Help me think about lump sum vs pension

[urn2bfree]

Wife is able to collect a small monthly pension starting next year- about $1000 a month….(NO COLA) - this would be gravy…not money she needs right now…we have lots of other savings…
alternatively they are now offering her a lump sum of around $91000 which she can park tax free into her IRA…(she won’t have to RMD for over a decade)
Clearly the comparison to an immediate annuity favors the pension. A similar $1000 a month annuity costs almost 3x as much as the lump sum on offer…
- but would she do better than $1000 a month not adjusted for inflation by investing the lump sum in say a Real Estate Syndicate? Obviously $12000 a year return on $90000 is a nice guaranteed return, but every year that $1000 will be eaten away by inflation- and the return will shrink…also she has to pay taxes on it before maybe investing the $1000 in something else, which also will have tax drag.
Please - Can you smart people on here help me think this through?

 

[RobbieB]

I'd take the grand a month. Unless the source is unsure.

 

[Teacher Terry]

Pension for me.

 

[target2019]

Take the pension. It can fund your Roth each year. Or you can spend half and invest half. And so on...

 

[bada bing]

No brainer - take the pension. $12k/yr on $90K lump is over a 13% payout rate. That is so skewed it looks like a mistake. Take the pension and offer them $90K to double it.

 

[ImThinkin2019]

We have pensions from United Technologies. Over the years, they sent us offers like you got. Every time we did the math we found the lump sum offer was much in favor of UTC, not us. I guess that should not be a surprise.

Agree with everyone else - don't take the lump sum.

 

[Dtail]

Take the pension. There is a reason for their offer......

 

[DrRoy]

Pension.

 

[Aerides]

Pension! Treat it like the gravy that it is and have fun.

 

[pb4uski]

Take the pension. There is a reason for their offer......

+1, especially if a SPIA would cost 3x the lump sum... pension plans offer lump sums so participants eyes bug out when they see that big ol number and jump on it without thinking it through... but more often than not the lump sum is a rip-off compared to the fair value of a SPIA with the same monthly benefit. For each lump sum the pension plan books a gain... like if you get to settle a $100 liability for $75.

BTW, the tIRA is tax-deferred, not tax-free.

 

[skibum]

I had a similar offer a few years ago. I considered the SPIA and other factors already noted, and leaned toward the pension. Nice returns on the $90k invested would favor the buyout of course. However, in the future scenario of nice returns, my portfolio would grow substantially and the additional $90k would be a small contributor.

Taking the pension is insurance against poor returns and living to a ripe old age, which fits nicely into my financial plan. A similar hedge is deferring SS, which insures against poor returns, long life, and also inflation. I hope to live a long and healthy life and recoup the return on these deferrals, if not, well I suppose I won't be around to regret the choices.

 

[finnski1]

Have to go with the consensus given your info. Take the monthly.

 

[RetiredHappy]

Definitely take the $1K a month pension, it is a superb return on a $91K lump sum. Guaranteed high returns is a no-brainer.

 

[Midpack]

No brainer - take the pension. $12k/yr on $90K lump is over a 13% payout rate. That is so skewed it looks like a mistake. Take the pension and offer them $90K to double it.

I've never seen a lump sum v pension choice so lopsided. But based on what the OP has posted the pension is a no brainer unless there's some reason to doubt the longevity of the financial source.

 

[chassis]

Wife is able to collect a small monthly pension starting next year- about $1000 a month….(NO COLA) - this would be gravy…not money she needs right now…we have lots of other savings…
alternatively they are now offering her a lump sum of around $91000 which she can park tax free into her IRA…(she won’t have to RMD for over a decade)
Clearly the comparison to an immediate annuity favors the pension. A similar $1000 a month annuity costs almost 3x as much as the lump sum on offer…
- but would she do better than $1000 a month not adjusted for inflation by investing the lump sum in say a Real Estate Syndicate? Obviously $12000 a year return on $90000 is a nice guaranteed return, but every year that $1000 will be eaten away by inflation- and the return will shrink…also she has to pay taxes on it before maybe investing the $1000 in something else, which also will have tax drag.
Please - Can you smart people on here help me think this through?

Take the lump sum. You/she don’t need the money now. You can earn a far better return on it than the equivalent annuity, which is letting the pension administrator keep the money.

The “annuity” that you build for yourself though your own investing choices will deliver more wealth to you than letting the administrator handle it.

 

[Major Tom]

I've never seen a lump sum v pension choice so lopsided. But based on what the OP has posted the pension is a no brainer unless there's some reason to doubt the longevity of the financial source.

This is exactly what I thought. Is the pension rock solid? Or, to be more precise, in your estimation, is it highly likely to be around long enough for you to get more than 91K in payouts? (i.e. more than 7 1/2 years?)

 

[gauss]

Take the pension -- sleep well at night! Especially if you have other market based investments.

Sure you might have a more than 50:50 chance to have a larger net worth when you die if you take the lump sum, but is this really what is important?

If you have already won the game (ie have enough) why keep playing with everything still on the table?

Having a pension AND having market based investments is like "having your cake and eating it too" -- the best of both worlds -- assuming you are not trying to maximize your final net worth.

If you haven't read Taleb's "Black Swan" book yet, you might want to.


Remember:

"The best is the enemy of the good".

-gauss

 

[gauss]

This is exactly what I thought. Is the pension rock solid? Or, to be more precise, in your estimation, is it highly likely to be around long enough for you to get more than 91K in payouts? (i.e. more than 7 1/2 years?)

Perhaps even more important is to understand how much of OP's pension would be "guaranteed" under the current PBGC laws.

 

[1242Vintage]

At retirement my wife had a very similar choice at similar amounts. At 57 y.o. she took the pension. Easy decision.

 

[pb4uski]

I've never seen a lump sum v pension choice so lopsided. But based on what the OP has posted the pension is a no brainer unless there's some reason to doubt the longevity of the financial source.

Or some reason to doubt the longevity of the pensioner.

 

[pb4uski]

Perhaps even more important is to understand how much of OP's pension would be "guaranteed" under the current PBGC laws.

If it is covered then it is far below the PBGC limits and would be fully covered.

 

[Gallaher]

My former employer, Bayer, offered me $150k 10 years ago for a similar pension. Even then the math was dubious. I kept the pension.
In retrospect, I should have taken the lump and put it in S&P 500.
How can you really know?
Glad I still have the pension.

 

[chassis]

My former employer, Bayer, offered me $150k 10 years ago for a similar pension. Even then the math was dubious. I kept the pension.
In retrospect, I should have taken the lump and put it in S&P 500.
How can you really know?
Glad I still have the pension.

The way one can “really know” is to do one’s own annuity and present value calculations on the pension stream vs yours and the company’s present values (their lump sum offer).

 

[Gallaher]

The way one can “really know” is to do one’s own annuity and present value calculations on the pension stream vs yours and the company’s present values (their lump sum offer).

You miss the point....your algorithm offers results after the fact.
My point is you can’t know the future.
To estimate the future requires assumptions about the future.

 

[Koolau]

Wife is able to collect a small monthly pension starting next year- about $1000 a month….(NO COLA) - this would be gravy…not money she needs right now…we have lots of other savings…
alternatively they are now offering her a lump sum of around $91000 which she can park tax free into her IRA…(she won’t have to RMD for over a decade)
Clearly the comparison to an immediate annuity favors the pension. A similar $1000 a month annuity costs almost 3x as much as the lump sum on offer…
- but would she do better than $1000 a month not adjusted for inflation by investing the lump sum in say a Real Estate Syndicate? Obviously $12000 a year return on $90000 is a nice guaranteed return, but every year that $1000 will be eaten away by inflation- and the return will shrink…also she has to pay taxes on it before maybe investing the $1000 in something else, which also will have tax drag.
Please - Can you smart people on here help me think this through?

I agree with most here - take the pension. No way to know if you could beat it with an investment of the $91K (I doubt that I could.) Don't sweat the taxes or other issues. Take the money and spend it, invest it, look at it or stick in under the mattress. I'm guessing you'll come out ahead. No expert and never had to make this decision myself so YMMV.