Offered lump sum payout of pension

[Gallaher]

Every situation is unique. This decision can’t be made without contemplation. Remember, Mega-Corp is hoping you will take the lump because it’s best for them...not you. Do some math. One cookie now or a couple latter.
I’ve done both. In retrospect, it would have been better to always take the lump but that’s looking back a market returns not forward at unknown returns.

 

[LRDave]

This thread piqued my interest and I went back and logged onto my Megacorp pension website. The lump-sum or monthly amounts are not very big, so whatever I do will have little impact on our finances.

But here's the odd thing: In July 2017, I plugged in the lump-sum into immediateannuities and the monthly payment almost matched the monthly payment amount offered by Megacorp spot on.

Today, I plugged in the current lump-sum and the monthly payment is offered by Megacorp is almost 18% better than the immediateannuities monthly payment.

I am a year and a bit older, but otherwise I am not sure how to reconcile the difference. Is Megacorp incented to steer the selection towards the no-cola annuity? The company and the pension fund are both in very good shape compared to most Megacorps.

 

[OldShooter]

... Another couple of friends are going take the lump sum, & plan to talk to someone at the local Edward Jones office. I suspect EJ is going to see a big influx of money into their coffers. ...

Ack! Fast Eddy is not known to be a trustworthy organization. For example: https://theconservativeincomeinvestor.com/edward-jones-a-financial-reputation-that-exceeds-reality/ YMMV, of course.

They also have a reputation for pushing annuities with big fees. If someone does get an annuity pitch it would be interesting to see how Eddie's proposal compared with the company annuity that they cashed out.

Regardless of where you and your friends move money, always run a BrokerCheck (https://brokercheck.finra.org/), looking especially critically at any customer disputes.

 

[marko]

Every situation is unique. This decision can’t be made without contemplation. Remember, Mega-Corp is hoping you will take the lump because it’s best for them...not you. Do some math. One cookie now or a couple latter.
I’ve done both. In retrospect, it would have been better to always take the lump but that’s looking back at market returns not forward at unknown returns.

Market performance is one side of the scale. "What will Megacorp be doing (or even be around)?" 10, 15 or 20 years later is the other side of the question.

I'll take the guarantee of having it in my own hands.

 

[Big_Hitter]

I am a year and a bit older, but otherwise I am not sure how to reconcile the difference. Is Megacorp incented to steer the selection towards the no-cola annuity? The company and the pension fund are both in very good shape compared to most Megacorps.

generally lump sums are based off of your accrued benefit, age and prevailing interest rates

we had a big drop in interest rates this year and lump sums paid in 2019 are generally using interest rates from late 2018

 

[jollystomper]

Had I the temperament for being a more aggressive AA investor, I would have considered taking my pension as a lump sum. But being a more moderate/conservative investor, my choice was to have a steady stream of income other than SS, in addition to my savings and investments, for balance purposes. I worry less about Megacorp being around that market fluctuations.

If DW and I both get hit by the proverbial bus anytime soon, there is still plenty for our kids to inherit. Again, just my personal tradeoff decision that does not apply to everyone.

 

[marko]

I think I'd sleep better if my pension was in the hands of a large, solid, established company like Sears, Blockbuster, Circuit City, Kodak, American Motors, Polaroid, USAir, KMart and the like.

Otherwise, I'd take the money and run.

 

[brett]

Not to mention Murray Coal (or it's subs) or Teamsters Central States Plan or some of the other multi employer DB plans.

This is a very different decision if your pension is larger, your employer solid, and the DB plan fully funded. The decision goes well beyond the financials of annuities, taxes, etc. There is no right answer for every person in this situation. Very much depends on personal circumstances and finances.

 

[pb4uski]

Excellent decision.

Congrats!

Isn't congratulations a bit premature since the OP didn't include any numbers?

For all we know he got 10c on the dollar.

IME these offers are typically 70c on the dollar compared to the premium of a SPIA with a similar monthly benefit. When I got mine a couple of years ago I had decided to reject the lump sum and happened to chat with a former colleague at megacorp who also was megacorp's retired pension actuary and he agreed that the lump sum offer was a ripoff.

 

[pb4uski]

.... the insurer in most cases come out ahead at end of life.

If you're suggesting that issuers make their money on your dying, then you're absolutely wrong. I spent a few years as the CAO of our annuity line of business and our mortality gains and losses were negligible.... mortality is not where annuity issuers make their money... where they make their money is on the interest spread (what they earn exceeds what they implicitly or explicitly credit to the annuity policy).

 

[pb4uski]

.... Not sure how it all works but I do know that there were about 50-100 folks like me who chose to take large pay-outs from the fully funded fund at the time...maybe we cleaned it out?

Probably not, usually the lump sum offer is less than the reserve (pv of future benefits for those in payout) so the pension plan often benefits from each lump sum accepted.... otherwise they would not do it.

Its funny that so many people think the lump sum is a great deal... if it was a bad deal for the plan do you think the plan would offer it?

 

[Big_Hitter]

When I got mine a couple of years ago I had decided to reject the lump sum and happened to chat with a former colleague at megacorp who also was megacorp's retired pension actuary and he agreed that the lump sum offer was a ripoff.

you guys had an inhouse actuary? must have been a very large company or an insurance/consulting firm

 

[pb4uski]

insurance company.... he also did actuarial work associated with our pension products... then he accepted an early out, started his own pension actuarial consultancy and continued to serve the pension plan until he fully retired a number of years later... it was a sweet gig for him.

 

[CardsFan]

If you're suggesting that issuers make their money on your dying, then you're absolutely wrong. I spent a few years as the CAO of our annuity line of business and our mortality gains and losses were negligible.... mortality is not where annuity issuers make their money... where they make their money is on the interest spread (what they earn exceeds what they implicitly or explicitly credit to the annuity policy).

Well, that makes sense, assuming the company has a large and varied participant pool. In some respects, no different than paying a commission for someone to handle all the details. And, I would presume, they can get better rates than an individual based on volume alone (though I am sure they also have folks to really vet the investments, as well)

 

[pb4uski]

Yes, mortality is pretty predictable for thousands of lives... we saw the same thing on the life insurance side... mortality gains and losses were negligible.

 

[Lienlord]

Had a small pension from a previous company. I left there 14 years ago, but they wouldn't let you do anything with it until I was 55. Well, now I am so I checked my options. Lump sum value is $25K or annuity of $91/mo. J&S annuity today. If I wait 10 years, lump sum is $37K or annuity of $183/mo. J&S.
I took the $25K lump sum rollover option today to my self-directed 401K. I think I can do better than those returns in a real estate investment.

 

[badatmath]

If my MC offered it I would need actuaries in there proving it was not a rip off. They are not known for their benevolence. But anyway as I have no heirs I would take the monthly payments.

 

[MI-Roger]

I selected the lump sum when I announced my retirement in late Fall of 2012. I had no confidence my soon to be former employer would exist for the rest of my life, and they had already reformatted/reduced pension calculations 3 or 4 times prior to my departure. Plus, we already had a Financial Planner with whom we had been working for 20 years.

One caveat! Ask how the check will be sent to you. Mine arrived as a folded over and sealed sheet of heavy paper stock, just like motor oil rebates. Only one step better than an open post card.

I do not remember being offered the option of paying for an express delivery requiring signature. I would have selected this option if offered since the check approached 7 figures in value.

 

[CardsFan]

I selected the lump sum when I announced my retirement in late Fall of 2012. I had no confidence my soon to be former employer would exist for the rest of my life, and they had already reformatted/reduced pension calculations 3 or 4 times prior to my departure. Plus, we already had a Financial Planner with whom we had been working for 20 years.

One caveat! Ask how the check will be sent to you. Mine arrived as a folded over and sealed sheet of heavy paper stock, just like motor oil rebates. Only one step better than an open post card.

I do not remember being offered the option of paying for an express delivery requiring signature. I would have selected this option if offered since the check approached 7 figures in value.

Better would be to do a direct rollover to an IRA (if available). No chance of a lost check, missing the 60-day deadline, etc.

 

[street]

If you're suggesting that issuers make their money on your dying, then you're absolutely wrong. I spent a few years as the CAO of our annuity line of business and our mortality gains and losses were negligible.... mortality is not where annuity issuers make their money... where they make their money is on the interest spread (what they earn exceeds what they implicitly or explicitly credit to the annuity policy).

I know a FA very good and yes the Financial Companies do acquire the money from these accounts if death occurs. Not here to argue with you but there is money left on the table from death in a lot of these cases. The guy is not a person that would be untruthful. So, that is one more reason I want the LS and the costs of owning an annuity costs more then I want to pay the Financial Company. They are rich enough I'm not going to pay their way.

 

[OldShooter]

... Not here to argue with you but there is money left on the table from death in a lot of these cases. ...

Of course. But in other cases the beneficiary lasts longer than the insurance company expected. It nets out. That is what @pb4 is trying to tell you. Of course he is only an expert; he is not some random FA who obviously would know more.

 

[jazz4cash]

The 417(e) interest rate used to calculate a lump sum is mandated by ERISA. A private pension Plan can offer more but not less. There are some options that could affect the amount offered in a minor way.

Every case is different. Our plan offered 100% of relative value for single life but 107% for 65% survivor benefit. I believe it was subsidized by Megacorp. There was no 100% survivor option.

I always figured the smart play would be take the lump and put into something ultra safe and buy the annuity when rates are peaking.

Some of us decide based on comfort level and management skills of a spouse.

 

[MI-Roger]

Better would be to do a direct rollover to an IRA (if available). No chance of a lost check, missing the 60-day deadline, etc.

Yes, the recipient MUST have a plan in place when they select the Lump Sum option to avoid unpleasant tax consequences. A direct roll-over (not offered by my employer) is one such plan.

 

[sheldon cornped]

Retired 5 years ago with many options for pension payout. Lump sum was $560k. Chose monthly pension payout that equals $50k/yr. with 100% for surviving spouse. Quick and dirty after 5 years is I have collected right at $250k, almost half of lump sum (w/o gains on hypothetical investmt). It was a no brainer for us. It has enabled not touching investments, even whilst putting child thru top tier University.

 

[Alexi]

Better would be to do a direct rollover to an IRA (if available). No chance of a lost check, missing the 60-day deadline, etc.

That's what I did.