Pension Plan or Roll over to IRA

[harry06880]

Hi Friends, one last piece of my retirement, Just got a letter from my megacorp pension plan statement.

Its says Nov 2021 lump sum would be 231,429.87 or monthly payout below

single life annuity 1514.81 per month
50% joint survivor annuity 1286.00 per month,

I m not sure this is that great of a deal. I currently can transfer out 210,652 PV into my IRA and manage it myself at Vanguard for the next few years if I want.

I m just wondering does this math add up, seems like they are using a very low Discount rate ?

I m not very versed on these cash balance pension plans converted to a monthly annuity. ( this one is not adjusted for cola)

thanks in advance for any help friends

Harry

 

[pb4uski]

Annuity seems like a good deal to me. ~6.6% payout rate if I understand correctly which is better than payout rates I have seen at immediateannuities.com

While it is true that the accretion rate for the lump sum from now to 2021 is low I think the better than market payout rate makes up for the slow growth of the lump sum amount.

Look at a FireCalc scenario where you have an amount equal to today's lumpsum invested and defer withdrawals for 9 years (2021 - 2012) and then withdraw $15,432 a year (joint survivor amount) for 35 years - I get a success rate of only 54%, with a 60/40 portfolio, suggesting that it would be challenging for you to replicate the payout of the annuity option by taking the lump sum today and investing it.

 

[Midpack]

Maybe others already know your age (and DW's), but we'd have to know your age to evaluate the options. Makes a considerable difference if your 55, 65 or whatever...

 

[Animorph]

Get a quote for an annuity for your $231k and see how it compares. I think the interest rate assumptions they're allowed to make have generally lowered the lump sum amounts fall below market rates. Although many of us would prefer the lump sum, it may make more sense to take the income, even if you just invest it again.

 

[Donzo]

I looked in your profile and see you are 56. 9 years till full retirement age and taking the monthly payments. This is a tough call. If interest rates go up alot during the next ten years - this monthly payment will erode....if the market grows slowly and inflation stays low - the lump won't purchase as much as the payments would.....maybe.
It's nice to have as many income streams as possible later in life. I would do a spread sheet to look at all the numbers....and then flip a coin.



Kidding about the coin toss.

 

[harry06880]

MMm

Thanks all for the advice, after running a spread sheet I believe I could do much better in 9 years than 231k, giving me a chance to buy a better annuity at that time. Going to roll into my IRA

Thanks all again this form is a god send

 

[Midpack]

MMm

Thanks all for the advice, after running a spread sheet I believe I could do much better in 9 years than 231k, giving me a chance to buy a better annuity at that time. Going to roll into my IRA

Thanks all again this form is a god send

I think the odds are with you, and I basically did the same thing for the same reason/thinking about 18 months ago. Good luck to both of us...

 

[rodi]

Another thing to consider.

Lots of people try for a 3 legged stool approach to retirement. Savings/investments is one leg - which has some volatility. Then SS is another leg - stable, COLA, etc. The third is pension. It's a stable income stream that won't be impacted by politics or market changes.

If you don't have any other pension - keeping the money in the annuity form provides this.

I have a much smaller lump sum/pension-annuity offer. (around $50k). I plugged in the numbers to immediateannuity.com and berkshirehathaway... and concluded the annuity provided by megacorp pays more than if I rolled the lump sum into a purchased annuity. I want at least a partial third leg of the stool - so I'm leaving it be. Perhaps the lump sum will be bigger when it comes time to take it - so I'm letting it ride at the company.

 

[Finance Dave]

Get a quote for an annuity for your $231k and see how it compares. I think the interest rate assumptions they're allowed to make have generally lowered the lump sum amounts fall below market rates. Although many of us would prefer the lump sum, it may make more sense to take the income, even if you just invest it again.

+1

The other option (what I would do) is to create an Excel model with an NPV based on all the cash flows and an assumed discount rate...then you can play "what if". It would take me about an hour to set this up....which is why I didn't offer to do it for you.

 

[pb4uski]

and an assumed date of death (or mortality table) since the cash flows are life contingent

 

[Lazarus]

I took the pension instead of cash at my company. The payout was about 6% until 62 then drops to about 4.5%

I didn't think I could beat that. Plus corp pension is insured through PBGC.
Also have a 401k. Social Security coming in 7 years.

The three legged stool.

 

[Finance Dave]

I took the pension instead of cash at my company. The payout was about 6% until 62 then drops to about 4.5%

I didn't think I could beat that. Plus corp pension is insured through PBGC.
Also have a 401k. Social Security coming in 7 years.

The three legged stool.

Congrats! Sounds like you thought it through and made the best choice for your situation.

Is there a 4th leg of that stool? Rentals?

 

[T-bird]

Congrats! Sounds like you thought it through and made the best choice for your situation.

Is there a 4th leg of that stool? Rentals?

Have our old house as a rental and attempting to see what kind of support it will have as a 4th leg. Income is fine with house paid for but time spent dealing with and the upkeep kind of saws away at a good bit of that stool leg.

Still will see if DW and I, mostly I, will want to continue past March, which is my SIRE date. Do I need the activity (no, no, no) or the head aches (no, no, no). Do you ever get the feeling that if you discuss something, even with yourself, you can come up with a reasonable conclusion. Sometimes it's easier than running it by the DW. Marriage a great institution if you happen to like institutions.

T-bird
Class of 2013
DW Class of 2012 (May, a done deal)

 

[Lazarus]

Congrats! Sounds like you thought it through and made the best choice for your situation.

Is there a 4th leg of that stool? Rentals?

There is a 4th leg of sorts for a while anyway. My wife is still working part time. We would still be FIRE without her income though.

I have thought about rental property. My Dad has had rentals most of the time. I moved to much to want to get involved for most of my working life. There is risk that my kids might end up in my rentals if I owned some. Then I wouldn't be able to kick them out if they got in financial trouble. So I think I will hold off for now.

 

[T-bird]

There is risk that my kids might end up in my rentals if I owned some. Then I wouldn't be able to kick them out if they got in financial trouble. So I think I will hold off for now.

You have the power of seeing into the future.

 

[nun]

MMm

Thanks all for the advice, after running a spread sheet I believe I could do much better in 9 years than 231k, giving me a chance to buy a better annuity at that time. Going to roll into my IRA

Thanks all again this form is a god send

The rate over the next 9 years they are giving you is only 1.1%.....ie $210k grows to $231k if compounded at 1.1% over 9 years. But the annuity looks like a good deal. You might be able to get a better one in 9 years, but who knows. I think the decision has to involve your AA and need for income. The company annuity has the advantage of being a sure thing...it could form a conservative guaranteed foundation for your retirement income. But that 1.1% return for 9 years is pretty hard to accept.

 

[Finance Dave]

There is a 4th leg of sorts for a while anyway. My wife is still working part time. We would still be FIRE without her income though.

I have thought about rental property. My Dad has had rentals most of the time. I moved to much to want to get involved for most of my working life. There is risk that my kids might end up in my rentals if I owned some. Then I wouldn't be able to kick them out if they got in financial trouble. So I think I will hold off for now.

I do own 2 rentals, and am looking for more.

Here's my summary of being a landlord:
1) Most people do it wrong
2) It's a TON of work up front
3) It's easy money on the back end
4) If something doesn't pan out according to #2 and #3 above....re-read #1

 

[FinancialDave]

The 6.6% is only for the 50% survivorship payout, which of course may be what you want, but the single life payout is 7.85% - which you will not find anywhere.

Now if you are just asking the question for a decision years in the future, I would say - "wait and make the decision then" - things do change! Otherwise if it is for today, TAKE THE PENSION.

fd

 

[FinancialDave]

Easy Money?

I do own 2 rentals, and am looking for more.

Here's my summary of being a landlord:
1) Most people do it wrong
2) It's a TON of work up front
3) It's easy money on the back end
4) If something doesn't pan out according to #2 and #3 above....re-read #1

I am not that much into the work and the risks that "mother nature" and tenants provide. After all is said and done, I prefer a good REIT index fund, which seem to have provided double digit returns over the last 10+ years - something that real estate has not -- in most analysis that I have done anyway.

 

[RetireBy90]

I do own 2 rentals, and am looking for more.

Here's my summary of being a landlord:
1) Most people do it wrong
2) It's a TON of work up front
3) It's easy money on the back end
4) If something doesn't pan out according to #2 and #3 above....re-read #1

I have to chime in on rentals. I have been in and out over many years now, and bought my current one 4 years ago. I've had a property manager since first one, and they have really kept me out of any trouble.

My bud just bought one in Reno where mine is, for income, and after all expenses including manager, is looking at 5-6% income without any appreciation. And it is cola adjusted income.