Whipsaw pension - lump or wait ?

[bada bing]

I'm on final approach to retirement in 6 weeks. Things change once I'm a *former* employee and that includes options for action on my pension. I've been with my current employer 11 years. My employer has a cash balance plan, and my cash balance is going to be ~$250K. The options within the plan are very flexible, I can start an annuity -at about 15% better than current market rates - anytime I choose up to age 71. I can leave the money in the plan and draw interest credits of the greater of 5% or the 30 year treasury rate. I can lump sum out of the plan anytime up until age 71. At age 71, I have to withdraw or annuitize. Lump sum withdrawals can be rolled into an IRA to defer taxes. The plan is 125% funded at last audit in Jan.

All well and good and my intention has been to leave the balance in the plan for now and earn the 5% interest credits. I became aware of an additional factor a few days ago - my pension has a "whipsaw". "Whipsaw" is a mechanism to make up for lump sums taken at times of low rates (like now). The calculations are more complex, but basically if I lump sum out now the whipsaw will pay me the difference between current real rates (1.5%) and the guaranteed rate (5%) for the years between now and age 65 (for me, 3.25 years.) Basically if I take the lump sum now, I would get an additional almost $30K. The "whipsaw" diminishes over time naturally, because the duration between "now" and age 65 diminishes as time passes. No "whipsaw" at all on lump sum withdrawals after age 65. The "whipsaw" also fluctuates monthly with current interest rate changes.

My personal situation:
I'm single, no dependents and 61.75 years old. I very likely will never work for money again. This pension is about 12% of my total retirement nest egg. I have a cash bucket in place now to cover living expenses until age 70, at which time SS and RMD's start. I have a "maxed" SS record. I have more money in tax deferred than I can economically Roth convert between now and age 70 and this pension lump sum would just add to that. If I stay in the pension another upside is the possibility that interest rates could improve in the next 8 years and make annuitizing more attractive, which I would consider.

Given the newly discovered "whipsaw", what would you do in my situation - lump out now or let it ride and forego the whipsaw?

 

[njhowie]

If I read it all correctly, I like the option to leave it and accumulate the 5% interest credits, which you were also liking. If you are picking up 5% when market interest rates are at zero, that is quite good. That should also go higher if/when market rates go higher as well - correct?

Seeing the rest of your financial situation, it does not appear that you "need" this $250k to make ends meet in retirement - let's just call it gravy...you'd do fine without it, but it's certainly nice to have it. That being the case, I would still go for leaving the money in the plan and taking 5% interest - no downside as I see it. The benefit of the whipsaw is certainly nice, but does not really sway me. If you had a plan for how to increase the rate of return above 5% when withdrawing, then I could see going the lump sum route. If you go for an annuity in the current interest rate environment, you're going to be looking at probably 2% return on your money going forward until the breakeven point. When you take an annuity, you lock in to the payments/rate on Day 1. Now is not the time to begin an annuity.

So, leaving the money in the plan, taking the 5% for a while gives you time to think - you'll have 10 years until 71 to make the decision to withdraw or annuitize.

I really like the guaranteed 5% without risk of loss.

 

[target2019]

I really like the guaranteed 5% without risk of loss.

I agree. Having a 5% guarantee and flexibility for years 62-70 is attractive.

 

[bada bing]

If you had a plan for how to increase the rate of return above 5% when withdrawing, then I could see going the lump sum route.

That is my head scratching question. I don't know how to model the relative value of $30K today, verses the 5% floor for 9 years. It calls for a prediction on both interest rates and market returns. I don't feel confident at all about being able to match a 5% annual return over the next 9 years, but they would pay me an extra $30K to try.

My personal bias has been to leave it drawing interest all along. It doesn't make a life changing amount in my overall plans in either case. I thought I knew all the minutia about my retirement benefits and finding out about this "whipsaw" kind of startled me.