good luck

 

[savory]

Faced with a very similar situation, I took the pension. My company was not doing well and it was likely they were to be acquired, which happened. Before I took the pension, I investigated purchasing a pension with the lump sum as suggested by pb4uski. (I did better with the company pension vs. the open market). I made sure to learn about PBCG insurance. And, the current level that the company has funded the pension. The company is required to share this with you. I was satisfied with these things, even knowing if my company goes belly-up, PBCG would likely not pay at my current pension level since I was on the higher end of pension payments. I did find that most people giving me advice suggested to take the lump sum. The key thing that convinced me was a study I read (sorry do not remember where I found it) that suggested people with steady income during retirement, seem to do better in retirement. I decided that with PBCG (still some risk that they will exist) and steady and known income flow in retirement made the pension a good choice for me. We do have one significant difference in our situation based upon what you have shared. I may have more savings in reserve. Having said this however, I would have still made the same decision since my pension covers the vast majority of my monthly living expenses.

 

[savory]

Meant to add Go Pack!

 

[MichaelB]

A $2.8k monthly payment is pretty good IMO for a $520k lump sum, better than what someone can get investing on their own. This amount is covered by the PBGC, so the risk of not getting the money is reduced. See PBGC info here PBGC's Guarantees for Single-Employer Pension Plans Fact Sheet.

I would take the pension.

 

[target2019]

There is a similar decision in the future for us. You may want to factor in rights of survivorship. $2800 per month is great. Add in earnings from the 401(k) and you are on solid ground. But the pension ends when you do, unless I missed something.

Something else that worries me is the corporate legal team. If they tell you to take the money and run... Or are they trying to get people to take the cash to increase the footing of the pension fund? Everyone is running away with the lump sum, but given the PBGC, are they all making right choice? I don't think they are.

My wife will get the pension, and will have longevity in her favor. It is likely we will take the monthly pension. The cash payout could not buy an annuity any where close to the monthly.

 

[Packerbacker]

Thanks for all the info. It really helps. The advice of the people in legal was more friendly advice, even though I know they are privy to more information about the company than I am. I am good friends with both of them, although I do value their opinions.

 

[tessaduncan]

I am new to this forum & to the concept of FIRE as my DH just took ER from Megacorp, about 10 yrs earlier than anticipated. One question I have is re: SWR as in Running_Man's post - if one takes out 4% annually on the $520K then isn't one left with $520K at the "end of the game"? And an annutiy dies with the last annuitant (thus = $0)?

 

[REWahoo]

- if one takes out 4% annually on the $520K then isn't one left with $520K at the "end of the game"?

Not necessarily - could be more, could be zero. If you haven't done so already, run your numbers through FIRECalc (link below) and take a look at the output graph. That will show you the many different ways you would have ended up in the past.

As to the future...?

 

[pb4uski]

I am new to this forum & to the concept of FIRE as my DH just took ER from Megacorp, about 10 yrs earlier than anticipated. One question I have is re: SWR as in Running_Man's post - if one takes out 4% annually on the $520K then isn't one left with $520K at the "end of the game"? And an annutiy dies with the last annuitant (thus = $0)?

While obviously results will vary depending on future returns, the 4% rule of thumb would result in a zero balance at the end, not $520. The other difference is that the withdrawal increases each year for inflation, so the first year withdrawal is $20,800 ($520,000 * 4%) but the second year withdrawal would be $21,424 and the third year withdrawal would be $22,067, etc. (assuming 3% inflation). This differs from a non-COLA pension where the pension is fixed and doesn't increase for inflation.

 

[Chuckanut]

Note: Some people who have studied retirement income have concluded that the 4% retirement withdrawal rate may not be as safe as once was thought. IIRC, they argue for a rate in the lower 3% area.

Retirement Researcher Blog: Ten Reasons Why the 4% Rule is Too Simplistic for Retirement Planning

Also, ask yourself how a pension or lump-sum will fit into your overall plan for retirement income. Have you diversified your sources of retirement income?

 

[imoldernu]

Good idea to do some heavy reading about the PBGC before making the decision. (not just the wiki article).

Also... as a supplement to the retirement calculators, building a few spread sheets with different scenarios... maybe a 20 year plan... brings home a lot of reality to simple bottom line planners. Try things like stagflation, deflation, hyperinflation for a three to five year period and see how that affects the longer plan.

Yes, you have to make assumptions, but four or five hours of plugging in numbers is a confidence builder. No easy answers.
Good luck...

 

[ERD50]

While obviously results will vary depending on future returns, the 4% rule of thumb would result in a zero balance at the end, not $520.

Not exactly - only the 5% failures (using the defaults), ends at or below zero. The other 95% end up positive, with more than your starting amount on average. From FIRECALC (with defaults, $750K, 30 years, 4%):

FIRECalc looked at the 111 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 111 cycles. The lowest and highest portfolio balance throughout your retirement was $-300,739 to $4,259,606, with an average of $1,323,668. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.6%.

The other difference is that the withdrawal increases each year for inflation, so the first year withdrawal is $20,800 ($520,000 * 4%) but the second year withdrawal would be $21,424 and the third year withdrawal would be $22,067, etc. (assuming 3% inflation). This differs from a non-COLA pension where the pension is fixed and doesn't increase for inflation.

Yes, and this is an important difference. About 2:1 in favor of COLA over 30 years.

-ERD50

 

[MooreBonds]

I have a decision to make about taking my defined benefit pension as a lump sum payment (about $520,000) or taking the monthly pension payments(about $2800 per month.) Most everyone is taking the lump sum that leaves the company.

This may not be an option, but any way you can take a 50% lump sum payout, and leave 50% with the pension? (or some other partial withdrawal)

 

[clifp]

I would suggest that you check out the pricing of a single premium immediate annuity with a premium equal to your lump sum of $520,000 and see what the monthly benefit payment would be. You can check out Vanguard or immediateannuities.com.

If you select the annuity option, does the pension plan buy an annuity or do you just have a promise from the pension plan to pay you $2,800/month? In theory, you should be protected even if the pension plan were to go belly up since you are under the PBGC limit.

Did the corporate legal folks explain why you should take the lump sum? From what you have said, unless the pension plan's pension benefit is significantly better than the SPIA, I would lean towards having the lump sum rolled over to an IRA and having the IRA buy a SPIA.

I second the advice to compare the benefits with other annuities providers. I'd also check out Berkshire Hathaway annuities, although you probably can get more money from other companies, I don't think you can get annuity from a more reliable company. But you are in the insurance business you probably know that.

The key piece of information we don't have is your age, marital status, and also some idea of your other financial resources. The pension is a great deal if you are 55. But if you are 65, you can get $2638/month from Buffett's company so not much different.

Given your concerns about the financial health I'd be inclined to take the pension if you are under 62 and lump sum if you are older than that.