Pension Payout

[Bobby99]

Hi Guys, I am being offered a lump sum pension at 55. I was considering taking it but I'm hesitant. Could I really be better than professional pension managers to invest this money for the next 40-45 years? My wife is 12 years younger. Especially in this interest rate environment. Here's what makes sense for me (please comment). I can take a "level income option" now that pays a level income until 62, then drops by the amount of social security. I'm still working but our cash flow is tight. I'd like to take part of the monthly pension check and invest in riskier stock funds for growth. That way I would not found feel badly if things drop 50% again-I still get the monthly pension checks.
By the way, if I'm working at 62 I won't take social security then but wait until I stop working. The reduced pension payout would continue even if I did not take SS at 62-we'd have to plan on that but I think cash flow would be made up from regular paycheck.
Thoughts?

[MasterBlaster]

We get these kind of threads quite a bit.

yes you can probably do better investing the lump sum option in stocks. However your risk goes up. And because the risk goes up your withdrawals should be modest.

Ask yourself...

What would I do in a sustained down market ? Would I have to eat dog food ?

Does the potential increased income from a stock portfolio outway the certainty of a pension annuity ?

Just to show what you could be up against in a worst case scenario- Go read Bernstein's articles on "The Calculator from hell"

http://www.early-retirement.org/foru...les-32828.html

That's the really bad negative side to scare you.

Then for the possible upside in the best-of-all worlds, here's something fun to examine:

http://www.early-retirement.org/foru...tml#post935025

[Bobby99]

I think you might have mis-understood my plan. I'll take the company pension at 55 as the" level income option" payable monthly as a single and 100% survivor pension. No lump sum. It is these payments I would use a portion of to get higher growth. No risk to pension payments at all.

[MasterBlaster]

OK I misunderstood what you posted.

The level income options I have seen give you more income until SS kicks in, and then the funding drops. The idea is to keep your income level.

So what you propose is to use that option and then save and invest some of the income.

But really (To a much lesser extent) the issues with a lump sum versus a constant pension annuity payment are the same. Consider the accelerated payment before 65 as a form of a (partial) lump sum.

[travelover]

I think you need to restate the actual question more clearly. I interpret it as a question as to whether you should take a lump sum or an income string.

[Bobby99]

What do you think of my plan to make my own hybrid plan-take monthly pension as "level income" and at 62 the amount drops down to account for your SS payment at that time. I would invest the monthly pension checks in more aggressive funds without having an entire lump sum at risk. I will sleep better knowing I don't have to manage the entire amount-just the monthly checks from the pension plan which could continue for another 40-50 years because of my wife's age. Thoughts?

[Midpack]

Quote:

Originally Posted by Bobby99 Hi Guys, I am being offered a lump sum pension at 55. I was considering taking it but I'm hesitant. Could I really be better than professional pension managers to invest this money for the next 40-45 years? My wife is 12 years younger. Especially in this interest rate environment. Here's what makes sense for me (please comment). I can take a "level income option" now that pays a level income until 62, then drops by the amount of social security. I'm still working but our cash flow is tight. I'd like to take part of the monthly pension check and invest in riskier stock funds for growth. That way I would not found feel badly if things drop 50% again-I still get the monthly pension checks. By the way, if I'm working at 62 I won't take social security then but wait until I stop working. The reduced pension payout would continue even if I did not take SS at 62-we'd have to plan on that but I think cash flow would be made up from regular paycheck. Thoughts?

1) You or someone needs to analyze the specific options - there is no pat answer irrespective of the actual $. The lump sum should be equal to what it would cost you to buy a level income option for yourself, and will be with many companies - but you can't assume so. However, you can't necessarily count on it and one may be advantages to you aside from the risk of investing for yourself.
2) Interesting pension option. If I'm interpreting correctly, your pension will provide a level pension before and after Soc Sec by making up the difference once SS kicks in. Since Soc Sec is COLA'd, I assume that means eventually your pension will pay nothing, displaced entirely by Soc Sec. It might depend on what age eventually works out to. And it makes #1 above more a little more difficult to evaluate, but still very doable.
3) Of course your longevity is a factor in the decision too. If you're average in every way, it's neutral. But people who are in poor health and know it might do better with a lump sum. Someone with a family history like 'everyone in my family lived to be over 100' might do better with a pension (annuity). Not saying you necessarily know, and we can all be hit by a bus or develop a life threatening illness, but some people have a good idea how their longevity will compare to the average.

Some things to think about...best of luck.

[MasterBlaster]

Quote:

2) Interesting pension option. If I'm interpreting correctly, your pension will provide a level pension before and after Soc Sec by making up the difference once SS kicks in. Since Soc Sec is COLA'd, I assume that means eventually your pension will pay nothing, displaced entirely by Soc Sec. It might depend on what age eventually works out to. And it makes #1 above more a little more difficult to evaluate, but still very doable.

I suspect that the pension is also COLA'd. Therefore the pension before and after SS kicks in gives the same level of income adjusted for (CPI) inflation.

[Bobby99]

Quote:

Originally Posted by MasterBlaster OK I misunderstood what you posted. The level income options I have seen give you more income until SS kicks in, and then the funding drops. The idea is to keep your income level. So what you propose is to use that option and then save and invest some of the income. But really (To a much lesser extent) the issues with a lump sum versus a constant pension annuity payment are the same. Consider the accelerated payment before 65 as a form of a (partial) lump sum.

True, but with much less risk than taking the whole as a lump sum. Also, no 10% penalty is put into IRA and you need $ above what a SEPP could payout. In essence, my pension/IRA hybrid mix will be well balanced by 62 with the contining pension stream considered the risk-free bond portion and the payouts used to fund more aggressive stock portion. If stocks plunge at the wrong time, I still have the pension and can at least high grade cat food!

[Bobby99]

Quote:

Originally Posted by Midpack 1) You or someone needs to analyze the specific options - there is no pat answer irrespective of the actual $. The lump sum should be equal to what it would cost you to buy a level income option for yourself, and will be with many companies - but you can't assume so. However, you can't necessarily count on it and one may be advantages to you aside from the risk of investing for yourself. 2) Interesting pension option. If I'm interpreting correctly, your pension will provide a level pension before and after Soc Sec by making up the difference once SS kicks in. Since Soc Sec is COLA'd, I assume that means eventually your pension will pay nothing, displaced entirely by Soc Sec. It might depend on what age eventually works out to. And it makes #1 above more a little more difficult to evaluate, but still very doable. 3) Of course your longevity is a factor in the decision too. If you're average in every way, it's neutral. But people who are in poor health and know it might do better with a lump sum. Someone with a family history like 'everyone in my family lived to be over 100' might do better with a pension (annuity). Not saying you necessarily know, and we can all be hit by a bus or develop a life threatening illness, but some people have a good idea how their longevity will compare to the average. Some things to think about...best of luck.

Thank you-just to clarify-the pension amount does not go to 0-it stays the same as long as your spouse lives because of 100% option. It goes down once-at 62 based on the estimated amount of social security you will get then. You do not actually have to file for social security but the pension still goes down that one time.

[rescueme]

Quote:

Originally Posted by Bobby99 You do not actually have to file for social security but the pension still goes down that one time.

So assuming you can live on the reduced pension, you could delay SS till age 66/70 and at that time get a slightly higher total payout anytime after the early SS age of 62.

These reductions in defined benefit (e.g. pension) program payouts are common in the SS reduction scheme as soon as you hit that age 62 date. It tends to make the plan look good, but the company providing the pension gets a break by not having to continue full benefits (COLA'ed or not) for the rest of your/survivor's lifetime.

[Bobby99]

Quote:

Originally Posted by rescueme So assuming you can live on the reduced pension, you could delay SS till age 66/70 and at that time get a slightly higher total payout anytime after the early SS age of 62.

Yes, for sure. By the way, I/m still working and plan to for a long time. No reason to take at 62 because of the income limits. If not working, I would take SS at 62 because I would have taken out $90,000 to invest by the time I turn 66 and 2 months, my full retirement age. There is no reason to wait. Any conservative return on the $90,000 will beat waiting for higher payout.

[Bobby99]

Quote:

Originally Posted by rescueme So assuming you can live on the reduced pension, you could delay SS till age 66/70 and at that time get a slightly higher total payout anytime after the early SS age of 62. These reductions in defined benefit (e.g. pension) program payouts are common in the SS reduction scheme as soon as you hit that age 62 date. It tends to make the plan look good, but the company providing the pension gets a break by not having to continue full benefits (COLA'ed or not) for the rest of your/survivor's lifetime.

I don't think that's true. The payout continues for my life and my wife (she's 43 now). The higher early payout from 55 to 62 and then reduced payment after should be equivalent to other options from an actuary view point. I think.

[clifp]

Bobby a good way to analyze these things is to look at how large an annuity the lump sum would buy. So for instance if the lump sum you'd get is say $400,000 you can get an a quote from a company like Berkshire here or find others on the web.

Use that as basis of comparison to see if you are better off with a lump sum or the pension. Lately due to some accounting rules changes and the low interest rates I found that in most cases the pension payments are better than the lump sum YMMV.

[Bobby99]

Quote:

Originally Posted by clifp Bobby a good way to analyze these things is to look at how large an annuity the lump sum would buy. So for instance if the lump sum you'd get is say $400,000 you can get an a quote from a company like Berkshire here or find others on the web. Use that as basis of comparison to see if you are better off with a lump sum or the pension. Lately due to some accounting rules changes and the low interest rates I found that in most cases the pension payments are better than the lump sum YMMV.

Thank you. I don't know the amount yet but I'm sure the pension has a better payout. Vanguard lists the highest immediate annuity with the ins. companies they deal with is 2.75%. That to me is the only way to compare-"risk free" return and then go on to other factors. Someone with a longer horizon and both good expertise and other assets to fall back on might get a higher long term return. If I pass first will my wife be interested in managing this money or would she better off with a check every month-plus the checks form the other investments the pension checks will provide? No.