Decision Time: Pension Payout Annuity vs Lump Sum

[clifp]

I learned something new about pensions today. Only Congress could add something about pension calculation in monster transportation bill. The essence of the MAP-21 provision is that it allows companies to fund pension on the assumption that these historically low interest rates won't last forever. So it allows companies to fund pension based on 25 years average interest rate rather than today's low rates.

The intermediate term effect is companies can get away with putting in less money now than the were before the change. This does increase the likelyhood of running out of money, if for instance we have a prolonged period of low interest rates and mediocre or worse stock returns.

The actual percentage of funding 72-92% concerns me less than the size of the drop 5-7% in one year. If it was my money before I sent in my paperwork. I'd find the person in HR or finance that is the pension expert and and ask him for an explanation.

There is one possible explanation which would not bother me. Typically pension average the pension returns over several years 3 to 5 and they often operate on June or Sept Calendar. So it is possible that horrible market declines of 2008, early 2009 were finally reflect last year in the pension. Any other decline would give me a pause.

 

[jim584672]

I notice a big drop in the lump sum amount from 2013 to 2014.
My plan send me a statement and I noticed it says they are calculating the lump with a 7.5% discount rate. So that explains it. The higher the rate the lower the lump. That rate is absolutely absurdly high. Some Megacorp lobbyist must have weaseled this change into the law.

 

[Renewed]

Thanks for your responses.
I will call HR today Clifp. The MAP-21 interest rate adjustment took me by surprise. If I can't get a good explanation I think I will go with the lump sum as I need to make a decision in the next couple of days. I can always buy an SPIA later when the interest rates hopefully increase some. I think overall I would feel more comfortable having a guaranteed income.

I don't usually vacillate so much over decisions. When I first thought of retiring I was strongly leaning toward the pension but now that the decision time is here I have a large degree of hesitation for some reason.

 

[Cobra9777]

You really can't go wrong either way. On one hand, your pension is rather large relative to the total financial picture. So, taking the lump sum and buying a SPIA later would allow you to customize the size of the annuity more to your liking. And as I said earlier, there are some tax and other consequences (ACA, Roth conversions) that would provide more flexibility under the lump sum option. On the other hand, DB pensions are a rarity, your payout ratio is pretty good, and it covers all your current expenses. Seems like a shame to let that opportunity get away. If the market goes into a decade-long funk right when you retire, you'll be kicking yourself. Unless your funding inquiries result in major concerns, I'd stick with the annuity.

 

[RockyMtn]

You really can't go wrong either way. On one hand, your pension is rather large relative to the total financial picture. So, taking the lump sum and buying a SPIA later would allow you to customize the size of the annuity more to your liking. And as I said earlier, there are some tax and other consequences (ACA, Roth conversions) that would provide more flexibility under the lump sum option. On the other hand, DB pensions are a rarity, your payout ratio is pretty good, and it covers all your current expenses. Seems like a shame to let that opportunity get away. If the market goes into a decade-long funk right when you retire, you'll be kicking yourself. Unless your funding inquiries result in major concerns, I'd stick with the annuity.

+1 on this sound thinking. A pension that covers your current expenses is something to take advantage IMHO.

 

[Renewed]

I thought I would let everyone know my decision which was to take the annuity. I talked with the retirement center regarding the funding. They do average over a 2-3 year period. I was also told if the funding fell below 80% for the MAG-21 that could affect lump sum payouts but would not affect annuity payments- interesting.

Essentially for me the simplicity of a "paycheck" and the fact that I will be more comfortable spending more in the early years with the annuity were the deciding factors. Also over a 30-40 year period with lower returns (I used 3 and 3.5% real to plan) the annuity had a better probability of success.

Thanks again to everyone for your input. It was very helpful in making me more comfortable with my decision. Now, on to having fun.

 

[nun]

Yes, I rolled it into an IRA. I ER'd last year at 60, and fully expected to have to start some withdrawals during 2014, but I got lucky and didn't have to. The Annuity would've kicked in immediately.

Still working on an investment allocation that will accommodate the withdrawals, though.

I opened a new fund in my IRA and just put my lump sum in Vanguard Balanced Admiral Index. So now I can see if the growth in the lump sum is better or worse than the pension.

 

[meierlde]

I thought I would let everyone know my decision which was to take the annuity. I talked with the retirement center regarding the funding. They do average over a 2-3 year period. I was also told if the funding fell below 80% for the MAG-21 that could affect lump sum payouts but would not affect annuity payments- interesting.

Essentially for me the simplicity of a "paycheck" and the fact that I will be more comfortable spending more in the early years with the annuity were the deciding factors. Also over a 30-40 year period with lower returns (I used 3 and 3.5% real to plan) the annuity had a better probability of success.

Thanks again to everyone for your input. It was very helpful in making me more comfortable with my decision. Now, on to having fun.

As I understand it once a plan falls below 80% lump sum payments are stopped.

 

[clifp]

I thought I would let everyone know my decision which was to take the annuity. I talked with the retirement center regarding the funding. They do average over a 2-3 year period. I was also told if the funding fell below 80% for the MAG-21 that could affect lump sum payouts but would not affect annuity payments- interesting.

Essentially for me the simplicity of a "paycheck" and the fact that I will be more comfortable spending more in the early years with the annuity were the deciding factors. Also over a 30-40 year period with lower returns (I used 3 and 3.5% real to plan) the annuity had a better probability of success.

Thanks again to everyone for your input. It was very helpful in making me more comfortable with my decision. Now, on to having fun.

Good for you. Given your excellent financial position (well done BTW) I don't think there was a bad decision. I would have done the same.