Ratcheting up the pension buyout offer

[ziggy29]

About 3-4 years ago Megacorp #1 sent me a pension buyout offer which I quickly disregarded after a quick running of the numbers. Well, today I got another one, and while I don't think I'll bite, they are really upping the ante.

The last buyout offer I received was for a lump sum of about $25K. This one is over $48K. It's almost to the point of being tempting; I'll be 49 in two days and this pension would be for $657 a month, no COLA and with 100% surviving spouse income, starting on 11/1/2030 (at age 65).

Maybe in a couple more years they'll come back with an offer of $60-70K and it will start to really catch my eye. My off the cuff math and Excel work suggests this is about where they would really get my attention.

Anyway, my question to those of you who have been offered these in the past: Has it been your experience that if the employer is determined enough to get pension liabilities out of their books, these offers can keep coming and usually get better over time? I do like the three-legged stool approach to retirement income and this my only DB pension in that "third leg". That said, it's certainly possible to entice me with a good enough offer.

 

[Car-Guy]

I did get one of these a couple of years ago and took it (on their first attempt) so I'm not sure if the offers would better over time or not. I rolled that money it into an IRA (so no taxes yet) and have been making money on investing it.

 

[W2R]

I have a small federal pension, but the lump sum was ridiculously low and did not increase; so I can't really provide any input on your main question. Plus, it is federal so it doesn't really correspond to megacorps in the context of your question.

I can't see that this is buyout is anywhere near big enough to be worth taking the lump sum.

If you get 657/month, that would be $7884/year. Plus you get the surviving spouse benefits.

At age 65, $7884/year would be 4% of $197,100. Sure, you might make some money between now and age 65 on the $48K if you invested it. But that much? Wow. Given how high the market is right now, well, my crystal ball is foggy but I just can't see it.

Each of us has a different set of circumstances, and it might (or might not) be pretty tempting to get one's hands on that money right now. Only you can decide this and it sounds like your analysis is pretty good. In my set of circumstances, if it was me, I wouldn't touch it with a 10 foot pole. It would take much more than that to get my attention, as you mention has been the case for you.

 

[Jack_Pine]

We just got our second try from old company. We both worked there. It wen up about 20% this time.

Ours is also non-cola with survivor benefit. They would have to raise it a lot for me to consider it. I look at it like part of our base income............

 

[harley]

Has it been your experience that if the employer is determined enough to get pension liabilities out of their books, these offers can keep coming and usually get better over time?

My experience has been that the offers keep coming, but they don't get better, and sometimes get worse.

My Mega did a few RIF/buyouts, testing the water so to speak. Then they made a really big offer. I don't remember the details, but I think they got something like 10 times as many people apply to take than they expected. Of course, I was about 2 years short of being able to take it.

After that they did a RIF/buyout every year, moving through different parts of the company. The buyout became less and less, until they settled for an ongoing formula, something like 1 weeks pay/year of service, add a year to age and service, and don't let the door hit you in the ass. I took one of those as soon as I became eligible for retiree medical.

Your company could be in the testing the waters stage, and in a year or so you'll get the proverbial offer you can't refuse. Good luck.

 

[ziggy29]

At age 65, $7884/year would be 4% of $197,100. Sure, you might make some money between now and age 65 on the $48K if you invested it. But that much? Wow. Given how high the market is right now, well, my crystal ball is foggy but I just can't see it.

True, but the thing is, the 4% rule is designed to assume that it's important to "die" leaving the principal more or less untouched (give or take a bit), compared to having a pension value of zero when we both kick the bucket. So it is a little apples and oranges, and for that reason, while I think the offer isn't enticing enough yet, IMO it's not directly comparable. The pension pays more because it has no value left after we both croak. We have no heirs and most of our estate will probably go to charity.

In reality, if we "expected" to work our principal down to zero when we died (as would be the case with a DB pension which has no value once both spouses die), using $7884 a year starting when I hit 65 (with joint life expectancy of maybe 25 years, when I'd be 90 and DW would be 87) I'd expect to use a divisor closer to 6%, which would leave a lump sum of about $131K in 2030 to provide that level of income. And to get to $131K over 16 years starting from $48K, it would take a CAGR of about 6.5% (not far from what I'd expect from a 50/50 or 60/40 AA over time). So strictly by the numbers, it would come down to whether or not I felt I could get more than a 6.5% return in those 16 years.

Another thing is that if inflation spikes, my pension doesn't rise -- it's locked in at this level and it has no COLA -- but I could invest a lump sum in ways that would at least partially keep up with inflation.

The more important thing for me right now is that we have about $850K in 401K and IRA investments already, and this is our only source for a DB pension, which makes me more inclined to keep the pension. This sum rolled into an IRA would only increase our sustainable 401K/IRA withdrawal income by less than 6%. Again, that said anything is for sale at the right price, including my DB pension.

 

[rodi]

Is the lump sum getting bigger because you're getting older and time is passing?

My "portable pension" from former megacorp had an increasing lump sum - even after they froze it - based on my age. Just like the annuity option, which pays more, the older I am.

I just got mail from Motorola Solutions - they own the two pensions I have from Motorola and from General Instrument. The GI one is a non-cola'd DB plan. The new offer is for a lump sum, or to start an annuity early (before retirement age). It doesn't seem like it pays more other than age adjustments than it did before. The other pension, from Motorola (pre split in half) is a portable pension. AFAIK it did not change at all - lump sum looks like it did before this offer... it goes up a few thousand every year I get older and don't take it.

 

[ziggy29]

Is the lump sum getting bigger because you're getting older and time is passing?

Maybe in part, since it takes a larger lump sum to generate that much income when said lump sum has fewer years to compound. That said, from $25K to $48K in 3-4 years, basically almost doubling from age 45 to 49? That seems extreme.

The new offer is for a lump sum, or to start an annuity early (before retirement age)...

Yeah, I got the "immediate annuity" option as well. We don't need that income now and it would only be about $200 a month for 100% joint and survivor, so I consider that a nonstarter. I guess they are hoping people are desperate enough for even a little bit of current income.

 

[MichaelB]

One possibility: the buyout offer is based on the value of the liability on the balance sheet, and that has increased over the past 3-4 years because the long term treasury rate has fallen from over 4% to 3.1%. As interest rates fall the present value of the liability rises, which motivates businesses to offer buyouts.

Further declines in the long term rates might lead to more buyouts at even higher values. OTOH, with increasing rates there may not be any more buyouts, or they would be for less.

 

[2B]

I received a buyout offer for one of my four small non-COLAd pensions a couple of years ago. None of the others have made an offer. The offer I got was well below the cost of an equivalent SPIA so even the annuity hater in me decided to stay with the pension.