The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: caffeine on January 14, 2019, 09:10:28 AM

I'm asking on behalf of someone else.
Buyout is $147k vs $990 monthly.
I'm not sure what to advice him. I'm sure he is more comfortable taking the monthly payment.
Details:
66 years old.
401k: 81k (this will be closer to 90k when retirement begins)
Social Security: 2.4k a month
No debt. House worth about $200k
In addition, he'll get a one time payment of $27k soon.
Retirement begins in May.
Any suggestions?

How old is he?

He is 66.
401k: 81k
Social Security: 2.4k a month
No debt. House worth about $200k
In addition, he'll get a one time payment of $27k soon.
Retirement begins in May.

Will the monthly amount be adjusted for inflation or is it a fixed amount forever? Will the money be invested?
Some example calculations:
Assuming 7% return on investment and no inflation adjustment the monthly amount will take 29 years to catch up
Assuming 5% returns it will take 19.5 years for the monthly amount to be better
Assuming 2% returns it will take 14.5 years

If his goal is to maximize monthly income for the remainder of his life, he should take the monthly pension. If the pension is adjusted for inflation, he can reasonably take $3650/mo gross income (SS+Pension+4% rule from 401k). If the pension is not adjusted for inflation, I'd limit monthly gross income to $3500 so that some of the 401k can make up future reduction in the buying power of the pension.
On the other hand, if he comfortable with gross monthly income no higher than $3150/mo (using 4% rule on 401k + lump sum) and is trying to maximize his estate for beneficiaries, the right choice depends on how long he will live and future market returns (both unknowable). Since the market is likely to outperform the pension in the long run unless the pension is inflation adjusted and a shorter retirement would always favor a lump sum, I'd recommend taking the lump sum if the pension is not inflation adjusted and his gross income requirements are below $3150/mo.

Other people have done the math for you and every ones situation isn't the same.
My understanding has been that the main reason a company offers a lump sum payout is because it is good for the company by saving them money. That might tell you something :)

What kind of shape healthwise is your friend in? That's important for trying to figure out how many of those $990 payments he might be around to collect. Does he smoke? Obese? The more unhealthy he is, the more consideration he should give the onetime payment.

I like RWD's approach. Explain those scenarios to your friend and he can choose. I also agree you need to consider inflation but I am assuming there is no inflation bump.
The only thing I can add is to consider the source of the monthly payments. If it is the federal government you don't need to think about it, if it's a private company that changes the odds a bit. Will it really get paid out as long as your friend lives?

I like RWD's approach. Explain those scenarios to your friend and he can choose. I also agree you need to consider inflation but I am assuming there is no inflation bump.
The only thing I can add is to consider the source of the monthly payments. If it is the federal government you don't need to think about it, if it's a private company that changes the odds a bit. Will it really get paid out as long as your friend lives?
Pension isn't Federal or State. It is from a certain motorcycle manufacturer that's closing a plant. That little bit is what gives me pause to suggest just taking the buyout. I'll pass RWD's numbers along. I suspect he will take the payments.

Is the pension plan sufficiently funded? Many are not which could lead to not receiving full benefits over time.

If they are very conservative and don't feel comfortable investing the money in the stock market because of the volatility, worst thing they can do is invest and sell in the down market, they can take the lump sum payment, put it into a money market account, CapitalOne is 2% over 10K, and deffer SS until he is 70. 2.4K in monthly benefits deferred until 70 comes out to 3.25K (2.4 *1.08^4) which is pretty close to the $990 pension and would be adjusted for inflation. Use the lump sum to cover expenses until they start collecting SS.
They can verify what amount they will be getting by deferring SS to 70 on the SS website.

Can he roll the lump sum payment into his 401k?

Is the pension plan sufficiently funded? Many are not which could lead to not receiving full benefits over time.
I hope so. I'm not sure how I can figure this out.
If they are very conservative and don't feel comfortable investing the money in the stock market because of the volatility, worst thing they can do is invest and sell in the down market, they can take the lump sum payment, put it into a money market account, CapitalOne is 2% over 10K, and deffer SS until he is 70. 2.4K in monthly benefits deferred until 70 comes out to 3.25K (2.4 *1.08^4) which is pretty close to the $990 pension and would be adjusted for inflation. Use the lump sum to cover expenses until they start collecting SS.
They can verify what amount they will be getting by deferring SS to 70 on the SS website.
He's filed for SS already, but I'll mention that.
Can he roll the lump sum payment into his 401k?
I believe so.

If there's a way to take the buyout and roll it into a 401k, I'd take it.
My father retired on a nice pension with COL increases, etc. All was good until the company was bought out by a larger corporation, whose lawyers immediately went to work on the pension contracts. I don't know the details, but his pension is now less than it was under the old regime. I'd rather have control of my money.