Cash out pension?

[Curmudgeon]

OP here, with more info:
1) I don't have any cash issues - I don't need the money now, just wondering what the best bet is. (See my 'Crossroad' intro in the "Hi, I am..." forum for more info on me)
2) I limited the options to just two - payout now, or lifetime annuity at age 65 - to make the analysis simpler. In reality I can take a cash payout anytime between now and 2027, or an annuity anytime between now and 2027, and the annuity could be simple, with survivorship, 50% survivorship, etc. etc. For any option, the amount would be calculated based on the $1414/mo guarantee - it would have nothing to do with what funds the pension was invested in, etc.
3) The pension is backed by PBGC, so I assume I have no risk if the company goes insolvent.

Sounds like the most common advice is to just hang on to it. Sounds reasonable, though I'm still worried that some period of runaway inflation between now and when I die will make $1414/mo not enough to buy me a decent hamburger & beer

 

[Big_Hitter]

I don't know how unusual it is, but I can report that this how it works for the pension plan of my US Fortune 100 megacorp. If unmarried, you cannot name a beneficiary, and the only way to have benefits extend beyond your death (after starting the payouts) is to select the 10 year guaranteed payout option, which reduces your monthly benefit amount.

pretty normal for a corporate DB plan

 

[harley]

3) The pension is backed by PBGC, so I assume I have no risk if the company goes insolvent.

There's definitely risk. PBGC has a max payout, although I don't know what it is off the top of my head. But it could reduce your payment significantly, depending on the amount. Also, PBGC itself is poorly funded, and if the many underfunded pension funds in the nation default PBGC might have to really tighten the purse strings. FY 2013 PBGC PROJECTIONS REPORT

Not saying you shouldn't take the annuity, but it's not without risk either.

The current multiemployer system, covering over 10 million participants, is under severe stress, and, absent changes in current law, many plans are likely to fail. Multiple sources of information confirm the increasing pressures on multiemployer plans. Figure 1 shows a dramatic increase in severely underfunded plans over the past decade. The most recent complete data filings show almost 1.5 million people at risk in plans that are severely underfunded.6 If and when those plans fail, many participants will experience significant benefit reductions.

 

[daylatedollarshort]

OP here, with more info:
1) I don't have any cash issues - I don't need the money now, just wondering what the best bet is. (See my 'Crossroad' intro in the "Hi, I am..." forum for more info on me)
2) I limited the options to just two - payout now, or lifetime annuity at age 65 - to make the analysis simpler. In reality I can take a cash payout anytime between now and 2027, or an annuity anytime between now and 2027, and the annuity could be simple, with survivorship, 50% survivorship, etc. etc. For any option, the amount would be calculated based on the $1414/mo guarantee - it would have nothing to do with what funds the pension was invested in, etc.
3) The pension is backed by PBGC, so I assume I have no risk if the company goes insolvent.

Sounds like the most common advice is to just hang on to it. Sounds reasonable, though I'm still worried that some period of runaway inflation between now and when I die will make $1414/mo not enough to buy me a decent hamburger & beer

We have a 30 year, low interest fixed rate mortgage on our house and that somewhat offsets the pension income and some investments like 4%, 30 year Treasuries (more than the mortgage interest rate). The pension money will not go up much with inflation but then the mortgage will not go up at all, and eventually the mortgage will be paid off, so even if there is high inflation our spendable income will still go up once the mortgage is paid off.

Another reason we took the pensions as annuities is that our pension income + SS is enough to live off of in retirement. So if we both develop health issues or dementia in our old age where we can't manage our portfolio or lose it all to some nice young financial adviser who churns it all away, at least we'd have the SS + pension annuity money coming in.

The PBGC has the most issues with multi-employer plans. Our pensions are from two different employers, mostly funded, from single employer plans, and the amounts aren't near their max payouts so we're taking the chance they and the PBGC won't all go broke and we'd lose 100% of our benefits. But how secure is your pension if you take the annuity is sure something to consider these days of underfunded pension issues.

 

[Running_Man]

There's definitely risk. PBGC has a max payout, although I don't know what it is off the top of my head. But it could reduce your payment significantly, depending on the amount. Also, PBGC itself is poorly funded, and if the many underfunded pension funds in the nation default PBGC might have to really tighten the purse strings. FY 2013 PBGC PROJECTIONS REPORT

Not saying you shouldn't take the annuity, but it's not without risk either.

The risk for $1,500 a month @ Age 65 not being paid is minimal close to the same as the risk on US Treasuries, the maximum payout for PBGC at age 65 for a single person is $5,000 per month. In the current environment I cannot see the minimum being cut below that while banks have been beneficiaries of trillions of FED purchases in the last bailout and after bailing out Freddie and Fannie. In such a case where that would be at risk any investment that the cash out would have taken would be in severe trouble as well.

 

[Curmudgeon]

Ususally a pension will offer a cash in at different times, as you get older the cash in should raise for time and with interest rate changes the amount can increase as well, can’t you just defer the decision for now?

The problem here, is that if interest rates go up I expect the payout to DECREASE. The guarantee is $1414/mo; the current payout is back-calculated from that using 'some' interest rate, it looks as though they're using about 5% right now. If interest rates go up, the payout will be recalculated from $1414 - and the present value of that fixed amount is LOWER if the interest rate is higher. So, any way you look at it, rising interest rates (coupled with inflation) will erode the value of this pension - whether I take it as a future annuity or a future cashout.

 

[pb4uski]

No, the benefit will increase if interest rates increase as the plan will be getting more interest on the lump sum that they are holding for you and pass that on to you.

It is just the inverse of when interest rates go up your monthly payment goes up and that is on money you owe, so on monies you are due then when interest rates go up your monthly benefit goes up.

 

[Curmudgeon]

No, the benefit will increase if interest rates increase as the plan will be getting more interest on the lump sum that they are holding for you and pass that on to you.

It is just the inverse of when interest rates go up your monthly payment goes up and that is on money you owe, so on monies you are due then when interest rates go up your monthly benefit goes up.

No, this is incorrect, you don't understand the details of the pension they are offering. There is no "lump sum" that they are holding for me. That is what makes this pension/buyout a little different than the run-of-the mill situation. All they are "holding" for me is a guarantee that in 2027, they will pay me $1414 per month, as long as I live. Interest rates, stock market performance, inflation - doesn't matter. Nothing will change that $1414. Any other option - such as a buyout - is calculated from that.

So, the buyout is calculated using the present value of that future cash flow, assuming some interest rate. The higher interest rates go, the LOWER the present value of that fixed future cash flow.

Sounds odd, but that's what it is. It's a non-COLA, defined-benefit pension.

 

[pb4uski]

You used the term payout, which suggested the benefit (monthly payouts)... in the post above you use the term buyout, which I assume refers to the lump sum, so you introduced the confusion. I agree that if you are referring to the lump sum and interest rates increase that the lump sum will decline.

 

[Curmudgeon]

Sorry for the confusion I caused with my sloppy choice of words. Yes, I used 'cashout' , 'buyout', and 'payout' all to refer to taking a lump sum payment.

Thanks!

 

[Running_Man]

The problem here, is that if interest rates go up I expect the payout to DECREASE. The guarantee is $1414/mo; the current payout is back-calculated from that using 'some' interest rate, it looks as though they're using about 5% right now. If interest rates go up, the payout will be recalculated from $1414 - and the present value of that fixed amount is LOWER if the interest rate is higher. So, any way you look at it, rising interest rates (coupled with inflation) will erode the value of this pension - whether I take it as a future annuity or a future cashout.

It is my feeling that the continued belief by most people that interest rates are going to increase is actually unlikely. Central banks have created a situation where interest rates cannot be allowed to rise very far due to large debt builds and weak economies. And in any case with every passing year if they are using 5 percent your payout will increase faster than most other investments you can find, tax free if interest rates stay the same. And if interest rates were to rise some your payout could still increase as the time to payout is decreasing. You might be surprised by how much the payout will increase over the years.

Usually the company sets the interest rate for all calculation of payouts at the end of the prior year and uses that rate for the following year - I would estimate by November 30th your company will have the interest rate to use for 2017. If rates really were to increase in a year you could file for payout before a yearend and the interest rate was increased. Usually the rate utilized and methodology for calculating of that is in the pension papers which you have to request and should each year.

 

[nun]

I assume the interest used to calculate the payout are the IRS segmented rates.

https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates

I would also take the pension.

 

[daylatedollarshort]

It is my feeling that the continued belief by most people that interest rates are going to increase is actually unlikely.

I found the graph in the article below interesting. Interest rates, real as well as nominal, have been declining globally for several decades while economist predictions fairly consistently have predicted flat or rising rates:

The Decline in Long Term Interest Rates

 

[Turn_the_Page]

That would be very unusual in my experience. Usually it would go to a spouse or if you are not married to your kids/heirs.

My experience with a large private company is that you are given choices such as:

- Benefit for your life only
- Benefit for your life and your spouse (100%, 75%, 50% - meaning how much the benefit your spouse receives if you die first)
- Same as above, but add 5 year or 10 year guarantee period

Of course, the monthly amount changes with each option. Oh, and if you exclude your spouse, they have to provide a notarized signature that they understand this.

My pension worked out to somewhere between 6.0 and 6.5%. This really gave me pause, as that's a decent annuitized benefit. Advice from CFP and my gut said - take the lump sum. That's what I did.

 

[pb4uski]

My plan says that it provides a death benefit equal to the value of vested accrued plan benefits. For marrieds, the spouse is automatically the beneficiary but my spouse and I can agree to name another beneficiary. Unmarried plan participants can name a beneficiary. If the plan participant dies without a named beneficiary then the benefit is paid to the spouse or the estate if there is no spouse.

The PBGC has a similar structure, though I'm sure the amounts differ:

If you are married and die before you receive your first pension payment, PBGC will pay your surviving spouse a survivor benefit. Your spouse can begin this benefit as early as the date you would have been eligible to receive a benefit from PBGC.

If you are not married and die before receiving your first pension payment, PBGC may owe you money at the time of your death. You may designate a beneficiary to receive this money, which is typically a small lump-sum amount.

 

[Big_Hitter]

My plan says that it provides a death benefit equal to the value of vested accrued plan benefits. For marrieds, the spouse is automatically the beneficiary but my spouse and I can agree to name another beneficiary. Unmarried plan participants can name a beneficiary. If the plan participant dies without a named beneficiary then the benefit is paid to the spouse or the estate if there is no spouse.

The PBGC has a similar structure, though I'm sure the amounts differ:

cash balance or traditional db?

 

[Running_Man]

My plan says that it provides a death benefit equal to the value of vested accrued plan benefits. For marrieds, the spouse is automatically the beneficiary but my spouse and I can agree to name another beneficiary. Unmarried plan participants can name a beneficiary. If the plan participant dies without a named beneficiary then the benefit is paid to the spouse or the estate if there is no spouse.

The PBGC has a similar structure, though I'm sure the amounts differ:

Typically in this the “death benefit equal to value of vested accrued plan benefits” if the pension has not been claimed is the spouse receives 50% of the original pension if 50% survival is an option in claiming the benefit. Each plan of course is different but there is one option that is considered default. With multiple claiming strategies for pensions one is almost always the default in case of death of the worker for whom the pension applies.

 

[pb4uski]

cash balance or traditional db?

Traditional DB plan

 

[LuckBeALady2016]

My experience with a large private company is that you are given choices such as:

- Benefit for your life only
- Benefit for your life and your spouse (100%, 75%, 50% - meaning how much the benefit your spouse receives if you die first)
- Same as above, but add 5 year or 10 year guarantee period

Of course, the monthly amount changes with each option. Oh, and if you exclude your spouse, they have to provide a notarized signature that they understand this.

My pension worked out to somewhere between 6.0 and 6.5%. This really gave me pause, as that's a decent annuitized benefit. Advice from CFP and my gut said - take the lump sum. That's what I did.

I was in the same situation. At the same time I was given the lump-sum option, I was diagnosed with cancer. I took the lump sum.

I may survive this diagnosis and live a long life (42-75% chance of 5 year survival), but who knows? I decided to take the money and run.

 

[Running_Man]

The problem here, is that if interest rates go up I expect the payout to DECREASE. The guarantee is $1414/mo; the current payout is back-calculated from that using 'some' interest rate, it looks as though they're using about 5% right now. If interest rates go up, the payout will be recalculated from $1414 - and the present value of that fixed amount is LOWER if the interest rate is higher. So, any way you look at it, rising interest rates (coupled with inflation) will erode the value of this pension - whether I take it as a future annuity or a future cashout.

You might consider that within the next 14 months the mortality tables for lump sums must be updated which will increase the amount of the lump sum calculation by about eight percent.
https://markleyactuarial.com/2016-mortality-tables-announced/

 

[youbet]

Mega offered me a lump sum option which I thought looked attractive vs the non-cola'd annuity option (with DW as 50% survivor beneficiary).

Assuming modest investment returns and a moderate rate of inflation (with investment return being 1% greater than inflation post tax), the breakeven point was at about 15 years bringing me close to my life expectancy. If I died prematurely and DW began collecting at 50%, the breakeven point moved to far beyond her life expectancy, so the lump sum offered her considerably more protection.

This was a one time offer where Mega had set aside X dollars to buy out vested retirees who had not started their pensions yet. The lowest packages were paid first and the highest last. As it turned out, by the time they got to me (somewhere in the middle I'm guessing), they depleted the stash and I did not get the lump sum. So, I started the non-cola'd annuity at 68 yo. I've been collecting for about a year. I'd still try for the lump sum if given a do-over. Non-cola'd annuities just don't seem like very good longevity insurance........ at least not to me.

 

[Pilot2013]

My experience with a large private company is that you are given choices such as:

- Benefit for your life only
- Benefit for your life and your spouse (100%, 75%, 50% - meaning how much the benefit your spouse receives if you die first)
- Same as above, but add 5 year or 10 year guarantee period

Of course, the monthly amount changes with each option. Oh, and if you exclude your spouse, they have to provide a notarized signature that they understand this.

My pension worked out to somewhere between 6.0 and 6.5%. This really gave me pause, as that's a decent annuitized benefit. Advice from CFP and my gut said - take the lump sum. That's what I did.

Yes, that was the case for mine AFTER you start the pension. I did determine based on a timely suggestion from my friend that, as a couple of other people noted above, there would be NO transfer of the pension benefit if i were to kick the bucket BEFORE starting the pension benefit.

Apparently not as unusual as some think.

 

[Running_Man]

Mega offered me a lump sum option which I thought looked attractive vs the non-cola'd annuity option (with DW as 50% survivor beneficiary).

Assuming modest investment returns and a moderate rate of inflation (with investment return being 1% greater than inflation post tax), the breakeven point was at about 15 years bringing me close to my life expectancy. If I died prematurely and DW began collecting at 50%, the breakeven point moved to far beyond her life expectancy, so the lump sum offered her considerably more protection.

This was a one time offer where Mega had set aside X dollars to buy out vested retirees who had not started their pensions yet. The lowest packages were paid first and the highest last. As it turned out, by the time they got to me (somewhere in the middle I'm guessing), they depleted the stash and I did not get the lump sum. So, I started the non-cola'd annuity at 68 yo. I've been collecting for about a year. I'd still try for the lump sum if given a do-over. Non-cola'd annuities just don't seem like very good longevity insurance........ at least not to me.

If you took what the lump sum had offered and used that lump sump to start with 4% withdrawals, how much lower than your pension would that have been? If you then took the difference between your pension and the lump sum 4% how long would you last before the lump sum would pass the pension.

I calculate that if you assume 1) inflation of 3% per year 2) investment returns of 5 % per year 3) a pension that pays $6,000 per year and offers $100,000 lump sum in lieu of that, would be able to pay $4,000 of withdrawals adjusted for inflation for 34 years one year longer than the lump sum with 4% withdrawals.

If you change the inflation to 5% and returns to 7% the pension last for 20 years of inflation adjusted returns while the lump sum still lasts 32 years. At 2 percent inflation and 4 percent returns the pension plan last 62 years while the lump sum still lasts 32.

 

[bada bing]

I have a similar situation to the OP. I have a small DB pension with a former employer I left 15 years ago of $800/month starting at age 65, non-COLA. I am being offered a one time lump sum opportunity that expires Nov 15. The offer:

Current Age: 58
Non-COLA payout starting at age 65 = $801/month
or
Present lump sum of $91,200

I have been researching this for a couple weeks. Some things I've found:

The lump sum offer is less than the retail value of an identical annuity I could buy by at least 20%. Current best price for the annuity is $117,00 with most results $122K~$127K

When pension funds make these offers, they are required to at least comply with PPA 2006, which is what my offer is. The calculator at https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=ppa06_lumpsum_cal is handy for seeing if what you are being offered is the minimum. I had mistakenly thought I would be offered somewhere close to the retail value of the annuity. This apparently is not how it typically works.

I have several conflicting thoughts I am mulling over on the best choice for me. This involves a lot of speculation over future returns and interest rates. The following seems reasonable to me.

Interest rates are not going lower, most likely higher in the next decade. The increase is likely to be slow to very slow.

The central banks really want to foster some higher inflation. This goes hand in hand with raising interest rates. The surprising thing to me is how much trouble they have had bumping up inflation. The old adage of "Don't fight the Fed" seems to apply here though, with my belief that eventually the Fed will succeed (or perhaps over succeed) in ramping up inflation and then raising rates.

Higher inflation and higher interest rates in the future both favor taking a lump sum now and investing it in my 70-30 overall portfolio. An annuity, if desired, can be purchased more cheaply in a future higher inflation, higher interest rate environment. Balancing against that is the fact the lump sum offer I currently have is ~20% less than the retail value of the pension as an annuity. Still don't know what I should do, but I have to make up my mind in the next 2 weeks.