Commutated value of define benefit plan

[pb4uski]

The "annuity" which a pension provides is not the same as those that you would pay hefty fees on if you go in to the market and purchase directly on your own.

Yes, it is an annuity product. However, the employer is paying a good portion of the fees to the administrator (e.g. Fidelity) and it is usually on a large scale that those fees are low when spread over the number of participants. Further, Fidelity, or other administrator is not employing salespeople taking commissions - which contribute to much of the fees in other annuity products.

Actually, not all pension plans buy an annuity to cover benefits payments... many just make the benefit payments from the plan's assets. That is arguably better because an annuity from an insurer would be priced to cover overhead, taxes and profit/return on capital in addition to benefits.

 

[njhowie]

Actually, not all pension plans buy an annuity to cover benefits payments... many just make the benefit payments from the plan's assets. That is arguably better because an annuity from an insurer would be priced to cover overhead, taxes and profit/return on capital in addition to benefits.

Didn't mean to imply that they always buy an annuity...as I put annuity in quotes - whether they do actually buy or implement an annuity payout scheme.

 

[jim584672]

The lump sum will be higher with low rates. My plan seems like they are giving a haircut to the lump sum amount when I compare it to a comparable immediate annuity. I have some years to ponder the decision.

 

[friar1610]

I had no lump sum option with my Federal (military) inflation adjusted pension. It has grown nicely in the 25 years since I started receiving it. The certainty of it being there every month has been one of the reasons I was able to retire early and have had virtually no stress about income during the ensuing years. (We do have other assets/income streams but they are largely frosting on the pension cake).

I know I would have been sorely tempted if I had been offered a big payout in lieu of pension back then. Without knowing what that number would have been, it’s impossible to say which would have been better financially. But with the perspective of 25 years, I’m very glad I have the pension.

 

[Car-Guy]

The last mega corp I worked for allowed for either a lifetime annuity or a lump sum payment.... I remember for planning purposes, they had a custom calculator that would allow us to put in things like years of service, age, salary, discount rates (interest rates), etc....

A lot of folks nearing retirement (including me) were watching rates drop each quarter and trying to guess where the bottom might be... (Lower rates equaled greater payouts). Anyway, at some point many of us (me included) turned in our retirement papers and took the lump sum.... I do recall that even a fractional or small change in the discount rate each quarter, would yield a big difference in the lump sum totals... It was a little like gambling since once the new rate was published, it was locked in for the next 3 months...So if rates went up, you lost... If rates went down, you won. Anyway, by working an extra 9 to 12 months, while rates were dropping I got an extra ~1/4m out of my lump sum settlement.

When I retired, I was able to roll the lump sum over into an IRA and so far, after ten years, I haven't touched it.... RMD's will hit me soon so I'll be forced to start withdrawals and pay taxes. But that's another story.

 

[Graybeard]

If you take a lump sum I assume that the money can be rolled into a tax deferred account? If yes, then I would assume there is an RMD each year or can you just let it sit without taking any distributions?

The reason I ask is if I was offered that I would want to take the lump sum if it could be rolled into a tax deferred account with no RMDs. But assuming there are RMDs on the money, I would want the RMD to be less than my monthly pension to reduce my taxes when RMDs are required on my current tax deferred accounts (2). I would look at it as a way to reduce taxes.

 

[street]

Car-Guy, have you ever figured out what you were to get each month from the pension and see how much more you have taking the lump?

The amount of monthly payment into what you have in lump and see how many years worth there is?

 

[TheWizard]

+1 Agreed.

Also studies of retirement "happiness" indicate higher scores with those receiving traditional pensions as opposed to managing it themselves.

-gauss

This is especially true for those retirees who live on for many years.
(In year nine of retirement and still ticking...)

 

[TheWizard]

Lump sum here. Mine has just about tripled in 5 years. The one thing to keep in mind is if you take the annuity/monthly payment and if you die what happens to those funds??

Well, in theory, those funds go to pay those annuitants who live longer, beyond their life expectancy.
But yes, if you're not expecting to live to at least your present life expectancy, then an annuity/pension may not be the best idea...

 

[njhowie]

If you take a lump sum I assume that the money can be rolled into a tax deferred account? If yes, then I would assume there is an RMD each year or can you just let it sit without taking any distributions?

The reason I ask is if I was offered that I would want to take the lump sum if it could be rolled into a tax deferred account with no RMDs. But assuming there are RMDs on the money, I would want the RMD to be less than my monthly pension to reduce my taxes when RMDs are required on my current tax deferred accounts (2). I would look at it as a way to reduce taxes.

Yes - when it comes out as a lump sum, exactly like a 401k distribution you put it into a Rollover IRA and thus when the time comes you must take RMDs from it. If you don't roll to the IRA within 60 days, then also like a 401k distribution, penalty/taxes will be due.


https://www.fidelity.com/learning-center/personal-finance/retirement/lump-sum-or-monthly-pension

 

[Montecfo]

Well, in theory, those funds go to pay those annuitants who live longer, beyond their life expectancy.
But yes, if you're not expecting to live to at least your present life expectancy, then an annuity/pension may not be the best idea...

Any money you paid into it that remains undistributed would go to your heirs.

 

[njhowie]

Any money you paid into it that remains undistributed would go to your heirs.

True, if we're talking about a 401k or other defined contribution plan which remained with employer.

However, I believe that we've (or at least most of us have) been talking about company funded defined benefit plan pensions, not 401k or similar. If you choose to take monthly payments from the company funded pension, at the onset you have to choose either survivor benefits or guaranteed payment period to have anything go to heirs should you pass away early.

The valid point which street has been making, and many agree with, is that if you take the monthly payments, no survivor benefits and no guaranteed payment period, should you pass away one month later, then you and your heirs get absolutely nothing - the employer/plan keeps everything you would have received.

 

[gauss]

Lump sum is better in my view for two reasons:

1. Lump sum money will earn stronger returns in the hands of the investor, if the investor is good at, and enjoys, investing.

2. Lump sum money is heritable beyond a surviving spouse. A defined benefit pension is not.

If heritability is not interesting, don't take the lump sum. If you are not skilled at, or enjoy, investing, take the lump sum.

I took a lump sum and am glad I did.

But isn't the heritability of a lump sum vs a pension really a bit of a red herring?

If one truly wanted to leave something to others after one's passing, one could easily buy a life insurance policy or save some of one's pension payments for this purpose.

I realize that if one isn't good with financial planning and/or has trouble spending less than your full payment, then this may be problematic, but if this is the case should one really be managing a lump sum? Either way, I dont think these issues effect too many of us on the boards.

edited second/third paragraph to reflect that comments were NOT being directly personally to chassis.

 

[FIREd_2015]

I went with pension (COLA) and no survivor benefits. The lump sum option was less than 10% of my total retirement assets. I wanted some longevity insurance plus as I get older I can see my interest in managing my finances decreasing.

 

[freedom2022]

Thank you all for responding.
All points taken.

 

[chassis]

But isn't the heritability of a lump sum vs a pension really a bit of a red herring?

If one truly wanted to leave something to others after one's passing, one could easily buy a life insurance policy or save some of one's pension payments for this purpose.

I realize that if one isn't good with financial planning and/or has trouble spending less than your full payment, then this may be problematic, but if this is the case should one really be managing a lump sum? Either way, I dont think these issues effect too many of us on the boards.

edited second/third paragraph to reflect that comments were NOT being directly personally to chassis.

I don't see heritability as a red herring. A pension taken as a lump sum is heritable, period. Assuming of course it isn't spent on necessities or frittered away.

I don't see any "should" or "shouldn't" in the management of a lump sum. I hold the view that it is in the best financial (mathematical) interest of the investor to take a lump sum distribution. If the investor does not want to do manage his/her money, does not know how to invest, or is an expert at frittering away money, then the investor has a choice to make on whether or not to take the lump sum.

 

[Safire]

Can a pension be left to a disabled child as the survivor rather than a spouse (especially if the spouse is fully in agreement with it)?

 

[pb4uski]

It depends on the plan, but it is rare that would be an option. If it was an option then the monthly amount might be lower due to the joint annuitants lower age.

 

[Carlos2]

Can a pension be left to a disabled child as the survivor rather than a spouse (especially if the spouse is fully in agreement with it)?

Yes, there are some that allow this.

 

[Carlos2]

The valid point which street has been making, and many agree with, is that if you take the monthly payments, no survivor benefits and no guaranteed payment period, should you pass away one month later, then you and your heirs get absolutely nothing - the employer/plan keeps everything you would have received.[/QUOTE]


This is not accurate for all plans and certainly not true for mine. If I were to die one month after retirement and had selected the member only option, my wife would get all of MY contributions and interest. She would not get any employer contributions or monthly benefits.

All plans are not the same so we must be careful to not place blanket statements.

 

[Montecfo]

True, if we're talking about a 401k or other defined contribution plan which remained with employer.

However, I believe that we've (or at least most of us have) been talking about company funded defined benefit plan pensions, not 401k or similar. If you choose to take monthly payments from the company funded pension, at the onset you have to choose either survivor benefits or guaranteed payment period to have anything go to heirs should you pass away early.

The valid point which street has been making, and many agree with, is that if you take the monthly payments, no survivor benefits and no guaranteed payment period, should you pass away one month later, then you and your heirs get absolutely nothing - the employer/plan keeps everything you would have received.

I refer to defined benefit pension plans and funds you paid in, either as payroll contribution or purchase of additional years. Those get paid out to heirs if not amortized prior to death.

Your statement is certainly true with respect to the company funded portion, which may be 100 percent, or not.

 

[meleana]

I had a tiny pension of $29 per month. Lol! I took the $5000 lump sum and put it in my IRA.

Hubby had a $1200 per month pension. He took the $300, 000 lump sum and rolled it into an IRA.

Both of us didn’t know the exact lump sum amounts until we initiated the process to start taking our pensions. Then we were given the option of the lump sum or the monthly payment.

 

[gamboolman]

I retired from megaoil effective 1-Feb-21.

We had a choice of the NCOLA Pension or Lump Sum

We chose Lump Sum. Primary reason was that we are terrified of Inflation and since the Pension was not cost of living adjusted - we chose the Lump Sum.

Another factor for us is that I had/have lost confidence in the Sr. Mgt ability to run the company the way a Oilfield Company ought to be - but that is a highly subjective personal opinion - but it was a factor for us.

The lower the % rate the more you get in Lump Sum. It can be significant differences from Quarter to Quarter when you plan your actual retirement date.

 

[freedom2022]

Update

Hi all,

I have two options:
1. Lump sum: $380,000
2. Joint survivor monthly pension: $1,750 for my life time / $1,100 for my spouse when I pass away
The pay out or pension will start next year.

I am inclined to choose a lump sum payment. Based on family history, 80 years old is probably the realistic estimate of my life time.
I understand the overall financial plan for retirement must be planned including all assets. However, I want to limit the discussion on these two options assuming I will have enough money for retirement. I don’t plan to retire next year.
I did simple calculation:
Every year I take out $21,000 (12*$1,750) and invest the rest of the money with 3.5 % return, I will have get 24 years.
First year: take out $21,000 and invest $329,000 ($380,000 - $21,000)
Second year: take out $21,000 and invest $319,515 ($329,900(1+ 3.5%)-$21,000)
I will be 57 years old next year. So, with only 3.5% return the lump sum payout will last until I am 81 years old.
Can someone please comment on this calculation?
Did I miss anything?
Thanks in advance.

 

[badatmath]

Note my username badatmath but if you expect to get $1750 a month either way I don't see what you are gaining here. You would get $1750 a month for life doing nothing right? Is your goal to have money left for survivors?

I peeked back through this thread and was surprised some of your options. We did not get offered lump sum and were not allowed to contribute a dime so perhaps I just do not understand.

Also call me cynical but employers don't offer lump sums unless it benefits them. . .