a (very) small pension

[tulak]

I have a tiny pension from a previous job and I received a notice that I can either take a lump-sum payment or begin monthly annuity payments now. Or I can do nothing and wait until 65.

Option #1 - Lump-sum payment. The amount is ~$5,584. I should be able to roll this over into my IRA, so no tax penalty.

Option #2 - Immediate Single Life Annuity for $29.37/month.

Option #3 - Single Life Annuity at age 65 for $106/month.

The annuities have no COLA.

I'm 43 years old. Looking at the IRA tables, my life expectancy is about 84 years old.

Based on the numbers, you can easily tell this isn't a deal breaker regardless of which option I choose.

I looked at immediateannuities and for a Immediate Single Life Annuity I'd get $21.30/month and at 65, $65.20/month. So if I went this route, I'd be better sticking with the current pension plan.

For the lump-sum option, I used VPW for now and at 65. For the former, I'd get ~$27/month and for the latter, $140/month. I used the average portfolio value from Firecalc from now until 65 using default values. Of course, these are ball-park numbers, since there's no way to know how the markets will perform.

As for the payout rate, it's: ($29.37*12)/$5584 = 6.3%, which looks pretty good.

The amount is so small that I'll probably take the lump-sum payment and buy a high-risk/high-reward ETF, something like EM.

But I have no experience in analyzing pensions and I'm wondering what's the best option out of three and mostly, why?

 

[Just_Steve]

My wife will be getting 2 small pensions in a few years. The way I see it is she should take the annuity on both, one will pay for dining out 3 or 4 times a month for the rest of her life and the other will pay for the electric bill every month for the rest of her life. Two less things she has to worry about coming out of our budget.

 

[pb4uski]

Given the small amounts involved and your young age, I would take the lump sum and roll it over into your IRA and invest it. I wouldn't want to bother with checks of $30/month or even $100/month in 20+ years.

 

[athena53]

I'm with pb4uski. Avoid the hassle factor; take the lump sum and invest it. Remember too, that every address change and every bank change over the years would require providing them your new information.

 

[harley]

Or even, take the lump sum and spend it. Have a nice vacation or something. You're talking chump change here.


If you want to invest it, obviously that's the way to go. But definitely take the lump sum.

 

[Running_Man]

You are talking about a 6.3% payout rate at age 43, while the amount is small that is no reason to not give these funds the same care any of your other funds have. Take the pension/annuity now and add this to your retirement portfolio, it can replace a portion of your bonds and allow you to invest other funds in equities. The size of the payment should not effect the decision making process. I find in life paying attention and making good small decisions leads to better luck in the big decision process. As for the reason why, to buy an immediate annuity on the open market at your age the amount paid is 4.3% payout, the offer you have is 46.5% higher in monthly payout than the market is offering. There are no safe fixed income alternatives I am aware of that will equal this payout for the remainder of your life.

 

[CRLLS]

if you don't need it now ( I know) then I'd roll it over into an IRA. It will grow and you will have some form of COLA associated with your investment. Looking at it another way, taking 30 now gives you about 19 dollars / month (inflation adjusted) when you reach 65.

 

[MBAustin]

Given the small amounts involved and your young age, I would take the lump sum and roll it over into your IRA and invest it. I wouldn't want to bother with checks of $30/month or even $100/month in 20+ years.

Completely agree. It's not out of the question that by the time you could start collecting it, you would have moved and they would have lost track of you, etc.

 

[kaudrey]

Completely agree. It's not out of the question that by the time you could start collecting it, you would have moved and they would have lost track of you, etc.

+1

 

[retire2020]

You are talking about a 6.3% payout rate at age 43, while the amount is small that is no reason to not give these funds the same care any of your other funds have. Take the pension/annuity now and add this to your retirement portfolio, it can replace a portion of your bonds and allow you to invest other funds in equities. The size of the payment should not effect the decision making process. I find in life paying attention and making good small decisions leads to better luck in the big decision process. As for the reason why, to buy an immediate annuity on the open market at your age the amount paid is 4.3% payout, the offer you have is 46.5% higher in monthly payout than the market is offering. There are no safe fixed income alternatives I am aware of that will equal this payout for the remainder of your life.

+1. I also have very small pension valued at 339/Month at age 65. I will look into see what I get beginning of next year when I FIRE...I will be 52 next month.


Sent from my iPhone using Early Retirement Forum

 

[Running_Man]

if you don't need it now ( I know) then I'd roll it over into an IRA. It will grow and you will have some form of COLA associated with your investment. Looking at it another way, taking 30 now gives you about 19 dollars / month (inflation adjusted) when you reach 65.

Invest the monthly annuity and earn 3% over inflation and you will have about 11,000 in the bank in today’s moneyand a 4% withdrawal along with the annuity pension assuming 3% inflation to your age 65 gives you $52 a month annuity with 2/3 inflation protected.

 

[nun]

I had exactly the same decision to make. My numbers were $35k lump sum at age 53 or $5.6k annual pension at age 65. I took the lump sum because I have
another larger pension that covers my income and I wanted to do an experiment.

http://www.early-retirement.org/forums/f28/results-of-my-experiment-after-one-year-80526.html

Your pension is a little better than mine and it looks like you'll have to average 5.6% annual return from the lump sum to match the pension....assuming you live to 84.

 

[Texas Proud]

Given the small amounts involved and your young age, I would take the lump sum and roll it over into your IRA and invest it. I wouldn't want to bother with checks of $30/month or even $100/month in 20+ years.

+whatever number is needed...

 

[tulak]

Thanks to everyone who responded. I'm planning on taking the lump sum, but I especially appreciate Running Man's take on this situation. This is exactly what I want to understand better.

You are talking about a 6.3% payout rate at age 43, while the amount is small that is no reason to not give these funds the same care any of your other funds have. Take the pension/annuity now and add this to your retirement portfolio, it can replace a portion of your bonds and allow you to invest other funds in equities. The size of the payment should not effect the decision making process. I find in life paying attention and making good small decisions leads to better luck in the big decision process. As for the reason why, to buy an immediate annuity on the open market at your age the amount paid is 4.3% payout, the offer you have is 46.5% higher in monthly payout than the market is offering. There are no safe fixed income alternatives I am aware of that will equal this payout for the remainder of your life.

Invest the monthly annuity and earn 3% over inflation and you will have about 11,000 in the bank in today’s money and a 4% withdrawal along with the annuity pension assuming 3% inflation to your age 65 gives you $52 a month annuity with 2/3 inflation protected.

What about taxes?

I didn't mention this in my original post, but I don't need the money nor do I want to increase my income. I'm in a high tax bracket, probably 33% this year, maybe the upper edge of 28% if I'm lucky.

Completely agree. It's not out of the question that by the time you could start collecting it, you would have moved and they would have lost track of you, etc.

I've had a pretty good track record so far. I earned this pension when I was around 20 and have been tracking it for the last 23 years. I only have 22 years to 64, so I'm half way there.

I had exactly the same decision to make. My numbers were $35k lump sum at age 53 or $5.6k annual pension at age 65. I took the lump sum because I have
another larger pension that covers my income and I wanted to do an experiment.

http://www.early-retirement.org/forums/f28/results-of-my-experiment-after-one-year-80526.html

Your pension is a little better than mine and it looks like you'll have to average 5.6% annual return from the lump sum to match the pension....assuming you live to 84.

Thanks for sharing the thread. I remember skimming it a while ago, but didn't pay too much attention to the details at the time. I'm going to read through it in more detail when I have time, but a quick look this time around and Fritz's comment #26 resonates with me. I'll definitely be following your experiment.

 

[karen1972]

I took 1/2 now and 1/2 I rolled over (as they were not fully funded so thats the best option they had without waiting). I'm 44 and had $35K turned into $170/month annuity. It happens to be just enough to pay for my health care premium each month so I do like the fact I don't have to draw down my taxable accounts to cover that. One bonus is we could have used it for the mortgage if we wanted a bigger house as they were willing to take a pension (that had paid out 2+ years) and treat it as good as a paycheck vs. the dividend income they were not accepting.

Being 44 I'm not that concerned about 65+, my 401k and SS will be more than sufficient, I'm more worried about getting my taxable accounts to last until 59 1/2. Having a small annuity now I thought was acceptable as part of diversification.

 

[Rustic23]

I have a small non cola's pension. I was not given the option, well not that I remember. Each month like clock work the money appears in my bank account. It just about covers mine and DW's medicare payment. No hassle at all. If I had taken a lump sum it would have been added to my IRA and I would have forgotten about it. Kind of reminds me of one of the places I w@rked. Good memories there.

 

[kgtest]

Good memories there.

I hope to forget about my work memories soon after retirement. Means to an end. Perhaps I chose the wrong profession or have become cynical.

I do spend a lot of time at work, but hoping to remember the vacations in the tropics, long walks on the beach, not the typing and nagging.

 

[Texas Proud]

You are talking about a 6.3% payout rate at age 43, while the amount is small that is no reason to not give these funds the same care any of your other funds have. Take the pension/annuity now and add this to your retirement portfolio, it can replace a portion of your bonds and allow you to invest other funds in equities. The size of the payment should not effect the decision making process. I find in life paying attention and making good small decisions leads to better luck in the big decision process. As for the reason why, to buy an immediate annuity on the open market at your age the amount paid is 4.3% payout, the offer you have is 46.5% higher in monthly payout than the market is offering. There are no safe fixed income alternatives I am aware of that will equal this payout for the remainder of your life.

My bold...

I disagree with this.... this is a small amount of money... you can make almost any decision with this and not change anything related to RE...

It also matters having money spread all over the place instead of in a few places...

So, IMO, size does matter in the process.... I would not want this money separate unless there were some big advantage for it sitting there... I do not see any big advantage.... if it were a lot more money, then even a small advantage would mean something....

 

[pb4uski]

What about taxes?

I didn't mention this in my original post, but I don't need the money nor do I want to increase my income. I'm in a high tax bracket, probably 33% this year, maybe the upper edge of 28% if I'm lucky.....

If you have the lump-sum rolled into an IRA (preferably directly) then there is no taxable income to you until you take the money out of your IRA.

 

[laurence]

My bold...

I disagree with this.... this is a small amount of money... you can make almost any decision with this and not change anything related to RE...

It also matters having money spread all over the place instead of in a few places...

So, IMO, size does matter in the process.... I would not want this money separate unless there were some big advantage for it sitting there... I do not see any big advantage.... if it were a lot more money, then even a small advantage would mean something....

What do you think the inflection point is? My pension is small but larger than this, I'm taking the about $1000/month at age 55 until I take social security, no COLA, option - work froze the plans a couple years ago, I'm 42 now. I chose this because it felt nice to pad the income until social security kicks in and reduce the withdrawal amount on my portfolio by about 10% for those seven years.

 

[Texas Proud]

What do you think the inflection point is? My pension is small but larger than this, I'm taking the about $1000/month at age 55 until I take social security, no COLA, option - work froze the plans a couple years ago, I'm 42 now. I chose this because it felt nice to pad the income until social security kicks in and reduce the withdrawal amount on my portfolio by about 10% for those seven years.

I really do not know... it is different for different people... I just think size does make a difference in the decision making...

I do not think $1,000 a month is a small pension... not big either mind you...

My mom has a pension (from my dad) that is $109 per month... it started 40+ years ago at $45 per month... she was lucky as they would make increases along the way, but usually had a $5 per month minimum... so it kept going up... I think this is small and would have recommended her take a lump sum (but, who knows for sure as the lump sum might have been much worse back then)...

 

[nun]

The pension is far better than a commercial annuity (6.3% payout). Assuming an average lifespan the OP would have to average 5.6% annual interest on the lump sum to match the pension. So I'd probably go with the pension and just treat it as some nice fixed income.

 

[tulak]

The payout amount of $6,372 was higher than what was originally estimated.

I rolled it over into a new IRA at Vanguard and invested it in Vanguard's FTSE ex-US Small Cap fund. We'll see how it performs over the next couple of decades, but it's going to be tough to compare performance to the annuity, since I don't know what I would have received if I went that route. I'm think it would probably be higher, since the payout amount was bigger than estimated.

As for setting up the account at Vanguard, I mailed them the check on Friday, which they received on Monday and immediately deposited into the account. That was a quicker turnaround time than I expected.

Unfortunately, they deposited the funds into the wrong IRA account. It took me a couple of days to get this sorted out with them. Originally, they were telling me it would take up to four weeks to correct this error, which was made on their end. After some complaining, they expedited the issue and it was taken care of by the next day.

I feel for others that would have to wait, which, as I mentioned to the Vanguard rep, is completely unacceptable for a financial institution. He mentioned that the department that handles these issues have a large backlog and he wasn't too happy about it either. Lucky for me I was able to get this dealt with quickly.

 

[socca]

Early in 2016, the company I worked for in the '90s tracked me down (nice of them!) and said that its defined benefit (non-COLA) pension plan could pay me $260/mo starting next year (age 55) or $520/mo starting at age 65, with a linear sliding scale for starts between age 55 and 65. I had written off any chance of getting a pension from the old megacorp since the company is now a microcorp after divestitures and mismanagement in the '00s. The letter didn't offer a buyout. There are a remarkable 30,000 people with a finger in this company's defined benefit pension plan. They stopped offering a defined benefit pension plan to new employees a couple of years before I left the company in 2000.

I have no idea what probability to assign to this company's estimate of the eventual payout. 100%? 75%? 50%? 25%? 0%? Can they arbitrarily cut the payout if their investment returns are below expectations? What regulations govern the management of defined benefit pension plans?

$6k annually pays for a nice annual vacation, assuming that I live long enough to start collecting at age 65. Even $3k annually takes most of the bite out of an annual vacation. I haven't yet decided what to do with this 'found' income stream. I much prefer 'found' income streams over 'found' expense streams.

 

[braumeister]

I had written off any chance of getting a pension from the old megacorp

socca, since you didn't expect it, if I were you I would take it now and treat it as an annual $3K vacation fund.