when to / how to take pension?

[DayDreaming]

I have a non-COLA pension which I can take anytime I choose to because I met some early retirement rules when severed from this company. At age 60 I'd get 100% of the pension value. At age 55, I get 80% of the value, at age 50, 50%. It's a decent pension which should cover most of my expenses, unless I screw it up, hence this question.

About me: I'm 48 and may be FIRED now, still thinking about that.
I have savings in taxable accounts which can last me several years and I should be spending that down.

I'm not sure what to do with the pension, some options I'm considering:

1) Take the lump sum now, roll it into an IRA. It would then have to grow at 7% annually to match the lump sum I'd get at age 55, or grow at 5% to match the lump sum I get at age 60. PROS: the money is safely (ha ha) under my control. CONS: uncertainty about what growth rate I'll get: I could do terribly, or it could be a great time to put money into equities.

2) Take the lump sum later, age 55 or 60. I can wait until later, and spend down my taxable savings in the mean time. PROS: I know I'll have a bigger lump sum waiting for me. (Or can that change?) CONS: long-term safety of the pension. I don't think there's any danger of this company going under anytime soon. It could be bought out or merged with another company, but I don't see any big risk here(?).

3) Take it as a monthly annuity at age 55. At that point, the monthly payout will cover almost all of my expenses, and my own savings can easily make up the difference. The more I think about it, the more I like this option. PROS: the comfort of having a guaranteed(?) income. CONS: long-term safety of the pension

4) A variation on #3: take a lump sum (now or later), buy an annuity somewhere and start taking monthly payments at age 55 (or later). PROS: avoid the risk of my former employer going bankrupt and possibly affecting the pension. CONS: using some online annuity calculators, the monthly payout is significantly less than what my pension would give me as a monthly payout.

5) A better idea that someone is bound to tell me.

Any thoughts on this?

 

[ziggy29]

I have a non-COLA pension which I can take anytime I choose to because I met some early retirement rules when severed from this company. At age 60 I'd get 100% of the pension value. At age 55, I get 80% of the value, at age 50, 50%. It's a decent pension which should cover most of my expenses, unless I screw it up, hence this question.

Ignoring inflation and the time value of money for the time being, let's see when the "breakeven" point would be for each of the pension options. Warning: math content follows! Let's define "x" as the number of years you'd collect pension income for each option. So if you could get x years of income at 50, you'd get (x-5) years of income at 55 and (x-10) years at 60.

Waiting until 55 instead of 50: 50x = 80(x-5) ==> x = 13.3, or breakeven at about age 63.

Waiting until 60 instead of 55: 80x = 100(x-5) ==> x = 25, or breakeven at age 80.

Waiting until 60 instead of 50: 50x = 100(x-10) ==> x = 20, or breakeven at age 70.

Based on this, at least, waiting until 55 seems a no-brainer over starting at 50. It ignores inflation and time value of money, but I don't think these would change the numbers enough to suggest taking it at 50 would be a better idea.

 

[freebird5825]

Wow, tough choices. I can't tell you what is the best option, but I can make some observations that may be useful in your final decision process.
- You have identified a lot of the risks - company solvency, change in defined benefits plans between now and when you actually utilize your pension plan. Defining the exact level of risk for either is almost impossible.
- We are FIREd at the exact same age, but my deferred FERS pension starting at age 56 will come from the fed. Whole different animal. The stability of the private sector pension rules of your company between now and your minimum age (55) are a key factor.
- You have analyzed the rates of return needed for the lump sum under your control vs the normal retirement annuity payout. Smart!!!
Wish I could help more.
I will be very interested to see that else comes in from the forum collective..

 

[Independent]

Just extending Ziggy's calculation: He said "How long do you have to live to justify deferring from 50 to 55? from 55 to 60? from 50 to 60?, assuming 0% interest." I'd express his answers this way:
0% -- 63, 80, 70
Here are some (approximate) ages for other interest rates:
3% -- 65, 94, 74
6% -- 69, 100+, 86
9% -- 81, 100+, 100+

Since the pension is non-COLA, the relevant interest rates are nominal (not inflation adjusted). So, yes, it looks like you wouldn't want to start at 50, but 7 years from now when you turn 55 you'll probably decide that it's time to start.

You mentioned comparing the pension lump sums to private annuity premiums. I think that's an excellent idea. If taking the pension as a monthly income always looks significantly better than taking the lump sum and buying an annuity, then it's possible your employer is intentionally skewing the lump sum calculation to favor the monthly income. I know that my employer did that - the only people who should take lump sums in that case are people who know they have medical problems.

It sounds like you really need the pension to afford to retire - it's not just gravy on top of your savings + SS. If that's true, then inflation is a big deal. I'd want to do some analysis with higher-than-average inflation rates to see how I would do in those scenarios.

 

[Bikerdude]

I have a similar pension from Megacorp and the general consensus (when I retired) was that 55 was the optimum age to begin taking payments, as Ziggy's math indicates. I did not have a lump sum option but the payments increased more between 50 and 55 than after 55 until age 60.

Your pension is covered by the government pension guarantee program up to a certain limit. If you are above the limit your pension could be at risk for the amount above.

An annuity is only as good as the insurance company that backs it, although the risk is probably small, recent events dictate caution. Good luck!

 

[LoftyNotions]

Here's what my Megacorp Annual Funding Notice has to say about PBGC Guarantees. I don't know, but I assume these are common to most plans:

Benefit Payments Guaranteed by the PBGC ​

If a single-employer pension plan terminates without enough money to pay all benefits, the PBGC will take over the plan and pay pension benefits through its insurance program. Most participants and beneficiaries receive all of the pension benefits they would have received under their plan, but some people may lose certain benefits that are not guaranteed.
The PBGC pays pension benefits up to certain maximum limits. The maximum guaranteed benefit is $ 4,500 per month, or $ 54,000 per year, payable in the form of a straight life annuity, for a 65-year-old person in a plan that terminates in 2009. The maximum benefit may be reduced for an individual who is younger than age 65. The maximum benefit will also be reduced when a benefit is provided to a survivor of a plan participant.
The PBGC guarantees "basic benefits" earned before a plan is terminated, which includes:
• pension benefits at normal retirement age;
• most early retirement benefits;
• annuity benefits for survivors of plan participants; and
• disability benefits for a disability that occurred before the date the plan terminated.

The PBGC does not guarantee certain types of benefits:
• The PBGC does not guarantee benefits for which you do not have a vested right when a plan terminates, usually because you have not worked enough years for the company.
• The PBGC does not guarantee benefits for which you have not met all age, service, or other requirements at the time the plan terminates.
• Benefit increases and new benefits that have been in place for less than one year are not guaranteed. Those that have been in place for less than five years are only partly guaranteed.
• Early retirement payments that are greater than payments at normal retirement age may not be guaranteed. For example, a supplemental benefit that stops when you become eligible for Social Security may not be guaranteed.
• Benefits other than pension benefits, such as health insurance, life insurance, death benefits, vacation pay, or severance pay, are not guaranteed.
• The PBGC generally does not pay lump sums exceeding $5,000.
Even if certain benefits are not guaranteed, participants and beneficiaries still may receive some of those benefits from the PBGC depending on how much money the terminated plan has and how much the PBGC collects from the employer.

 

[CuppaJoe]

Welcome to posting, LoftyNotions! Hope you find the time to go over to the "Hi, I am" section and introduce yourself. I'm pondering if your handle is a reference to the terrain in your neck of the hills? Maybe multiple meanings?

 

[Delawaredave5]

1) Take the lump sum now, roll it into an IRA. It would then have to grow at 7% annually to match the lump sum I'd get at age 55, or grow at 5% to match the lump sum I get at age 60. PROS: the money is safely (ha ha) under my control. CONS: uncertainty about what growth rate I'll get: I could do terribly, or it could be a great time to put money into equities.

What's the calc for lump sum ? Wife has non cola DB Megacorp pension. Full pension at 58, reduced 5% each year if you start early, no lump sum.

Regarding, "grow at 5% to match the lump sum I get at 60" -- it would need to grow at an AFTER TAX rate of 5% with comparable risk. We believe we cannot get 5% after tax return at same/less risk - so we have not started pension (don't need money yet).

There is certainly risk in DB Megacorp pensions - friend of mine was pilot for Continental - huge DB pension - went bankrupt - he's getting 30% of original amount from Pension Guarantee Board..

 

[cashbalancetrouble]

How did you determine the lump sums payable?

The lump sums payable will be decreasing from now until 2012 because the interest rate used to calculate them is blending in corporate bond rates. This maybe the last year a lump sum may make any sense for someone who is in relatively good health.

Prior to 2008, the calculation to determine the present value used the 30 year treasury value, something like 4.6%. The calculation uses this interest rate to determine the present lump sum to produce the monthly payout earned for your mortality rate, life expectancy. Starting in 2008 this rate will be replaced by a blended corporate bond rate in 20% increments until 2012 when the rate will be 100% of the blended. In 2008 this reduced the lump sum pay out by about 2%, in 2009 it will be about 6%, in 2010 it will be 17%, when done the lump sum payout will be about 40% less than the same credits would have produced in 2007.

 

[DayDreaming]

...Let's define "x" as the number of years you'd collect pension income for each option. So if you could get x years of income at 50, you'd get (x-5) years of income at 55 and (x-10) years at 60.

Waiting until 55 instead of 50: 50x = 80(x-5) ==> x = 13.3, or breakeven at about age 63.

Waiting until 60 instead of 55: 80x = 100(x-5) ==> x = 25, or breakeven at age 80.

Waiting until 60 instead of 50: 50x = 100(x-10) ==> x = 20, or breakeven at age 70.

Based on this, at least, waiting until 55 seems a no-brainer over starting at 50. It ignores inflation and time value of money, but I don't think these would change the numbers enough to suggest taking it at 50 would be a better idea.

Thanks, Ziggy, that helps a lot!

... If taking the pension as a monthly income always looks significantly better than taking the lump sum and buying an annuity, then it's possible your employer is intentionally skewing the lump sum calculation to favor the monthly income. I know that my employer did that - the only people who should take lump sums in that case are people who know they have medical problems.

It sounds like you really need the pension to afford to retire - it's not just gravy on top of your savings + SS. If that's true, then inflation is a big deal. I'd want to do some analysis with higher-than-average inflation rates to see how I would do in those scenarios.

I didn't know that companies could skew the lump sum calculation, but if my former employer could, then it doesn't surprise me that they would.

Just to clarify my situation, without the pension, FireCalc still says I have an 86% chance of success. I'm not too happy with that number. With the pension it's a 100% chance. I like that a lot.

What's the calc for lump sum ?

Not sure. I can see the formula used to calculate the annual payout based on my past salary and other factors. But regarding the lump sum, it only states that the value is calculated using the interest rate and mortality table prescribed by the Secretary of Treasury. The interest rate is the rate on 30 yr U.S. Treasuries that is issued a monthe before the payment date. So I guess that tells me the future lump sum is not as guaranteed as I thought it was. (I've never retired before, there is so much to learn!) The numbers I'm currently using are from an online tool at my pension plan's website.

How did you determine the lump sums payable?

The lump sums payable will be decreasing from now until 2012 because the interest rate used to calculate them is blending in corporate bond rates. This maybe the last year a lump sum may make any sense for someone who is in relatively good health.

Prior to 2008, the calculation to determine the present value used the 30 year treasury value, something like 4.6%. The calculation uses this interest rate to determine the present lump sum to produce the monthly payout earned for your mortality rate, life expectancy. Starting in 2008 this rate will be replaced by a blended corporate bond rate in 20% increments until 2012 when the rate will be 100% of the blended. In 2008 this reduced the lump sum pay out by about 2%, in 2009 it will be about 6%, in 2010 it will be 17%, when done the lump sum payout will be about 40% less than the same credits would have produced in 2007.

Eeek! It's starting to sound like if I really want the lump sum I should take it now intead of later!

But the monthly annuity at age 55 is sounding much better to me. Except for that nagging question of what happens to this company over the next 40 years, or however long I live. The PBGC guarantees sound resonable for someone who starts a pension at "normal retirement age" of 65. For younger people, the guaranteed payout doesn't sound so attractive. I need to do some more reading on the PBGC website to understand this better.

Thanks for the input, everyone.

 

[Delawaredave5]

How did you determine the lump sums payable?

The lump sums payable will be decreasing from now until 2012 because the interest rate used to calculate them is blending in corporate bond rates. This maybe the last year a lump sum may make any sense for someone who is in relatively good health.

Prior to 2008, the calculation to determine the present value used the 30 year treasury value, something like 4.6%. The calculation uses this interest rate to determine the present lump sum to produce the monthly payout earned for your mortality rate, life expectancy. Starting in 2008 this rate will be replaced by a blended corporate bond rate in 20% increments until 2012 when the rate will be 100% of the blended. In 2008 this reduced the lump sum pay out by about 2%, in 2009 it will be about 6%, in 2010 it will be 17%, when done the lump sum payout will be about 40% less than the same credits would have produced in 2007.

I'm slow. Given above, how do you calculate a lump sum for someone with a $10,000/year pension at 58 with a 20 year life expectancy ?

Is the =PV(0.08,20,10000) in Excel ? Or $98,181 for a 20 year, 8% discount rate, $10,000/year pension ?

How can the discount rate go from 4.6% to 17% ??

Who controls the discount rate ? Government ? Company ? Thanks.