Pension Benefits - Options

[kb56]

One of the companies that I have worked for has offered me early retirement options. I think I can roll the lump sum into my existing 401K. Anyone given this type of option, and what might be a pitfall I might not be able to see at this time? Comments please!


Pension benefit – Options


$51,430 in Pension Plan (vested)


Options:


At age 65 (in 2 yrs) $380 per month for life


Lump Sum $51,430


Single Life Annuity $341 per month for life

PS - there are Joint and Survivor Options, but since I am single, I am not considering any.

 

[MasterBlaster]

One of the companies that I have worked for has offered me early retirement options. I think I can roll the lump sum into my existing 401K. Anyone given this type of option, and what might be a pitfall I might not be able to see at this time? Comments please!


Pension benefit – Options


$51,430 in Pension Plan (vested)


Options:


At age 65 (in 2 yrs) $380 per month for life


Lump Sum $51,430


Single Life Annuity $341 per month for life

PS - there are Joint and Survivor Options, but since I am single, I am not considering any.

Well lets look at this...

$380/mo ==> $4560/year

now using our ubiquitous 16X ballpark factor to convert (nonCOLA) annual pension payments into lump sums we get (for a 65 year old person) $72960 (= 16 X $4260).

But that has to be discounted back to now. If we then, for example use a 4% discount rate then we would have a lump sum (today) of 67456.

with a 10% discount rate we get...60298

with a 19% discount rate we get 51522 (which is close to what you were offered)


So based on all that, It seems like they were a little short with you.

If your pension has a COLA in the annual payments the math just gets worse

 

[axle234]

One of the companies that I have worked for has offered me early retirement options. I think I can roll the lump sum into my existing 401K. Anyone given this type of option, and what might be a pitfall I might not be able to see at this time? Comments please!


Pension benefit – Options


$51,430 in Pension Plan (vested)


Options:


At age 65 (in 2 yrs) $380 per month for life


Lump Sum $51,430


Single Life Annuity $341 per month for life

PS - there are Joint and Survivor Options, but since I am single, I am not considering any.

I was offered the same and took the Lump Sum. My financial planner put it in a IRA.
Plus sides - you can withdraw monthly payments, it can grow, depending on where you invest it. Passed on after death.

Down Side - investment can go down,

It depends on if you have a Financial Planner, can you depend on them?
Are you Savy enough to make and handle your own financial plan. Do you want that headache.

FYI - Mine has grown about more then 12% in the last two years and I take a small withdraw each month.

 

[MasterBlaster]

Apples and Oranges

axle234:

You may indeed do better with your money in a diversified portfolio of stocks and bonds than by holding a pension.

But don't kid yourself, doing so is to take on more risk than would be holding a secure pension.

 

[axle234]

axle234:

You may indeed do better with your money in a diversified portfolio of stocks and bonds than by holding a pension.

But don't kid yourself, doing so is to take on more risk than would be holding a secure pension.

Sadly, folks here took drastic cuts in their Pensions when the companys here went under. Loosing 12K or more a year. You just need to see which Risk is best for you. Others here have Never seen their Cola or little pension increase to meet inflation.

Recent pension news - "Corporate America is finally ready to deal with a monkey on its back: massive pension obligations.
AT&T Inc on Friday said it plans to contribute a $9.5 billion stake in its wireless business to its underfunded pension plan. Earlier this week, Verizon Communications Inc moved to unload $7.5 billion in pension obligations to insurer Prudential Financial Inc."

So how safe is your Pension?

 

[MasterBlaster]

You missed the point and are changing the subject.

The issue was, given a vested pension what is the best option as for it's disbursement.

And by the way, since the Pension Protection Act of 2006 was signed into law, companies just can't squeeze out of their obligations like they once did.

 

[ziggy29]

And by the way, since the Pension Protection Act of 2006 was signed into law, companies just can't squeeze out of their obligations like they once did.

And it's no coincidence why many, as Verizon did in the quote above, are taking a big one-time hit and offloading pension liabilities to insurance companies. They can't escape the music any more and yet they are desperate to free themselves from the uncertainty of DB pension plans and their future liabilities.

In any event, more and more people are realizing that their pensions are only as strong and solvent as the companies and governments which are backing them.

 

[pb4uski]

I suggest that you go to immediateannuities.com and other sites and price out a SPIA with a $341 monthly benefit (I assume that the $341 would begin immediately). If the premium exceeds $51,430 per month then I would lean towards the annuity.

Another factor to consider would be the "diversification" of your expected post retirement cash flows between annuity type cash flows (annuities, pensions, SS, etc) and withdrawals from your retirement nestegg. So for example, if you already have a lot of pension income and SS ignoring this opportunity that would tend to favor the lump sum, if very little then it would tend to favor the annuity.

At the end of the day it is a judgement call and the right answer won't be known until you are pushing up daisies.

 

[axle234]

You missed the point and are changing the subject.

The issue was, given a vested pension what is the best option as for it's disbursement.

And by the way, since the Pension Protection Act of 2006 was signed into law, companies just can't squeeze out of their obligations like they once did.

Not trying to create a argument, just providing choices. The Baltimore Steel workers has a Vested pension. The PBGC took over the under funded pension plan and later reduce workers pensions. They even asked retirees to pay back money. In later years, I believed Verizon asked management workers to pay back money.

 

[GT1 Doug]

I agree with Ziggy, pensions are only as strong and solvent as the companies and governments which are backing them. Given your age, the current risk with the PBGC would be low so it appears the defined benefit pension is viable. Based on opinions that recommended a mix of post retirement cash flows between annuity type cash flows (annuities, pensions, SS, etc) and withdrawals from your retirement nestegg as pb4uski suggested, we attempted to get our "guaranteed" cash flows to come close to what our minimum basic expenses would be, without any undue risk. In my DW case, her pension was at risk based on her age and company finances, therefore, her lump sum was rolled over into a qualifying IRA. My pension was much less at risk, therefore, taking the pension payments made more sense. My pension is not COLA protected, so it is not as good a deal as I would like, but it appears to provide a reasonable return.

 

[rodi]

kb56. I'm in a similar position - a small pension that is being offered as a lump sum, or as an annuity starting either now or at whatever time in the future I choose.

I did what pb4uski suggested - priced out the lump sum equivalent to get the same annuity - and like your case, I concluded they were a little light on the lump sum offering. If I had to chose today - I'd take the annuity.

The idea of a 3 legged stool appeals to me. Investments, SS, and Pensionized income.

Since I don't have very much in the way of pensionized income - I'm uncomfortable converting the little that I do have into investments... That would make it a two legged stool - more risky for the long term.

Most of my coworkers have rolled the lump sum into an IRA. There is nothing preventing me from doing that in the future. I don't have to take the lump sum or the annuity/pension before age 70. Who knows, interest rates may change and my lump sum might buy a nicer annuity than what is being offered by the pension program, sometime in the future.

So for now - I'm leaving it alone. I plan to retire in 4 years at age 55... I'm just going to postpone that decision for the time being.

 

[savory]

I followed much of the same thinking shown in rodi's reply et al. I opted for the pension vs. lump sum. The only new information I can share is that there was an article I read referring that suggested those with a steady and expected income during retirement were happier in their retirement. Since Immeidateannunities demonstrated the annuity was a good deal and my other investments fit well with my plans, I took the pension. I like the three legged stool approach. BTW, most people advised that I take the lump sum.

 

[golfnut]

For whats it worth, I opted for the lump sum of $135,000 vs. a monthly $699 (100% joint). It was a difficult decision but I rolled the lump into the Vanguard Wellesey fund.

 

[kb56]

Thanks for the thoughts and ideas.
This Form is always good in this type of discussions.

 

[Backpacker]

Must be the season for lump sum buyouts. I didnt see anyone mention the company but mine was from PNC.

I am 48 and they are offering $18k buyout now or $96 a month for life. If I wait until I am 65 to draw I would receive $355 a month for life.

I calculated if I invested $18k at 7% for 17 years I'd have $59k, I ended investment at age 65 on the assumption that I'd start drawing down on investment at that point (there are lots of potential flaws in that logic I know). If I take the 96 bucks a month and live to age 90. it would = $48k. If I wait until age 65 to draw the $355 a month and live to 90 it would = $106,500.

I had not thought of the SPIA calculation - so ran those numbers too. If I invested $18k now it would pay only $71 a month so the $96 a month they are offering is actually higher. I dont know the age assumptions in either case.

I do like lodi's three legged stool approach; although $355 a month 17 years from now may buy a tank of gas I still like the idea of having some Pension funds in the mix.

My back of the napkin (1-hour or less) analysis has me leaning more toward waiting it out and taking the $355 a month in the future.

 

[Donzo]

I would lean towards the payments given how close you are to start receiving them. Only real concern is inflation on a non cola payment. The purchase power of the payments could really erode over time. Many think we have a dose of high inflation coming....but, who knows? Difficult long term decision..

 

[Midpack]

In any event, more and more people are realizing that their pensions are only as strong and solvent as the companies and governments which are backing them.

That's a big part of what drove my decision. I was fortunate in that I was offered a lump sum that was within 1% of what an annuity providing the same income benefit & terms as the pension they offered.

The other reason I took the lump sum (again presuming it's roughly equal to the pension benefit) was, it was like having my cake and eating it too. I can always buy an annuity with the lump sum money if I change my mind, whether it's a year after I retired or in 30 years, or any time in between. An annuity is a pension you buy (I'm referring to a SPIA here).

Since I'm entirely comfortable investing myself, and not knowing what might happen to the institutions backing the retirement fund or federal regulations, I took the lump sum. There are no guarantees of course, but if history is any indication, I can do better investing the money myself and then buy an annuity if need be later in life - for a lot less than now. For those concerned about losing the lump sum, you can invest as conservatively as you like, it's not a given that you'll lose ground even if the markets tank in the years ahead.

My 2¢...

 

[sailfish]

I took the lump sum and wish I took the pension annuity. It was from a major oil company, so I didn't fear a default. Even though I have done well investing it myself in Schwab, it would be nice to have a little more guaranteed cash along with soc. sec. I still have a 401K and some other savings that I also draw from. An important issue for many retirees is that that would like to leave some inheritance to the children and that makes them choose a lump sum more often IMO!

 

[Midpack]

I took the lump sum and wish I took the pension annuity. It was from a major oil company, so I didn't fear a default. Even though I have done well investing it myself in Schwab, it would be nice to have a little more guaranteed cash along with soc. sec. I still have a 401K and some other savings that I also draw from. An important issue for many retirees is that that would like to leave some inheritance to the children and that makes them choose a lump sum more often IMO!

Why can't you buy an annuity yourself?

 

[sailfish]

The rates now are so low it doesn't pay. Came to almost a 7% rate, comparing it to my lump sum. I am getting around 5 to 6% dividends and interest on stocks and bonds I bought with the lump which has also increased in value, so I can live with that.

 

[Midpack]

The rates now are so low it doesn't pay. Came to almost a 7% rate, comparing it to my lump sum. I am getting around 5 to 6% dividends and interest on stocks and bonds I bought with the lump which has also increased in value, so I can live with that.

Good reason, I wholeheartedly agree now is a historically bad time to buy and annuity if you can avoid it (not everyone can, or wants to, and that's fine).

Again, I guess I was fortunate that my MegaCorp calculated the lump sum they offered based on prevailing rates at the time, Jun 2011 when rates were horrible, so it was technically a wash in terms of value to me at the time. In fact that's another reason I chose to take the lump sum then, annuities will get relatively cheaper when rates increase (they will, the question if only when) and also as I age (simply fewer payout years for the provider).

 

[Running_Man]

And it's no coincidence why many, as Verizon did in the quote above, are taking a big one-time hit and offloading pension liabilities to insurance companies. They can't escape the music any more and yet they are desperate to free themselves from the uncertainty of DB pension plans and their future liabilities.

In any event, more and more people are realizing that their pensions are only as strong and solvent as the companies and governments which are backing them.

I do not believe the reason Verizon or any company are dumping pension because they were try to avoid future pension liabilities. It is the fact that fluctuating returns on the pension assets end up affecting the bottom line of the company. So paying the price of fully funding the pension and terminating the pension, and a terminated pension is pretty much the best pension to be in, gets the company out of the situation and avoids future liabilities for future employees by not offering a pension. For the employees in the plan, this is great, new employees not so great to me.

And one of the ways the companies can get the most money back is by offering the choice of a calculated annuity or a lump sum. If you offer both there is no requirement to offer market value for the lump sum and the company, if many choose the lump sum, has to actually to pay less to fully fund the plan if the plan has not yet reach the terminated and transferred state.

The plans that are somewhat more suspect are plans that are woefully underfunded and not yet terminated. If the company declares bankruptcy and the pension falls to government guarantees, the participants in the plan may very well see a cut in their pension, you need to figure out which group you are in and how the funding of the plan rates, which is the most important criteria to me.

 

[Rowdy]

...The plans that are somewhat more suspect are plans that are woefully underfunded and not yet terminated. If the company declares bankruptcy and the pension falls to government guarantees, the participants in the plan may very well see a cut in their pension, you need to figure out which group you are in and how the funding of the plan rates, which is the most important criteria to me.

I have a similar situation with a pension buyout; I'm opting to wait for my previous (not very healthy) employer to provide the pension later in life. Why? Because PGBC is there to back it up. I'm below the PBGC monthly guarantee amount for my age, so I really see little risk in sticking with the pension. Do forum members believe that if you are below the monthly PBGC guarantees, that the PBGC won't pay your vested pension amount on covered plans? Does anyone have FIRST hand experience of being shorted under a PBGC takeover scenario (assuming you are under the minimums)? I have heard all sorts of stories of back room deals between companies and PBGC, however, I suspect these are just stories.

Many companies are jumping on the buyout bandwagon because of recent changes that allow companies to offer lower buyout amounts than they could have previously. Here's an article from Kiplinger detailing the change: Pensions: Take a Lump Sum or Not?

 

[obgyn65]

This is what I would do also.

I suggest that you go to immediateannuities.com and other sites and price out a SPIA with a $341 monthly benefit (I assume that the $341 would begin immediately). If the premium exceeds $51,430 per month then I would lean towards the annuity.