Author Topic: Small pension - take a lump sum?  (Read 710 times)

ZiziPB

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Small pension - take a lump sum?
« on: October 01, 2018, 11:17:33 PM »
What do I take into account when trying to figure out whether to take a small pension as a lump sum and roll it over to my 401k or leave it be and take it in installments at 65? 

I'm 50, recently FIREd, single.  Total stache of about $1.6m split about evenly between retirement and taxable accounts.  If taken as a lump sum the pension is $32K, so a small piece of the puzzle.  If left to pay out in installments, the pension would pay $300 per month starting at 65.  I have no other pensions, just SS which should be about $2300 per month at 67.

reeshau

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Re: Small pension - take a lump sum?
« Reply #1 on: October 02, 2018, 05:23:43 AM »
My first question would be:  do I trust the company to be around that long?  The pension payout is someone's amortization of the invested value of this same money--something you could probably match with ease in an IRA with index funds.  So, if you can leave it alone yourself, such an account gives you money in the bank.  The company's pension (assuming in the US) is insured by the PBGC, so with such a small amount is likely to be fully insured.  But the PBGC itself has funding issues.  Whatever the end scenario, you have put this piece of your future in someone else's hands.

In the end, you have to understand the community you are in, when you posed the question:  everyone here is going to take control, if that's an option.  If you do not, then you can think of this pension as part of the bond portion of your asset allocation, and be more aggressive with your stock allocation than you would be without it.

jim555

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Re: Small pension - take a lump sum?
« Reply #2 on: October 02, 2018, 06:41:06 AM »
The lump sum amount should change every year since it is calculated based on a discounting rate that changes.  Hard to say what is best.  In my state pension income is tax free up to 20K, while IRA withdrawals are not tax free.  You could look at SPIA immediate annuity pricing to get a feel for what looks like a better value.

Financial.Velociraptor

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Re: Small pension - take a lump sum?
« Reply #3 on: October 02, 2018, 08:29:01 AM »
The idea to price against an annuity is sound.  But the advice about whether the company is going to be financially sound is better.  I have a small pension coming that will be worth about 22k gross, when I turn 55.  I plan to take the lump sum as it is with an oilfield services company which happens to be a deeply cyclical industry that has a way of bankrupting the weak hands.

MDM

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Re: Small pension - take a lump sum?
« Reply #4 on: October 02, 2018, 11:29:00 AM »
Much depends on what you get for "i" and "L" in the table below.

Three ways to evaluate "pension now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by Future Value (FV) of the lump sum" (FV principal is not touched), or
  - the "Constant withdrawal of FV over time L" (principal goes to zero), or
  - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
Lump sum nowPV$32000
Payment starting nowPmt_now0$/payment
Interest ratei5.0%/yr
number of years until annuity beginsn15yr
number of payments/yearfreq12/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$67639
Interest generated by Future ValueFV(i,n,P) * i282$/payment
Longevity of future annuityL25yr
Constant withdrawal of FV over time LPmt_future395$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year (of 25) Trinity-style withdrawalW(FV,L,i,g)3853$/yr
321$/payment
See rows 73-94 of the 'Misc. calcs' tab in the case study spreadsheet to enter your numbers.

DaMa

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Re: Small pension - take a lump sum?
« Reply #5 on: October 06, 2018, 05:47:27 AM »
I've got the same issue.  Mine is about 80k and has a guaranteed minimum 4% annual interest rate, so I've always looked at it as the no risk portion of my portfolio.  I have no concerns with the long-term health of the company, though.

chasesfish

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Re: Small pension - take a lump sum?
« Reply #6 on: October 06, 2018, 09:02:14 AM »
Go to Fidelity's annuity calculator and run the calculation for  "I want this amount of income at X age".

They will tell you how much of a lump sum you'd have to invest now to get it.

If your lump sum offer is the same or higher than what the replacement income stream is from a rated insurance company, take it immediately.  If its lower, consider keeping the pension if you trust the company/government not to cut it.

Westoftown

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Re: Small pension - take a lump sum?
« Reply #7 on: October 10, 2018, 02:24:10 PM »
I had this same thing twice - one pension for $50K and another one for $30K.   I rolled them both over into my 401K rollover through Fidelity.   Usually you can even get some cash or free trades for bringing in $30K+.   I like being able to do what I want with it and also withdraw it when I want.  Plus if I die there is an amount left for the kids there, versus probably none if you die with a pension.