Would you take guaranteed 6.5% returns for 30 years (pension buyout)

[pb4uski]

True, but let's not help it along....

 

[LRDave]

Do you really think tax rates are headed lower? The current tax rates are set to expire in 2025. Then go up.

For that matter, we really do not know enough about where the market is headed either. And nothing about inflation.

If you do not have enough money to pay taxes on a 14K rollover, you are a LONG ways from retirement. It can even be done over multiple years.



Tax-free withdrawals of both principle and earnings after your 30 years of letting it grow.

I don't think we know much about OP's situation. Still working? Retired?

I am not referring to tax rates within the tax code. If the OP converts the $14K to a Roth, taxes will be paid at his/her current marginal tax rate. 25%? 28%? Who knows?

If rolled to a tIRA, what tax rate will OP withdraw it at when retired? 12%? 15%? Who knows?

We don't know OP's situation. But the issue is: What marginal tax rate is the Roth conversion going to take place at vs. what marginal tax rate will be applied to the tIRA withdrawals later.

For many of us, our lower marginal tax rates will be in the future - when retired and there is less income.

 

[RAE]

I would take the buy out. Control your own future. It's also one less thing to keep track of...
I did this with both my own and my DW's pensions when the offer came.

+1. Not only one less thing to keep track of, but one less thing to worry about also. A lot of things can happen in 30 years.

 

[pb4uski]

....We don't know OP's situation. But the issue is: What marginal tax rate is the Roth conversion going to take place at vs. what marginal tax rate will be applied to the tIRA withdrawals later. ...

+1 While a roll over to an IRA is sound advice, there is insufficient information to know whether it should be to a Roth or tIRA.

 

[GenXguy]

... with the stipulation that if you died early, the money was gone?

That 6.5% over 30 years is effectively what my pension buyout would need to earn in order to equal the pension payments.

I will only speak in terms of real returns since I don't know what inflation will be.

For my fulls stash, I would definitely take guaranteed 6.5% real returns, heck even 5%, and maybe even 4% real returns.

 

[NW-Bound]

I will only speak in terms of real returns since I don't know what inflation will be.

For my fulls stash, I would definitely take guaranteed 6.5% real returns, heck even 5%, and maybe even 4% real returns.

Who would not take 6.5% real return? I am spending less than 1/2 of that.

Even 6.5% nominal return feels like a fair price. But if I take that, I lose the excitement when the market goes nutty, both up and down.

At 6.5% real return, the deal is good enough for me to go look for excitement elsewhere.

 

[zesty]

How are you getting the the 6.5%?

Also, are you sure that if you die before 65 you get nothing? My understanding is that some plans work that way but most do not.

That said, given the relatively small amount of the lump sum I would rollover the lump sum into an IRA.

6.5% was roughly the amount the $14k would need to compound at to get me to about $90k. Taking 1/20th of the $90k each year would get me $4500 a year for 20 years, assuming no return or inflation.


But that is a quick and naive calculation as some have pointed out, and it's actually worth more than the pension because if I died at say 70, the return of the pension would've actually been negative. So it is probably more like 2-3%.


As for the dying before 65, I assumed I'd get something but now I'm not sure. I've scoured the documents they sent me and I see nothing about it so I might send an email and ask them.

 

[zesty]

You are confusing the payout rate with the rate of return... the rate of return is about 2% or 2 1/2%.... you can get a fair idea of rates of return by looking at the IRR of longer period certain annuities... the other 4 1/2% or 4% is simply a return of principal.

Below an example of a 65 yo female in CA with a $100,000 premium.

Note that the benefit for a 10 year period certain annuity is $909/month... for a $100,000 premium that equates to a 1.76% rate of return... so if you put $100,000 into a savings account that earned 1.76% APR and withdrew $909/month after 10 years your money would be gone.

For a life annuity, the payout is $509 per month so the payout rate is 6.1% ($509*12/$100,000). The return depends on how long the annuitant lives... if they die early the return is negative... if they live long at the most the return is the payout rate of 6.1%... if they live 30 years (to age 95) the return is 4.6%.

Below are the year by year returns deoending on how long you live:

Lump Sum 100,000
Monthly benefit 509
Age n IRR p (death)
65 0
66 1 -98.3% 0.780%
67 2 -80.4% 0.840%
68 3 -59.8% 0.894%
69 4 -44.2% 0.943%
70 5 -33.1% 0.990%
71 6 -25.1% 1.038%
72 7 -19.3% 1.095%
73 8 -14.8% 1.163%
74 9 -11.4% 1.241%
75 10 -8.7% 1.330%
76 11 -6.5% 1.428%
77 12 -4.8% 1.533%
78 13 -3.3% 1.639%
79 14 -2.1% 1.743%
80 15 -1.1% 1.850%
81 16 -0.3% 1.967%
82 17 0.4% 2.096%
83 18 1.1% 2.231%
84 19 1.6% 2.367%
85 20 2.1% 2.509%
86 21 2.5% 2.662%
87 22 2.9% 2.823%
88 23 3.2% 2.978%
89 24 3.5% 3.122%
90 25 3.7% 3.258%
91 26 3.9% 3.394%
92 27 4.1% 3.526%
93 28 4.3% 3.638%
94 29 4.5% 3.723%
95 30 4.6% 3.779%
96 31 4.8% 3.801%
97 32 4.9% 3.785%
98 33 5.0% 3.723%
99 34 5.1% 3.611%
100 35 5.2% 3.445%

Thanks a lot! I had assumed that I'd live until 85 when coming up with the numbers but hadn't quantified the returns for different lifespans.


Also you're right, the pension is gone after I die whereas the IRA would still be around, so that is actually a lower effective return for the pension.

 

[Senator]

I don't think we know much about OP's situation. Still working? Retired?

I am not referring to tax rates within the tax code. If the OP converts the $14K to a Roth, taxes will be paid at his/her current marginal tax rate. 25%? 28%? Who knows?

If rolled to a tIRA, what tax rate will OP withdraw it at when retired? 12%? 15%? Who knows?

We don't know OP's situation. But the issue is: What marginal tax rate is the Roth conversion going to take place at vs. what marginal tax rate will be applied to the tIRA withdrawals later.

For many of us, our lower marginal tax rates will be in the future - when retired and there is less income.

All true. We do not know if he will be alive. Or where he will be living, or if he will be in LTC. Maybe he will be in prison. Or living in Mexico. Or if the Pension will be broke. Somethings you have to assume, like the fact he is likely an average person working in a decent job that has a pension and will likely stay out of prison, LTC and still be alive. Likely his income will increase as he gets closer to retirement age. The 6.5% increase in a pension is due to less years of collecting, not growth or capital gains.

With 30 years left to go, I assume he is still working today. At 30 years, $14K invested in the historical S&P with a 7% yield, every 10 years the amount will double. At 10 years $14K is $28K, at 20 years, it's $56K and at 30 years it's $112K. At a withdrawal of $375 a month, that amount will continue forever, and leave a lump sum.

We know Federal tax rates are headed up in 2025, the current rates expire then. Most of the presidential candidates want to end the lower rates earlier, and have large spending plans that will involve higher taxes, from someone. The Federal and many state, city and local budgets are in the red, and getting more red. Tax rates will be headed up, almost guaranteed. I do not think you can count on lower tax rates as you get older, unless you are planing on living in poverty. (If that is the case, you could have retired at after high school)

Some of the best money I ever invested is in my Roth, as I put in a bunch when they were first enacted. I could live many years on it.

I am counting on a 50%+ federal tax rate for the average person. That is in my plan.

 

[joeea]

We know Federal tax rates are headed up in 2025,

Unless they don't.

Tax rates will be headed up, almost guaranteed.

If you are saying "tax rates will increase at some point in time", then sure. It's like saying "We are headed for a recession."

I am counting on a 50%+ federal tax rate for the average person. That is in my plan.

LOL! I guess that's a plan.

 

[zesty]

All true. We do not know if he will be alive. Or where he will be living, or if he will be in LTC. Maybe he will be in prison. Or living in Mexico. Or if the Pension will be broke. Somethings you have to assume, like the fact he is likely an average person working in a decent job that has a pension and will likely stay out of prison, LTC and still be alive. Likely his income will increase as he gets closer to retirement age. The 6.5% increase in a pension is due to less years of collecting, not growth or capital gains.

With 30 years left to go, I assume he is still working today. At 30 years, $14K invested in the historical S&P with a 7% yield, every 10 years the amount will double. At 10 years $14K is $28K, at 20 years, it's $56K and at 30 years it's $112K. At a withdrawal of $375 a month, that amount will continue forever, and leave a lump sum.

We know Federal tax rates are headed up in 2025, the current rates expire then. Most of the presidential candidates want to end the lower rates earlier, and have large spending plans that will involve higher taxes, from someone. The Federal and many state, city and local budgets are in the red, and getting more red. Tax rates will be headed up, almost guaranteed. I do not think you can count on lower tax rates as you get older, unless you are planing on living in poverty. (If that is the case, you could have retired at after high school)

Some of the best money I ever invested is in my Roth, as I put in a bunch when they were first enacted. I could live many years on it.

I am counting on a 50%+ federal tax rate for the average person. That is in my plan.

I think a federal sales tax, like the VAT, is more likely than a 50% federal income tax for the average person.

 

[MichaelB]

Please keep politics out of the discussion.

 

[GenXguy]

Who would not take 6.5% real return? I am spending less than 1/2 of that.

I don't know the answer to that - people sometimes surprise me with their choices. This thread might be an indication. Heck, I would settle for 5% real, and maybe even 4% or less real based on my short FIRE horizon.

I'm planning on spending an average of about 2.7% in FIRE to cover all my required expenses and significant discretionary spending, but sometimes plans change.

 

[imoldernu]

Since I don't invest, looking at probabilities gets me confused.

I am not much good at numbers, but FWIW... Federal IBond results

Jan 2001 $10,000 June 2019 $14,627 Inflation

Jan 2001 $10,000 June 2019 $27,848 IBond


I think that may be a compound interest rate of about 5.&%

We don't know what the future may hold, but feel relatively safe with the US Government guarantee.

The $70K we spent on I Bonds in 2001 and 2003, are returning about $1100/mo. now

Just one thing to look at.

 

[GenXguy]

I do not think you can count on lower tax rates as you get older, unless you are planing on living in poverty. (If that is the case, you could have retired at after high school).

My personal tax rate (all income/payroll taxes) is about 30% effective, and I'm projecting it to be closer to 4% of my drawdown during FIRE while increasing my discretionary spending much much higher than it is now. My effective tax rate for my total drawdown will be even less than that in early retirement, but the average increases due to SS and greater 457/401 distributions later in retirement, but overall, I'm still looking at about 4% on average throughout retirement.

 

[NW-Bound]

Since I don't invest, looking at probabilities gets me confused.

I am not much good at numbers, but FWIW... Federal IBond results

Jan 2001 $10,000 June 2019 $14,627 Inflation

Jan 2001 $10,000 June 2019 $27,848 IBond


I think that may be a compound interest rate of about 5.&%

We don't know what the future may hold, but feel relatively safe with the US Government guarantee.

The $70K we spent on I Bonds in 2001 and 2003, are returning about $1100/mo. now

Just one thing to look at.

The I bonds sold in the past paid a very high rate above inflation. The highest was in May 2000, which paid 3.6% above inflation. Whoo Wee!

I was ignorant, and was still busy licking my wounds from the tech stocks crashing from the top in March 2000, so did not buy any I bond until much later in 2003.

More recent I bonds just match the inflation rate. No real return for them. Recently, I bonds have gone up to 0.5% above inflation.

 

[homestead]

Since I don't invest, looking at probabilities gets me confused.

I am not much good at numbers, but FWIW... Federal IBond results

Jan 2001 $10,000 June 2019 $14,627 Inflation

Jan 2001 $10,000 June 2019 $27,848 IBond


I think that may be a compound interest rate of about 5.&%

We don't know what the future may hold, but feel relatively safe with the US Government guarantee.

The $70K we spent on I Bonds in 2001 and 2003, are returning about $1100/mo. now

Just one thing to look at.

That is pretty good returns. Wish I would have bought some then.
Just for comparison Wellesley would have returned; jan 2001 to date $34,755.

 

[imoldernu]

Re: Taxes...

One of the nice things about being relatively poor, is that thus far, (since about 1998) we haven't had to pay federal or state taxes. Illinois does not tax social security, and the amounts we have received from other sources have been low enough to be under the taxable $$$. The small cash reserve we began with is now running out, so jeanie's annuity is picking up the slack. OMG! maybe have to pay a few hundred dollars in tax this year... but maybe not.

We budget about $45K/yr in expenses, but generally spend between $35 and 37K. Bad habits in frugality continue... not consciously but hard to shake.

My big, crazy, out of my mind expense, came this year, with the purchase of a Drone from Amazon. Oh... and an incredible $112 to fix the air conditioning on our 98 Lincoln Town Car. jeanie drives that, I drive the 96 Cadillac SLS. She could have driven it without the air, but I decided to indulge because I love her.

Hmmm... bet you never had to put cardboard inserts in your shoes to fill in the sole holes when you were a kid. It was all okay, and not problem, 'til a wet winter day when I was walking my regular mile to school.... in the slush.

 

[RunningBum]

Hmmm... bet you never had to put cardboard inserts in your shoes to fill in the sole holes when you were a kid. It was all okay, and not problem, 'til a wet winter day when I was walking my regular mile to school.... in the slush.

You would lose that bet.

 

[Senator]

Hmmm... bet you never had to put cardboard inserts in your shoes to fill in the sole holes when you were a kid. It was all okay, and not problem, 'til a wet winter day when I was walking my regular mile to school.... in the slush.

No, however I was in the 6th grade before I actually wore shoes to school. I was barefoot in HI for most of my childhood.

And I grew up with a Coleman cooler for a refrigerator. Saw my mother work 2-full-time jobs and a part-time one. Sometimes working for 32-hours straight.

I definitely know about poverty and getting out of it. And it takes hard work and determination, not benefits.

 

[bada bing]

When I ran the immediateannuities.com calculator on buying a annuity that I wouldn't start collecting on for 30 years, I got $229 as the highest payment, so that would indicate taking the pension is better. It's a pretty small amount though, and you might be able to do better investing on your own, so I don't think it matters that much.

+1

I've been through the small pension buyout offer twice already and I'm vested in 2 more that haven't made offers. I've done some research while evaluating the offers I've had. Companies are wanting to ditch pension obligations accrued years ago and there has been an increase in buyout offers over the last 5 years. Generally, it appears as though lump sum offers are less than the best prices for retail annuities. That was certainly true for both offers I received, was broadly true for posts I read in various forums and is true in the case of OP's offer.

If you think you will want annuity income in retirement, I would consider holding the pension. It is a better deal than you will find on the retail market. If you don't want an annuity, take the buyout. Generally, annuities under perform a well managed portfolio, but there are risks to consider. Some people want some annuity income at the prices that prevail, some want to go it on their own.

One other generally true rule of thumb is that the best value in annuity is delaying Social Security. If a person wants more annuity, the first place to devote money is setting aside living expenses to delay SS. It makes no sense, generally, to buy an annuity or take a pension and also start SS early.

 

[zesty]

One other generally true rule of thumb is that the best value in annuity is delaying Social Security. If a person wants more annuity, the first place to devote money is setting aside living expenses to delay SS. It makes no sense, generally, to buy an annuity or take a pension and also start SS early.

Good point, I didn't think about that. Pensions start at 65 and could help bridge the gap if I wanted to delay SS to 70.

 

[rk911]

nope. if it was offered i'd absolutely do a lump sum rollover to a trad ira.

 

[pb4uski]

6.5% was roughly the amount the $14k would need to compound at to get me to about $90k. Taking 1/20th of the $90k each year would get me $4500 a year for 20 years, assuming no return or inflation. ....

I would frame it this way. From the immediate annuities.com info in an earlier post we know that the payout rate for an annuity for a 65 yo is about 6.1% or so. $4,500/year divided by 6.1% is $73,770. For $14,000 to grow to $73,770 over 30 years would be a 5.7% return.

 

[Koolau]

Since I don't invest, looking at probabilities gets me confused.

I am not much good at numbers, but FWIW... Federal IBond results

Jan 2001 $10,000 June 2019 $14,627 Inflation

Jan 2001 $10,000 June 2019 $27,848 IBond


I think that may be a compound interest rate of about 5.&%

We don't know what the future may hold, but feel relatively safe with the US Government guarantee.

The $70K we spent on I Bonds in 2001 and 2003, are returning about $1100/mo. now

Just one thing to look at.

Heh, heh, one of my few actual financial regrets is that we didn't jump on I-Bonds earlier and more often. Back in the early '00s, they were a really good deal, easy to get (just stop into a bank or even a credit union), could get $30K/social security number per year ($60k/couple), paid real interest PLUS inflation, easy to cash - back then, could get and hold pieces of actual paper, etc. Nice!

Now, they're hardly worth the (increased) effort. Not worth the low interest rate IMO. Still, so happy we bought what we did back in the day. Like money in the US treasury, just waiting for us to claim it. Don't suppose we'll out live them as they will stop generating interest in 2033 (for us). If we get close, we'll start cashing them, a few per year before '33 to titrate the taxes.

I don't think I'd bother buying any now, but YMMV.