Big decision-WHEN to cash in the Pension??

[Ken11]

I would appreciate the thoughts of all the savvy folks that hang around here. This feels like a big decision for me.

After 33 years of service I’ve earned a pension from megacorp. Now I need to decide whether or not to pull the trigger on my retirement $ in 2011. Here's the deal...

I ER’d last year. However, I have not yet cashed in my retirement $. My monthly pension is calculated based a formula that reduces the payout by for each year below age 62. I’m 57. This means that, if I let it ride, month by month I pic up roughly 4.3% on my pension on an annual basis. There is no investment risk involved.

However, I’ve been intending to take the pension as a lump sum. I feel I need to do this to maintain some up-side and to protect against potential inflation (the monthly pension is non-COLA). These funds are a large percentage of my total net worth- and I have “just enough” to retire.

The monthly pension gets converted to the optional lump sum payout based on ERISA interest rates for August (published in September). So, while the age-based formula yields about 4.3% WITHIN each year the lump sum for January gets re-set based on interest rates.

The newly issued 2012 interest rates affect me as follows:
1-1-2012 my lump sum is (1.3%) lower that it would be on 12-1-2011.
6-1-2012 my lump sum is .7% higher than on 12-1-2011
12-1-2012 RIGP is 3.2% higher than on 12-1-2011.

Main points I’m considering are as follows:

I’ve always thought that any pending market correction/double dip would give me a buying opportunity. I think flexibility to react may be very valuable. I understand it will take 4-5 weeks to get a $ transfer of the lump sum into my IRA or 401K. If a real correction occurs this is not that long. However, it may be important to be able to move more quickly if desired. The market swings can be pretty abrupt these days.

Absent any wild swings…Generally speaking summer is an off market. So, it might be good to enable some buying at that time. If so, sticking with “the formula” for 6 mos only in 2012 does not yield much.

{Mod edit]The 2012 election results may also affect the market. How early this could become baked into the market is a good question.

There is some lump sum risk based on megacorp maintaining an 80% funding threshold for the retirement plan. If funding goes below 80% over half my retirement might need to be taken as a non-COLA monthly pension instead of a lump sum. I’m not convinced I would be given advanced warning of such a change. So far this has never happened. I consider it a low probability risk.

There is the possibility that 2013 ERISA rates might look attractive to me. This would require corporate bond rates (esp the long ones) to be at a lower interest rate than today. If the 2013 lump sum re-set is favorable based on lower rates in August 2012, that would be great. In addition, the age formula will continue to credit me for age yielding a 4+% positive return within each year.

I have some weeks to decide.

If I knew that rates would fall (or even hang steady) between now and August 2012 Id hang tight. I note that the LT corporate rates have already demonstrated a multi-year upward trend. However, the Fed is a wildcard and a recession looms.

Comments are welcome.

Cheers

[MasterBlaster]

If anyone tells you that they can predict interest rates then don't believe em'.

I don't have "The" answer for you as to optimal strategy. But my personal opinion is that having a reliable income stream isn't so awful. between Social Security and a pension you (perhaps) could have a base living standard. Then you could (perhaps) invest other assets more aggressively.

The other question you might ask yourself is ... If I take a lump sum, Where am I going to put my pension money so that it is (relatively) safe and gives a good return ? If you throw it away in the investment-du-Jour, then how does that affect you. What's the worst that could happen ?

These are big decisions that have big consequences when underlying rates change. So good luck choosing wisely.

[rescueme]

Quote:

Originally Posted by MasterBlaster But my personal opinion is that having a reliable income stream isn't so awful. between Social Security and a pension you (perhaps) could have a base living standard. Then you could (perhaps) invest other assets more aggressively.

I would agree to this statement.

A couple of other things from my feeble mind jump out at me.

First of all, is this pension company run/administrated, or is it in a form of an annuity where a set amount is given to a 3rd party to invest and provide benefits?

I ask this, because if it is company run (assuming it's not federal/state) you are subject to risk of the pension being eliminated or greatly curtailed if the company goes out of business in the future, during your remaining lifespan. This happened to both my BIL and FIL (different companies) and it greatly affected their income expectations (and their lifestyle). While I agree with MB as to the form of future income (and a pension is really a form of an annuity), I'm just throwing out what risks could be involved. I know you currently intend to cash out, but things have a way of changing over time.

Secondly, you say that the pension is not Cola'ed (as most private companies are not). Is there a possibililty that you could take a portion of it and consider an inflation adjusted SPIA to protect yourself a bit from future inflation during the rest of your life? I'm not one to be convinced that my investment skills could carry me for a major part of my retirement and the reason that I took my lump sum and split it between an SPIA and market investments. Just my attempt to spread the risk with the largest single amount of money I would ever receive (nope - I'm not in anybody's will).

Third, is there an SS offset (usually at age 62) where your pension is reduced with the expectation that you will be filing for early SS, and keep the payments "level"? You may be better off (as you planned) to take the lump sum and save/invest on your own, and delay SS till your FRA or later in order to ensure your income as the years go by.

Your quandary seems to be on the immediate impact of possible inflation. I'm just throwing out a couple of things to consider, beyond that single artifact. Additionally, the idea of your forecast of the future market (regardless of reason) is based upon assumptions (and hopes). IMHO, that's not a plan but just a simple hope against what may - not will, happen in the future.

Good luck to you, regardless of your decision (even keeping the pension, if that's your future wish).

[chinaco]

If the pension is solidly funded... I would not jump to the conclusion that a lump is the best approach.

Do some research and analysis and make sure you understand all the issues. You should consider your overall situation... including other assets you may already own.

Guaranteed income can reduce certain risks.

Take a look at Jim Otar's book "Unveiling the Retirement Myth". Consider your pension to be similar to a nominal SPIA.

[JmfromTx]

After swearing for years that I was going to take a lump sum I changed my mind when I was preparing to retire and took the annuity. It provides income that I could live on if I had to. It gives me peace of mind to have regular income that I can supplement with savings. When I checked on a SPIA I found I would have to invest sixty percent more than my lump amount to get the same income. I've seen arguments against this but in my mind it's a lump sum sitting in my portfolio making a lot more than my other investments right now.

[Sandhog]

Quote:

Some companies require you to take your pension plan in the form of an annuity payout; essentially monthly payments for your life. More and more companies, however, are giving you the option of taking your pension as a lump sum distribution instead of an annuity payout. You need to carefully weigh out the pros and cons of a lump sum or annuity distribution before making this decision.

Lump Sum Or Annuity - How To Compare Pension Distribution Choices - Pros And Cons

I don't have much invested in previous job in terms of annuity but I choose to let it ride and not take lump sum. You can make your own decision and know what you won't regret in worst case scenario.

[Ken11]

Quote:

Originally Posted by JmfromTx After swearing for years that I was going to take a lump sum I changed my mind when I was preparing to retire and took the annuity. It provides income that I could live on if I had to. It gives me peace of mind to have regular income that I can supplement with savings. When I checked on a SPIA I found I would have to invest sixty percent more than my lump amount to get the same income. I've seen arguments against this but in my mind it's a lump sum sitting in my portfolio making a lot more than my other investments right now.

I did check the price of an SPIA vesus my lump sum.
The SPIA seems to be at a 5-12% premium versus the lump sum -depending on the survivor terms employed.
This was a cursury price check.
IMHO- This isnt enough of a delta to offset some of the other positive attributes of a lump sum payout.

[chinaco]

Quote:

Originally Posted by Ken11 I did check the price of an SPIA vesus my lump sum. The SPIA seems to be at a 5-12% premium versus the lump sum -depending on the survivor terms employed. This was a cursury price check. IMHO- This isnt enough of a delta to offset some of the other positive attributes of a lump sum payout.

On those positive attributes. Can you describe them. How will you turn it into a better overall outcome?

IOW - what do you intend to do with the lump that will yield a superior outcome? Or what is there about your situation that requires the lump sum rather than the annuity?

There are certain reasons where it might be a good decision for some people given their circumstances... (e.g., you know you will die really young and not draw many payments from the annuity and the money could be passed on to heirs).

[Ken11]

Quote:

Originally Posted by chinaco On those positive attributes. Can you describe them. How will you turn it into a better overall outcome? IOW - what do you intend to do with the lump that will yield a superior outcome? Or what is there about your situation that requires the lump sum rather than the annuity? There are certain reasons where it might be a good decision for some people given their circumstances... (e.g., you know you will die really young and not draw many payments from the annuity and the money could be passed on to heirs).

Sure,

With the lump sum I:

Maintain upside investment potential.
Can better position to keep up with potential inflation.
Can always decide to purchase an annuity later- perhaps on more favorable terms. (Taking the monthly pension is an irreversible decision).
Have more flexibility to minimize/manage taxes
Have more flexibility to access funds when needed in special situations.
Have some chance to leave something to heirs.
Avoid any small risk of the pension defaulting/being eliminated.

My mainline plan assumes a LT return of 5.5% and inflation of 3%.
Most advisors consider these reasonable figures that reflect the new market realities. ( prior to the financial crisis most assumed 7-8% returns). Firecalc gives me a 95% success rate. re: sequence of retuns risk: Going back to work for some time over the next few years is my safety valve if things get off track early on.

[mystang52]

I'm conservative and cautious, so my view is skewed that way. Your comment about "just enough" at least implies you need this pension. If you plan to take, and invest, the lump sum what will your financial position be if the market tanks?

[Midpack]

Quote:

Originally Posted by chinaco IOW - what do you intend to do with the lump that will yield a superior outcome? Or what is there about your situation that requires the lump sum rather than the annuity?

I just took a lump sum, it was a no-brainer for me. I can always buy an annuity later, at better rates, IOW more income. Don't know when, but interest rates have to go up sooner or later, there's no room to go down from here.

For others who want to lock in now just to eliminate risk, that's fine...

[Ken11]

Quote:

Originally Posted by Midpack I just took a lump sum, it was a no-brainer for me. I can always buy an annuity later, at better rates, IOW more income. Don't know when, but interest rates have to go up sooner or later, there's no room to go down from here. For others who want to lock in now just to eliminate risk, that's fine...

This has been my thinking.
However, it does require you to obtain sufficient returns in the interum so that you can fully fund a "better" annuity when the time comes.
There is some risk in that.

[Midpack]

Quote:

Originally Posted by Ken11 This has been my thinking. However, it does require you to obtain sufficient returns in the interum so that you can fully fund a "better" annuity when the time comes. There is some risk in that.

Mine is in cash at the moment soon to be invested in Short Term Bonds - Investment Grade. To me the downside risk is small, YMMV.

[chinaco]

Quote:

Originally Posted by Midpack I just took a lump sum, it was a no-brainer for me. I can always buy an annuity later, at better rates, IOW more income. Don't know when, but interest rates have to go up sooner or later, there's no room to go down from here. For others who want to lock in now just to eliminate risk, that's fine...

My comments were intended to stimulate some thought (just in case he has not done his homework). I didn't get into the real issue. Too much for a post.

Otar does a good job of comparing and contrasting some of the options. But because his book is focused on educating financial planners about a subset of problems... he assumes one can execute effectively lifelong.

One really needs to consider all of the things that can go wrong and try to manage the risk.... some of those risks may result in financial risk... but they have little to do with finances... it is one's life long ability to deliver. Maybe the life of their spouse.

If he has not done it yet... he should do some careful study/self education and analysis that considers all of his circumstances. It seems he is highly focused on hope of the hope of maximizing an outcome and less concerned about all of his risks (what might go wrong)... including life oriented risks.

For example: if the primary manager of the funds strokes out tomorrow morning or 10 years from now and wind up in a NH bed ridden and cannot speak... is the spouse ready to take over? That type of thing. Its not like it doesn't happen. Right!

Ultimately, we (and our spouse) own the decisions we make. I hope people make good decisions... how to produce and manage life long income is a big decision.

[kaudrey]

Quote:

Originally Posted by mystang52 I'm conservative and cautious, so my view is skewed that way. Your comment about "just enough" at least implies you need this pension. If you plan to take, and invest, the lump sum what will your financial position be if the market tanks?

+1

Your comment about "just enough" is what worries me, too. You indicate you are thinking about this because of the potential for better returns, but what about the downside risks?

- DOW falls back toward 6,500 and stays there for a while
- Interest rates continue to stay low or fall even further (i.e. this doesn't solve your inflation concern).

What is your risk tolerance level? If you invest and the market falls 10%, 20%, or more (again) will you have enough to sleep at night (or even to live on)?

Kaudrey

[chinaco]

Read this....

Think about your situation. Consider the "stuff happens" possibility.

http://www.early-retirement.org/foru...dow-58089.html