Pension Payout Offer in hand

[tryan]

So my former mega-corp was bought out. Now the parent company wants to clean up some of the pension obligations they inherited. If I do nothing I am "promised" $850/mo starting at age 65 (11 years away) OR 1/2 ($425/mo) starting age 55 (next year).

The "pay-off" proposed by the new mega corp has the following options:

1. $76.6k paid in Dec 2015 IRA xfer or lump sum.... all done - bye-bye.
2. Single life Annuity $385/mo forever begining 1 Dec 2015
3. 50% Joint and Survivor Annuity $364/mo forever begining 1 Dec 2015
3. 100% Joint and Survivor Annuity $346/mo forever begining 1 Dec 2015

Using some annuity calculators it seems that if I can beat 5% annual return then take the loot and invest it. Otherwise leave it with them.

What to do , What to do .....

 

[gauss]

Well, if I had other market investments (ie 401k etc), then I would certainly be inclined to keep the pension for diversification if nothing else.


Trying to beat 5% in the market going forward for several decades maybe harder than you think.


-gauss

 

[Dash man]

DW is in the same boat with her company and chose the lump sum and is rolling it into her 401k. She may roll it into an IRA after the first of the year so we don't get burned on taxes for a backdoor Roth IRA contribution we did earlier.


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[Dash man]

Well, if I had other market investments (ie 401k etc), then I would certainly be inclined to keep the pension for diversification if nothing else.


Trying to beat 5% in the market going forward for several decades maybe harder than you think.


-gauss

We considered this, but if DW died before starting collection of the pension at age 65 (6 years away), I'd get nothing. A lump sum is a sure thing. She has a history of cancer, so it's a real concern, though she's currently cancer free.


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[karen1972]

Not sure if there is any COLA with your pension. but I personally would take the lump sum in my IRA (and I did in similar circumstance) especially since there was zero COLA.

Take $76K and say you bought ATT today at 33.55 which buys you 2,265 shares earning $1.88/yr dividend or $4258 or $355 a month...and you still have ALL the principle. Obviously I wouldn't buy all ATT but just off the top of my head I found something that matched what they pay out and picking a stock with long history of increasing dividends means I also have inflation protection.

 

[bclover]

We considered this, but if DW died before starting collection of the pension at age 65 (6 years away), I'd get nothing. A lump sum is a sure thing. She has a history of cancer, so it's a real concern, though she's currently cancer free.


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This is what we did and it turned out exactly as you said.

Dh's company was sold in 2010 and he had the option of starting his pension, delaying it or taking a lump sum.

We took the lump sum. He passed away in 2012 from leukemia. Had he taken the payments they would have stop and that would have been that.

 

[tryan]

Thanx for sharing!

Mine is non-COLA. Hadn't thought about being dead before being able to collect (probably human nature at work...).

Pretty much ruled out the lower paying annuity options since I could get more in less than a year at age 55 (with the same survivor options).

 

[stepford]

Immediate Annuities claims that your pension would cost you $94K if you were to buy it on your own. So your company is offering you about a 20% haircut on the lump sum. Depending on your comfort level with the company's continued existence (or your own) you may still prefer the lump sum, but if you and they are going to be around for a while it seems like the pension might be the better deal.

FWIW I have an almost identical pension from my first job ($880/mo non-COLA'd that I'll receive starting at 65). They offered me an even worse buyout (about $65K) a couple of years ago and I opted to keep the pension. If they go belly up anytime in the next 20 years, though, I'll feel pretty stupid about that.

 

[gauss]

Immediate Annuities claims that your pension would cost you $94K if you were to buy it on your own. So your company is offering you about a 20% haircut on the lump sum. Depending on your comfort level with the company's continued existence (or your own) you may still prefer the lump sum, but if you and they are going to be around for a while it seems like the pension might be the better deal.

FWIW I have an almost identical pension from my first job ($880/mo non-COLA'd that I'll receive starting at 65). They offered me an even worse buyout (about $65K) a couple of years ago and I opted to keep the pension. If they go belly up anytime in the next 20 years, though, I'll feel pretty stupid about that.

Are we talking about private, single-employer pensions here?

Under current law there is a back-stop of protection for bankrupt pensions via the PBGC. If you start drawing very early or have a very large payout then you may exceed the insurance caps, but this is often not the case.

The law, however, is subject to change in the future.

Also, what is important is the level of funding of the pension fund which is a separate legal entity from the company itself. The annual funding disclosures will list this as a percentage typically in the 60-100+ range.

Taking the PBGC "guarantee" together with the funding level of the pension fund gives useful information when accessing these risks.

-gauss

 

[marko]

So my former mega-corp was bought out. Now the parent company wants to clean up some of the pension obligations they inherited. If I do nothing I am "promised" $850/mo starting at age 65 (11 years away) OR 1/2 ($425/mo) starting age 55 (next year).

What to do , What to do .....

I had the same situation.

I took the money and ran! What happened is that the company who acquired us also was acquired later on and the newest company decided to start playing games with the pension. Lots of people aren't getting what they were promised, the 'fully funded' pension ended up no longer being fully funded etc etc.

DW had a similar situation earlier this year. She took the money and felt better about having it under her control rather than trying to figure out a moving target of "who has the money".

Unless you're dealing with a major outfit, (GE, P&G) I'd consider the benefit of just grabbing what you can and managing it yourself.

 

[ziggy29]

I had one of these buyout offers last year, but I decided the offer wasn't good enough. I don't think my former Megacorp is likely to go belly up, and in reality, I wanted *some* defined benefit component to my retirement income since it will be mostly 401K/IRA investments. (In other words, I wanted to keep all three legs on my three-legged stool of retirement, even if the pension "leg" is only a small stump.)

I believe their offer was something like $30K, compared to my pension which will offer a non-COLA $650 a month for 100% survivor income starting in 2030 when I turn 65. That only represents about another 4% of my current retirement account balance, so I decided the small income stream I can't outgrow was a little comforting.

 

[gauss]

I had the same situation.

I took the money and ran! What happened is that the company who acquired us also was acquired later on and the newest company decided to start playing games with the pension. Lots of people aren't getting what they were promised, the 'fully funded' pension ended up no longer being fully funded etc etc.

DW had a similar situation earlier this year. She took the money and felt better about having it under her control rather than trying to figure out a moving target of "who has the money".

Unless you're dealing with a major outfit, (GE, P&G) I'd consider the benefit of just grabbing what you can and managing it yourself.

I suspect that you are referring to future accruals that have not been actually earned yet. This is a sad reality that we live in where the final years of a defined benefit pension typically count many times more than the earlier years in calculating a benefit. My company stopped pension accrual after I had given 22 years of service and it was totally legal. Pension accruals can be frozen or terminated at any time unilaterally by the company unless there is some type of contract involved (ie typically union or executive).


I voted with my feet and left since my pension would be exactly the same if I worked until I had 30 years vs leaving early.

Traditionally, companies cannot just decide to stop paying for accrued benefits unless a bankruptcy is involved.

This, however, was revised about a year ago for multi-employer (ie union managed) pension funds where benefits can indeed be retroactively cut if the union-managed pension fund has serious risks of insolvency. A scary precedent.

-gauss

 

[statsman]

Immediate Annuities claims that your pension would cost you $94K if you were to buy it on your own. So your company is offering you about a 20% haircut on the lump sum. Depending on your comfort level with the company's continued existence (or your own) you may still prefer the lump sum, but if you and they are going to be around for a while it seems like the pension might be the better deal.

Getting about 80% of value on the pension buyout is a decent deal in today's world. I was offered $243K lump sum for a pension that will pay $2,450/mo starting the middle of next year. An annuity for that would cost about $525k, meaning the lump sum was 46% of value. An easy "No".

 

[Midpack]

Just out of curiosity I just re-ran assuming CURRENT age of 65 and 11 year deferral to age 76 and replicated Midpack's answer. I think assuming a current age of 54 more accurately reflects the OP's situation.

Whoops, I agree with you, thanks.