Pension plan terminated

[Omega]

I know this has been asked dozens of times, but I can't help myself! My pension plan has been terminated and I've been offered a one-time, lump sum buyout of $233,256 for my single life annuity of $1593.24/mo starting at age 65. I am 57 with about 600K in other retirement accounts and will collect SS. Would you take the lump or keep the annuity?

 

[HI Bill]

Is the payout adjusted for inflation? If you took the lump sum and invested it for the next 8 years, it would likely double in value, and 4% of the new value would be approximately the same as they are offering you now. Personally, I’d take the lump sum and if possible, roll it over to an IRA. That would give you some withdrawal flexibility.

 

[Omega]

I don't know if it's adjusted for inflation.

 

[iloveyoga]

If my pension plan was being terminated, I would certainly take the lump sum. Usually you can do an IRA or 401(k) rollover. There are government rules on how the lump sum is calculated.

 

[Palmtree]

The general advice is to take the lump sum it you want to invest it yourself, or buy an annuity to replace what you had. I compared your payout (+/-$1600) to what you could purchase with the $233,000 at immediateannuities.com. For a male living in PA, it gave a payout of $1477.

 

[pb4uski]

I know this has been asked dozens of times, but I can't help myself! My pension plan has been terminated and I've been offered a one-time, lump sum buyout of $233,256 for my single life annuity of $1593.24/mo starting at age 65. I am 57 with about 600K in other retirement accounts and will collect SS. Would you take the lump or keep the annuity?

I would keep the pension to have diversification of income sources.

According to immediateannuities.com $233,256 invested by a 57 yo male in PA in a 8 year deferred annuity with payments for life beginning at 65 would pay $1,478.... suggesting that the value of the lump sum is more like $251,443.

https://www.immediateannuities.com

 

[Omega]

I am a woman btw

 

[Omega]

I would keep the pension to have diversification of income sources.

According to immediateannuities.com $233,256 invested by a 57 yo male in PA in a 8 year deferred annuity with payments for life beginning at 65 would pay $1,478.... suggesting that the value of the lump sum is more like $251,443.

https://www.immediateannuities.com

I thought the valuation was a low as well

 

[street]

Is the payout adjusted for inflation? If you took the lump sum and invested it for the next 8 years, it would likely double in value, and 4% of the new value would be approximately the same as they are offering you now. Personally, I’d take the lump sum and if possible, roll it over to an IRA. That would give you some withdrawal flexibility.

X2 and you are in control of your money to invest.

 

[Jerry1]

I would take the annuity if I could get comfortable with the security of the annuity. Is it held by a reputable company? Is it guaranteed as a pension by the Pension Benefit Guaranty Corporation (PBGC)? Having the annuity is a risk diversification play. It’s nice to know you’ll have that much coming in for the rest of your life even if it’s not inflation adjusted. It will spread your risk and allow you to possibly hold off taking SS (another annuity) until later (70?).

FWIW, that’s what I would do and in fact, that’s what I did when I left my job. A lot of people take the lump sum and I hope it works out for them. In retrospect, it probably would have been better to have taken the lump sum given the market these past couple years. However, no one knows the future and I felt better taking the annuity/pension (mine is a pension).

When DW and I are both on SS, my pension plus our SS payments will meet our base budget and then some, meaning a very low withdrawal rate for the little bit more we’ll need to round out our total spending.

 

[pb4uski]

I would keep the pension to have diversification of income sources.

According to immediateannuities.com $233,256 invested by a 57 yo female in PA in a 8 year deferred annuity with payments for life beginning at 65 would pay $1,387[-]1,478[/-].... suggesting that the value of the lump sum is more like $268,068[-]251,443[/-].

https://www.immediateannuities.com

I am a woman btw

My bad... your profile said gender undisclosed so I made a guess and had a 50% chance of being wrong. See the changes to the numbers above... make the pension more appealing.

I'm not surprised, lump sums are usually a raw deal and not in the pensioner's best interest.

 

[Midpack]

pb4uski gave you the best guidance BUT you have to ask if it’s inflation adjusted, probably not but that would make a HUGE difference. And who is paying the annuity (not your employer I assume), so you can check their financial status. An annuity isn’t worth much if they go belly up - NOT likely but I’d want to know before making the choice. Best of luck.

 

[CRLLS]

Have you considered your legacy? If it is important to you, then I would suggest you look at a rollover. Typically, a pension stops when you die. No value is left. It could be tomorrow (I hope not) or in 40 years. A rollover will still have something to pass on.

There is a SORR risk in doing it yourself where keeping the pension does not have that. Everyone's situation and comfort level is different.

 

[statsman]

I'm not surprised, lump sums are usually a raw deal and not in the pensioner's best interest.

Tell me about it. My former Megacorp offered a pension buyout that was roughly half of what it would have cost for an annuity. Likely one of the worse deals I have seen posted on this forum. I stuck with the pension that I started 5 years later. If I could have received at least 90% of annuity value, I would have gone with the lump sum.

As it is, they shut down the pension at the end of 2021 and moved the funding to an annuity for all pension owners. So, instead of being covered fully (in my case) by PBGC, it is covered up to $250K in terms of a replacement annuity should the current insurance company default. For now, that coverage is insufficient to replace my current pension/annuity fully should the worst happen. Sigh.

 

[Omega]

pb4uski gave you the best guidance BUT you have to ask if it’s inflation adjusted, probably not but that would make a HUGE difference. And who is paying the annuity (not your employer I assume), so you can check their financial status. An annuity isn’t worth much if they go belly up - NOT likely but I’d want to know before making the choice. Best of luck.

It is not adjusted for inflation. I am not familiar with the company that will administer the annuity, and I’m not sure if I should mention the name here. I didn’t expect to have to make this decision so soon!

 

[Omega]

Have you considered your legacy? If it is important to you, then I would suggest you look at a rollover. Typically, a pension stops when you die. No value is left. It could be tomorrow (I hope not) or in 40 years. A rollover will still have something to pass on.

There is a SORR risk in doing it yourself where keeping the pension does not have that. Everyone's situation and comfort level is different.

This is definitely something I am considering. What is SORR?

 

[Omega]

My bad... your profile said gender undisclosed so I made a guess and had a 50% chance of being wrong. See the changes to the numbers above... make the pension more appealing.

I'm not surprised, lump sums are usually a raw deal and not in the pensioner's best interest.

Thanks for the numbers! Makes sense that it’s even less considering women have a longer life expectancy.

 

[Katiek]

This is definitely something I am considering. What is SORR?

Sequence of returns risk - the risk that a portfolio suffers losses early in retirement and it's difficult to recover.

 

[CRLLS]

This is definitely something I am considering. What is SORR?

Sequence Of Return Risk. An "average" rate of returns is well accepted and used for planning purposes. If during the early years of withdrawals, the markets don't do so well, it can shorten the number of years that the investment will support.

 

[Graybeard]

This is definitely something I am considering. What is SORR?

Sequence of returns risk.

"This is the risk that comes from the order in which your investment returns occur. To put it another way, sequence of return risk is the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of a portfolio."

Read this https://www.investopedia.com/terms/s/sequence-risk.asp

 

[chassis]

Take the lump sum and put it into an IRA. I did this.

You control your money in an IRA. If any money is left, it is heritable to your beneficiaries, if any. A pension is not heritable.

 

[Katiek]

There's no one right answer, a lot depends on your circumstances and preferences. It seems like the annuity is a better value than what you could purchase for this amount now. From a security standpoint, it's nice to have some steady income that you won't outlive, but inflation will take a bite of it.



Taking the lump sum can be a good choice if you are comfortable investing it and are concerned about having something left over for heirs. You may well be able to make more in the long run, and know your estate will get something if you die early. But you have the responsibility of investing it and there is a chance it could go down.


Personally I'd look at my overall budget and spending and determine if your other savings and SS are enough. If so, you might want to take more risk and take the lump sum. But if the annuity buys you more peace of mind, that's ok too.

 

[bada bing]

Three random thoughts from someone who has gone through similar decisions in the past a few times (I vested in 4 different private pension plans during my career):

1. When comparing your pension verses a private annuity, consider that private annuity payouts are based on the prevailing interest rates at the time the annuity is opened. Very likely, your current offer is also based on current rates and would be locked in at the time you elect it. There is a potential arbitrage available if you wanted an annuity, but not necessarily the current pension. Interest rates are likely to be higher in 8 years. It is possible you could take the lump sum (enhanced by current low interest rates), invest it for 8 years, and then buy a private annuity at a (much) better interest rate later. Important consideration for a fixed annuity without inflation adjustment. This is what I would likely do if I was set on taking an annuity.

2. Probably not likely, but is the lump sum a one time offer ? Some pensions offer open ended lump sum elections. In some cases there is a defined rate of return on the principal held. Not likely, but important to understand all the different pieces.

3. Remember to consider that there is a bond-like aspect to having a pension that can justify changing investment allocations outside of the pension. This is an aspect that you seldom see mentioned by the "invest it yourself for greater returns" crowd on pensions and especially early SS. Say you normally run a 60-40 stock/bond allocation on your retirement savings while covered by a pension. If you take the pension lump sum and invest in the same 60-40 allocation, you have effectively increased your overall equity position risk. Nothing wrong with that, just be aware of it and make appropriate adjustments in your modelling. If 60-40 was "right" for you while covered by a pension, then maybe 50-50 would be an equivalent risk position after adding the lump sum to your portfolio.

 

[Running_Man]

Take the lump sum and put it into an IRA. I did this.

You control your money in an IRA. If any money is left, it is heritable to your beneficiaries, if any. A pension is not heritable.

The pension would return a greater than 4% payout on the $230,000, allowing your overall portfolio to grow each and every year. Year one is about 11K greater. Assuming a 3% inflation rate by age 87 $175,000 would be in the porfolio from savings but not accounting for any market gains, average 5% per year on the savings and portfolio at age 87 would be $335,000. While the lump sum would be between 12k and 980K according to Firecalc

 

[Sunset]

I know this has been asked dozens of times, but I can't help myself! My pension plan has been terminated and I've been offered a one-time, lump sum buyout of $233,256 for my single life annuity of $1593.24/mo starting at age 65. I am 57 with about 600K in other retirement accounts and will collect SS. Would you take the lump or keep the annuity?

Women tend to live a long time, so that alone says taking the generous annuity over a lump sum is the best course.
The folks that suggest taking the lumpsum for your heirs are counting on early death so some is left over.

They are offering to buy out the annuity to save money, which again suggests they realized the annuity will cost more. They are preying on people wanting the marshmallow (money) now, rather than having restraint.