Offered lump sum payout of pension

[ziggy29]

The monthly or lump sum decision involves many factors. One I did not see mentioned is that by taking the lump sum you assume the risk of managing that money, and as one ages the risk of being scammed out of it increases. By contrast, taking monthly payments means someone else has the management risk. Monthly payments are more difficult to scam from an older person because the scam needs to be repeated monthly.

There are other factors, for sure. One factor for me in turning down the buyout offer was that I like the three legged stool concept of retirement and this pension is the only (small) DB pension leg we have. Secondly, they offered about $31K as a buyout at a time when an SPIA with similar terms would have cost $89K.

 

[pb4uski]

... Secondly, they offered about $31K as a buyout at a time when an SPIA with similar terms would have cost $89K.

Wow... and I thought my former employer was cheap when they offered me a lump sum of 70% of what it would have cost to buy a SPIA with the same pension benefit!

 

[ziggy29]

Wow... and I thought my former employer was cheap when they offered me a lump sum of 70% of what it would have cost to buy a SPIA with the same pension benefit!

Yeah, when I did my homework it was pretty insulting. I suspect they are banking on the idea that many people won't.

 

[2retireearly]

For a quick test. Take the defined monthly amount. Multiply it by what you consider your life expectancy is in months...see what the difference is. Best thing is to find a single prem immediate annuity, calculator, online,, and see what the present value is as a lump sum of your monthly payouts, with whatever today's interests are. Somewhere between 1 and 4 percent. I have never heard of these lump sums being a good value for your monthly stream of guar payouts. One should only take if they don't think they have an average life expectancy, or if they need the money. Or if you think the company might disappear ( tho legally they still owe you this pension). The reason they are offering you this, is they want to make a good deal..for them!

 

[Rightcoaster]

This is interesting

I was just downsized on Friday -
I am 59yo.

Pension was frozen a year ago -

Offer ls $321,375
Monthly $1,765 life non cola -
(I can wait and let it grow a bit, until 65 ($2,775)- but not sure
the lump sum will be back on the table.)

Immediate annuity site - $1488 mo

About $277 a month difference - 15ish%
Yet the paper work states 102% relative value to single life annuity
where do these numbers come from ?

I read elsewhere online that single company pensions are safe.
Yet reading this site, I get worried.

 

[2retireearly]

I was just downsized on Friday -
I am 59yo.

Pension was frozen a year ago -

Offer ls $321,375
Monthly $1,765 life non cola -
(I can wait and let it grow a bit, until 65 ($2,775)- but not sure
the lump sum will be back on the table.)

Immediate annuity site - $1488 mo

About $277 a month difference - 15ish%
Yet the paper work states 102% relative value to single life annuity
where do these numbers come from ?

I read elsewhere online that single company pensions are safe.
Yet reading this site, I get worried.

When the pension was set up they used a calculation of age at that time, interest rate at that time and life expectancy at that time,and a lump sum amount of money then (either you paid in, they paid in, or both). And from that they got the 1765, based on the age of 59. So now you put in the lump they are offering you, used a life exp a calculator on an insurance company , and some interest rate, and got a bigger payout, for age 59. But your life exp now at 59 is greater than it was, at say, 25, when the pension amt was first calculated...OK..but what you care about is if its a good deal. Let's say today at 59 you think you might live into your 90s. Using no interest rate..just the 1765 times all those months, you get 741300. But..if one takes that lump sum they are offering and thinks they can find a better investment, to get them up to what they think their Life Exp is..then go for it..if you only live 10 more years the lump sum is a great thing...if you live 35...its not. unless you can put it int a great investment. Many people who take these lump sums, need the money, and don't reinvest it..

 

[Rightcoaster]

thanks

When the pension was set up they used a calculation of age at that time, interest rate at that time and life expectancy at that time,and a lump sum amount of money then (either you paid in, they paid in, or both). And from that they got the 1765, based on the age of 59. So now you put in the lump they are offering you, used a life exp a calculator on an insurance company , and some interest rate, and got a bigger payout, for age 59. But your life exp now at 59 is greater than it was, at say, 25, when the pension amt was first calculated...OK..but what you care about is if its a good deal. Let's say today at 59 you think you might live into your 90s. Using no interest rate..just the 1765 times all those months, you get 741300. But..if one takes that lump sum they are offering and thinks they can find a better investment, to get them up to what they think their Life Exp is..then go for it..if you only live 10 more years the lump sum is a great thing...if you live 35...its not. unless you can put it int a great investment. Many people who take these lump sums, need the money, and don't reinvest it..

oh okay, I understand... still need to decide but thank you for clarifying!

 

[GrayHare]

Not to be argumentative, but what is the risk that they take as managers?

The pension managers risk not being able to make the monthly payments, and dumping their obligation on the PBGC won't go well for them.

 

[imnontrad]

For men this is worth it since the payment is calculated on the life expectancy of a man. You can then invest it as you want or even work on converting to a Roth account for further tax-free growth.

For women, it's a real judgement call. You would have the money. but since women may live longer, the benefit may not be as much vs taking a check for life.

But it also depends on the health of the company. Too many have relied on that check and then the company is sold or goes out of business and the pension goes away.

BTW, instead of getting the money, request a direct rollover to your pre-tax retirement account.

 

[almost there]

"company is sold or goes out of business and the pension goes away"

Not in all cases. In my case, if its under / around $3500 a month its insured.
I had a cash balance account (My pension was phased out / based on age / yrs of service in a specific year- I didn't make the cut off for the pension) In my case the annuity option was better percentage wise than cash. Just under 6%. Waited 3 yrs to take it at 55 a little over 3 yrs ago. Had 30 yrs with the Co.
Anyway, In my case, I have enough liquid. And like getting the monthly deposit's.
Taking it at a younger age also helps. Am pretty sure between my wife and I we could pull 30-40 years from it. Inflation will kill it. But still was the way to go in my case. I dont have faith I can beat the % for 30-40 yrs. Not in our 80's 90's anyway LOL. ....Side note. Many do not pencil out. On line calculators made it an easy decision. Added... Am not an aggressive investor these days. In my case, getting a 3% return on the lump and it would be gone in under 20 yrs. Taking the same $$$ out of it monthly.

 

[jw72]

I have a small pension 1400.00 a month coming and I am keeping the monthly payments vs 300K lump. The reason is, I am saver and if I take the lump sum I will save it. If I get a check every month I will be more likely to spend it. I am looking forward to the "mailbox money". No watching the market, to tenant calling, no worries just a check every month to spend.

 

[jldavid47]

I had to make the same decision four years ago when the company I retired from made the same offer. I took the offer after analyzing OUR situation. YMMV. Background: I was given an incentive to retire from this company at age 47 with a reduced service pension which I took. I had been receiving non-indexed monthly payments since 2001. We had taken the 50% survivor option at the time (right or wrong). My wife is 3 years younger than I am.



This is the thought process I went through at the time. If I die early, it is MUCH better to take the lump sum even if my investments underperform. This gives my wife a larger stream of payments (even if she converted the money into another annuity) than she would have received with a 50% reduction. The problem is that I have no idea how long I have to live, so taking the lump sum betting on anti-longevity. It is also protecting against inflation. The fixed monthly payment would rapidly decline in purchasing power if high inflation returns. If we have the money at least it could be invested in a way that might keep up with inflation.


I also did not make this decision in a vacuum. I looked at the entirety of our retirement and how well my wife could provide for herself if the statistical likelihood or me passing first happened. So, in conjunction with the decision to take the lump sum, I simultaneously made the decision to defer taking Social Security until age 70. Doing so accomplishes two things. First, it balances the anti-longevity "bet" of taking the lump sum with a longevity "bet" of deferring Social Security. Second, it gives my wife a higher survivors benefit if I should die first.


Nothing in my decision making process had anything to do with maximizing return. It had everything to do with balancing risks and creating a higher "floor" if I should happen to precede my wife in death. Our decisions aren't right for everyone because each person has a different situation. It's the thought process that's important here, not the final decision.

 

[street]

^ absolutely, well stated.

 

[CRLLS]

Agreed, well stated. We went thru essentially the same thought processes for both DW's and my pensions.

 

[Caskem]

When I got the offer I did a lot of research. I grabbed it primarily for the ability to pass it on. Since I took it, my FA has doubled it. Much better than $600/month that it would be...assuming the company lasted and honored their promises. A BIG assumption in the case of my company.

 

[Oakster]

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.

I have tried a few times to withdraw an older pension from a government agency that I worked for. Each time they desperately try to talk me out of it. It does not appear at all that they want me to take the lump sum. They really want the money in the system to help fund other retirees, or at least that was the feeling that I got. I always ended up getting busy and not getting the paperwork done. I need to do that this year and get my lump sump moved over to an IRA so it can grow. All the good returns that have happened over the last decade and my account, with about $50k in it, has grown less than $500 a year. I could have grown in greatly had I moved it sooner.... my bad.

 

[meleana]

My husband is retiring on 12/31 and doing the same. Over to T Rowe Price. Same will be for the 401K. We are working with a fee only financial advisor as to how to invest it there within a new rollover brokerage IRA.


The monthly payments would have been $1500 or under depending on the annuity option you choose. No thanks.