Lump Sum Vs Pension

[kraftyone]

Hi Kraftyone here. I am already retired (early at 50). Approaching 55 and now eligible for either a pension of $3099 per month or $500,000 lump sum. Current assets = 1.5 million (401k, savings, portfolio) and other income (from trust) of $150,000 +. I am leaning toward the pension for two reasons; I won't have to manage it and, based on my research, it seems like a pretty good deal (better than I can do on my own.

Thanks to all

 

[martyb]

Is there any inflation protection (ie. COLA) with the pension, or is it fixed at that amount forever?

$3099 every month is actually a pretty good number based on $500,000.

 

[travelover]

How likely is it that the pension provider will fail and default on the pension?

 

[easysurfer]

That's a really good pension payment. If you plug in the numbers and compare that to an annuity calculator like at Immediate Annuities - Instant Annuity Quote Calculator. the $3099/month pension seems a lot better.

 

[kraftyone]

Hi all, thanks for the quick responses. To answer your very good questions; no there is not a COLA feature and yes the company is very secure. That said I am sure folks felt the same about UAL, Delta, GM and others at one point in time. The pension is 88% funded, at this time, and the company is in good shape. I used the Immediate Annuity site and came to the same conclusion.

thanks again and Happy Thanksgiving!

 

[martyb]

It's a very good pension as long as the company is good for it. There's that darn crystal ball thing again....whoda thunk Enron was going down the drain? Unfortunately, the only way you'll really know will be with the passage of time. So...that being said...I'd have to think about it a little more...lol. That's an awfully big chunk of money to gamble with, but then if it works out, it's an awfully generous pension.

 

[Contrarian]

Forgive my ignorance on this subject, but though this would be a great return of 7.43%, assuming company secure, how would your spouse or heirs be affected and is that a factor?

Bob

 

[W2R]

Given the security of the pension as you have outlined, if I were in your situation I'd take the pension.

What a great pension you have, and I suppose it would be backed by the PBRC in the unlikely event that it should fail. Congratulations!

 

[obgyn65]

I agree with W2R

Given the security of the pension as you have outlined, if I were in your situation I'd take the pension.

 

[chinaco]

We are in a similar type of situation. There is no way I could purchase my pension's payout from a strong insurance company with the lump value. I am taking my pension. The pension also reduces our risk.

There are some risk trade-offs. It will provide some longevity mitigation, current liquidity (you recieve regular cash payments)...


A couple of obvious risks... Pension Fund strength/viability... Inflation risk (and the impact of it) assuming the pension does not have a COLA. You need to acquaint your self with inflation and how to offset the effects of inflation. Since you have a portfolio, you have the money to deal with the inflation by offsetting it.


BTW-- if that pension has a COLA... you are extremely lucky.

 

[FIRE'd@51]

A couple of points:

The life expectancy for a 55 year-old female is about 28 years, so if the pension pays out for 28 years, the return would be 6%, before inflation. With 3% inflation, the real return would be 3%, which IMO, is likely achievable over 28 years with an S&P 500 index fund, even in a relatively poor market environment.

Have you looked at the after-tax return on the pension? If I am reading your post correctly, you have 150K of other income. You don't say anything about your expenses, but a question I would ask is what an extra 37K per year of ordinary income from the pension might mean for your tax situation.

 

[kraftyone]

Thanks again for all your feedback and questions. Regarding survivor benefits, my company offers a lot of options from 50% up to 100%. The 50% benefit reduces my monthy pay out to $2,959. Still good but given our other assets and the $150,000 + from our trust we are in good shape there. Unfortunately we do not have children. We are both extremely healthy and have longevity on both sides.

The tax question is a good one as is the expense question. Our trust income is down, for now, and the extra income from the pension income will be welcomed. We can get along without it but not without tapping into our portfolio principle (which we don't want to do).

Thanks again for all your feedback and thought provoking questions.

 

[Midpack]

I'd take the lump sum unless the company/source is absolutely bullet proof. I don't know of any company I'd guarantee for the next 30 years, but I'm pretty conservative. YMMV

My "pension" is worth about half of yours and I will definitely take the lump sum even though mine is with a Fortune 500 company. However, my lump sum amount is exactly what an annuity would cost me on the open market for the monthly amount so it's a wash from that POV - unlike your options. Your company is evidently trying to induce you to take the monthly option - I wonder why?

 

[MARKT]

I am new to this...like today, Nov. 26, and am years away from retiring.
But based on my own Mom losing everything recently in the stock market
crash...because she put way to much trust in her advisor...I'd take your lump sum pension, and invest it safely and wisely.

If the corporate and wall streeter cheats can do what they did and get bailed out;
and then on top of it all...still get all those huge bonuses...where's our safety?

It's one of the reasons I've come to this site first and foremost...even with a
pension retirement program with the state of California, I won't touch for a
good 20 years, I have to make more money on the side and invest it wisely.

Because I've just seen too much damage done recently by those who have the wealth, and therefore the power and still get away with it.

So my success is really all on me.

MARKT

 

[easysurfer]

Markt,

Something I think worth reading:

The Financial Markets: When Fear And Greed Take Over

It's good to have a balanced view and be aware of the principle of fear vs greed.

Welcome aboard.

 

[kyounge1956]

Here's a recent WSJ article on the lump sum vs monthly payment decision.
The Great Pension Gamble - WSJ.com

 

[MARKT]

I agree about the balanced views and a great article on fear and greed.

But I also know, based on recent and personal experiences, it will just be
better for me personally to devise my own investment plan...and not count on
the big play it safe pension program I am currently under as am employee
for the state of California as well as social security.

These are simply day to day bread and butter for me.
Finding the right and honorable investment advisor...firm and portfolio picks
is truly in my hands.

As well as taking on multiple, additional jobs and starting up a very low cost, low overhead small business in addition to my full time deal with the state is what will fund my new, investment portfolio over the next 20 to 25 years.

Now, me, I love working. Staying healthy and busy as a bee.
I don't like the actual idea of retiring.

The more successes I have and overcoming challenges as opposed to obstacles
is what gets me out of bed every day and be glad to be alive.

MARKT

 

[easysurfer]

...
Finding the right and honorable investment advisor...firm and portfolio picks is truly in my hands.
MARKT

As far as my investments, that's why I just decide on Indexing with asset allocation and dollar cost averaging

1) I don't have to worry about a dishonest investment advisor and keeps my fear/greed in check

2) I don't have the knowledge/time to do stock picking on my own

With that said, nothing wrong with some good ol' chicken money too.

 

[Nords]

Now, me, I love working. Staying healthy and busy as a bee.
I don't like the actual idea of retiring.
The more successes I have and overcoming challenges as opposed to obstacles
is what gets me out of bed every day and be glad to be alive.

Joining this board to ask its knowledgeable members' advice on finances and investing is one thing.

Proselytizing about working for the rest of your life when you have no freakin' idea what retirement involves... that's another thing.

If you define your "successes, challenges, and obstacles" in terms of the workplace then you may want to question whether you can be responsible for your own entertainment. Anyone can get out of bed in the morning due to externally-imposed obligations. Not having to get out of bed every day is what makes me glad to be alive...

Keep in mind that you're free to continue to voice your opinion, but it has no credibility until you've taken at least a six-week sabbatical to decide which lifestyle you prefer.

http://www.early-retirement.org/forums/f30/the-fog-of-work-42328.html

 

[chinaco]

Here's a recent WSJ article on the lump sum vs monthly payment decision.
The Great Pension Gamble - WSJ.com

Yes. The Pension Protection Act in 2006 changed the lump calculation. In effect a larger interest rate is used to discount lump sum calculations.

 

[chinaco]

My "pension" is worth about half of yours and I will definitely take the lump sum even though mine is with a Fortune 500 company. However, my lump sum amount is exactly what an annuity would cost me on the open market for the monthly amount so it's a wash from that POV - unlike your options. ...

Are you sure that your analysis of the situation is correct? Have you looked at all of your options and thoroughly thought it out?

 

[FIRE'd@51]

...even with a pension retirement program with the state of California, I won't touch for a good 20 years, I have to make more money on the side and invest it wisely.

MARKT

I would change the word "even" to "especially".

 

[clifp]

Here's a recent WSJ article on the lump sum vs monthly payment decision.
The Great Pension Gamble - WSJ.com

Thanks for the article changing the pension calculation from Treasury Bonds to Corporate Bonds actually explains a phenomena I've observed recently. Several years when people posted the pension vs lump sum, I would plug the numbers into private annuity and look the at the interest from the best CD rates and conclude that lump sum was a better deal or worse case it was a wash between the two.

The last 1/2 dozen or so lump sum vs pensions I've looked at the pension seems to be clearly the best deal.


In this case it is paying almost 7.5% and given that you don't have kids presumably leaving a large estate isn't an top priority. The government TSP annuity would only provide $2200 and private ones would offer only $2500/month. In the event that company went bankrupt tomorrow the Pension benefit guaranty corporation would pay you $2025 and amount which raise each year as you get old at age 61 the entire pension would guaranteed if the company goes broke. In contrast in most states annuities are typical limited to $250,000 by the state insurance funds if the insurance company goes broke.

Would you do better investing the money in the stock market possibly? but you also could do much worse as the last decade shows us. It seems unlikely that 50/50 stock bond portfolio would generate more income than the pension.

 

[clifp]

Keep in mind that you're free to continue to voice your opinion, but it has no credibility until you've taken at least a six-week sabbatical to decide which lifestyle you prefer.

http://www.early-retirement.org/forums/f30/the-fog-of-work-42328.html

Given that he is working for the State of California which is basically bankrupt he may have opportunity to take the sabbatical quicker that he imagines.

 

[FIRE'd@51]

Yes. The Pension Protection Act in 2006 changed the lump calculation. In effect a larger interest rate is used to discount lump sum calculations.

More precisely, a larger rate is used to discount the annual pension payments to arrive at the the lump sum.