Author Topic: 257K in a portable pension....will pay 1900.00 per month....lump it or leave it?  (Read 4350 times)

Sultan58

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I'll be faced with that question in two years.....leave my company pension alone and collect 1900.00 per month until I expire....or take the lump sum and roll it to an IRA and depend on market return for income. The trick is that I would have to earn 9% per year to equal the 1900.00 per month payout.....a very formidable task.

Plus if I leave it alone--I would like to leave an ex-wife as my beneficiary at a 75% contingent annuitant since I firmly believe she will outlive me. If i instead take the lump sum at retirement  and manage within the 4% withdrawal rate, then she will inherit the lump sum when I expire and have responsibility for managing it. (yeah weve buried the hatchet and get along very well now)

Very large overseas based company---ovr 100K employees worldwide---pension plan 85% funded currently.

Currently have a 401K that will provide 20K a year at the 4% rule level and expecting 2000.00 per month SS income as well, so I dont have to take a huge risk with the pension sum. I dont believe for a minute the general populace will allow SS to go away--too many tens of millions depend upon it. I'm confident the pols will fix it when they have no other choice.....the same way they manage everything else.

Its not an easy decision for me....though I know some would immedately say take the lump sum and run because you dont know if your company will be around 20 years from now. Thats true. Given the size and current company health, I believe they will be, unless there's a huge geopolitical event that approaches Armageddon. But nothings certain but these taxes I pay every year.

I guess weve all seen enough solid companies go under and dump their pension plans on the PGBC and leave retirees with a 60% payout or worse.

So what to do when presented with the decision two years from now? It's enough to make me think long and hard.

YttriumNitrate

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I'll be faced with that question in two years.....leave my company pension alone and collect 1900.00 per month until I expire....or take the lump sum and roll it to an IRA and depend on market return for income. The trick is that I would have to earn 9% per year to equal the 1900.00 per month payout.....a very formidable task.
Does the $1900 a month adjust for inflation in future years?

Sultan58

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I'll be faced with that question in two years.....leave my company pension alone and collect 1900.00 per month until I expire....or take the lump sum and roll it to an IRA and depend on market return for income. The trick is that I would have to earn 9% per year to equal the 1900.00 per month payout.....a very formidable task.
Does the $1900 a month adjust for inflation in future years?

No it does not.

Blindsquirrel

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Pension, no annuity that you can but for 257k will pay 1900 a month.


CoffeeR

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Pension, no annuity that you can but for 257k will pay 1900 a month.
Are you sure? When I look at a deferred SPIA's purchased with $257K that start paying 20 years from now for life, non-cola adjusted, for a couple currently 45 years old, I'm seeing numbers > $2600/month. Again, I do not know the details of the OP, but I was putting in some reasonable numbers.

Sultan58

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The SIP plan on our company website allows us to model expected payouts for a variety of dates and scenarios.....remember, retirement is two years away for me...so the 257K is what the pension sum will be at in early 2021.

Anyhoo--the pension plan was just frozen last month---so no more pay credits--but we do get interest credits at 5% until we retire.  When I plug in a January 2021 date to begin pension payments....1900.00 is what it spits out. (it would be higher without a 75% contingent annuitant calculated in but still not 2600.00)

CoffeeR

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The SIP plan on our company website allows us to model expected payouts for a variety of dates and scenarios.....remember, retirement is two years away for me...so the 257K is what the pension sum will be at in early 2021.
Sorry, I misread. If retirement is 2 years away than $1900 is quite good (without knowing more info). No annuity I know pays that.

jim555

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I have a similar situation coming up.  Right now I am leaning to taking the annuity.  The lump sum has the advantage for heirs, but this is not a concern for me now.  Also a lump has the possibility of keeping up with inflation while the annuity has no COLA.

CheezM

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If I read correctly, you have SS and other retirement funds on the 4% rule - which adjusts for inflation.  So you already have inflation adjusted income, a majority of it.  I'd definitely take the $1900/mo.  That's more than double the 4% rule for the same $257k.

MayDay

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I cashed out a pension, because when I did the math, they were paying about 7% interest a year.  I figured that was about what I would do in the market myself, and then I wouldn't be reliant on a company that could go bankrupt between now and then.  Of course mine was going to pay out something like 150$ a month, so it also wasn't worth maintaining a separate set of paperwork for :)

Overall I'm quite happy to not have to worry about it.  The money is tucked away in my IRA and I don't have to do any extra work now or in the future to manage it.

pantherchams

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See another thread here on this type of issue.

I would take it and go, almost in any case, because you get the principal (or your wife) no matter what happens if you take it.  If not, who knows....

You're comparing apples ($1,900/mo.) with oranges (the principal).  Recalculate at a rate of withdrawal that lets you take the 1,900/mo. while drawing down principal to see how long it lasts...that's your real comparison.  THEN, add on the risk of letting someone else promise you send that money rather than having it in your hands.

I came to say this, agree 100%.  I'm not sure you are considering what is happening with the $257k principal. 

Ozlady

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My Husband cashed out his pension all 300K of it ; reason being we want to pass it to our heirs and also we had enough outside of this pension so it is a bonus for us...

also at the time of the brexit deal, the interest rates were so low they calculate a very attractive lump sum figure for us...

it is now sitting nice and invested ...what did they say? A bird in the hand....

Imma

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It sounds like the pension is severely underfunded. That would be one reason for me to consider taking a lump sum.

partgypsy

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It sounds like the pension is severely underfunded. That would be one reason for me to consider taking a lump sum.

Why do you say that? Do you know the company involved?

BicycleB

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OP, your particulars seem almost perfectly balanced to me, between stay or go. I guess that due to the option that others have of leaving, I'd go with the lump sum.

Imma

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It sounds like the pension is severely underfunded. That would be one reason for me to consider taking a lump sum.

Why do you say that? Do you know the company involved?

OP writes that the pension is only 85% funded. I don't know what the normal funding level is in other countries, but in my country <105% is considered underfunded (I think in other countries the threshold is slightly lower but hopefully 85% isn't normal). I would rather have a lump sum in my own account, under my control, rather than risk the pension not being (completely) paid out.

BicycleB

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In the USA, the standard for a corporate pension being fully funded is such that few companies meet it, but there is also a rule that they have to increase their contributions if they fall below a certain amount. 85 to 90 percent funded is pretty common because it's slightly above the requirement. By itself, it doesn't mean that the pension is likely to go broke, unless the majority of large American companies goes bankrupt (or chooses to default on pension obligations). It means that, from time to time, the company will have to raise its share of pension contributions a little. 85% to 90% of the needed funds are already set aside for the next 30 years, at least according to the investment return assumptions used by the pension.

Simplified summary of the rules:
https://www.investopedia.com/terms/u/underfunded_pension_plan.asp

Article gives an example of month to month (?) variation in funding status of corporate America; 89% was average at the time of the article:
https://www.pionline.com/article/20180504/ONLINE/180509914/us-corporate-pension-funding-increases-in-april-8211-5-reports

Of course, it is always possible that an individual company could have problems. To protect against that, due to the details of OP's case, I guessed above that the lump sum was safer. But the funding status alone doesn't imply unusual risk in my view.

My view's worth what you paid for it...   :)
« Last Edit: March 04, 2019, 01:12:04 PM by BicycleB »

Sultan58

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Found out today that pension plan is 95% funded...not 85.

From the responses.....it appears the community is about eually divided on whether to take the lump sum or pension. Good points were made for either case.

I'll watch things carefully for the next two years before I decide. If the markets tanking then...or more companies are in a pension crisis---it will be tempting to take the lump and invest.  But since the planned payout would be about 9% a year --- id have to be pretty sure I was at a good investing window.

It would be easier if i didnt care about my Ex. lol

Just Joe

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It would be easier if i didnt care about my Ex. lol

You're a good person.
« Last Edit: March 06, 2019, 08:51:08 AM by Just Joe »

Malloy

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I love this forum.  I was 100% sure that the answer was going to be to take the annuity and not the lump sum, but there were very thoughtful responses on both sides.

I'd still take the annuity, FWIW, because 1900/month represents about 600k in savings to me.  You are getting a pretty good rate for 257k.

partgypsy

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I personally would keep it as an annuity. The black swan is not that you would make more in the market (unlikely could match that return in the market going forward) but that something happens to the company such that the annuity stops.  Looks like a nice healthy retirement amount, congratulations! I am aiming for 3600-4K a month retirement income when the time comes.
« Last Edit: May 23, 2019, 01:36:58 PM by partgypsy »

DeniseNJ

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1,900 x 12 months is 22,800 per year x 25 to use 4% rule is 570,000 you'd need to be holding, or about twice what the lump is worth.  If you'd get even close to this amount I'd take the lump, but to pull out almost 23K a year with an investment of only 257K sounds like a deal to me.  I'd take the annuity.  Be sure you are allowed to take the reduced annuity and name the ex as the beneficiary--some plans will only let a current spouse continue the benefit.

Cassie

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Keep the pension.

JLee

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If you invested that $1900/mo directly for nine years, a 7% return would provide a gain of $288,293 before taxes and inflation.  Doing that for another nine years results in a total gain of $825,044 (plus $1900/mo).

If you invested $257k directly for nine years, a 7% return would provide a gain of $224,663 before taxes and inflation.  Leaving it alone for another nine years would put you with a total gain of $645,723 and a total balance of $902,723.

I would likely take the monthly amount.

FIRE 20/20

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1,900 x 12 months is 22,800 per year x 25 to use 4% rule is 570,000 you'd need to be holding, or about twice what the lump is worth.

Does the $1900 a month adjust for inflation in future years?

No it does not.

The 4% rule increases your withdrawal by inflation each year.  His pension does not.  Therefore any calculations or mentions of the 4% rule are irrelevant.

Metalcat

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I love this forum.  I was 100% sure that the answer was going to be to take the annuity and not the lump sum, but there were very thoughtful responses on both sides.

I'd still take the annuity, FWIW, because 1900/month represents about 600k in savings to me.  You are getting a pretty good rate for 257k.

Why do people keep saying this???
It's not indexed to inflation, so you cannot compare it to the 4% rule.

It's the equivalent of a 7% WR on 275K with no increase in either withdrawals or increase of the principal.

That's VERY different from the 4% WR where withdrawals increase yearly with inflation and where the principal increases as well.

Apples to oranges.

There are legit reasons on both sides of the argument, but saying that the annuity is equal to 600K in savings is not accurate.

If anything, they're not far off equal in value if you assume a 7% return on average. The main differences are the risk of being entirely invested in one company and the ease of the ex wife handling the finances if/when she inherits them.

jeff191

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I used to work on benefits strategy and design for a large US based company with multiple pensions. A couple of years ago, we closed our DB plan to new entrants even though the plan was funded to ~110% at the time (company was putting a lot of cash into plan due to favorable tax treatment). Plan wasn't closed because of underfunding or any crisis, the actuaries just calculated that long term it was less risky for the company to close the plan and make additional contributions to 401(k) instead.

Regarding the lump sum vs. annuity, it's different for every individual as others have said. But over the last few years, companies offered lump sum cashout windows in their pensions for a reason. Favorable mortality tables made it much cheaper to pay the lump sum today vs. having the liability out there in the plan. Basically it was cheaper to pay people lump sums today than it might be in the next few years. This only applies to defined benefit plans which are calculated based on a promised payout and not sure if you have a cash balance plan which is somewhat different.

I personally have left my 2 small pensions with my prior employers. Both plans are adequately funded and there is always PBGC coverage if the plans do go under. I have most of my retirement savings in 401(k) and IRAs already so figured I might as well leave the risk on the company for these.


DeniseNJ

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If you invested that $1900/mo directly for nine years, a 7% return would provide a gain of $288,293 before taxes and inflation.  Doing that for another nine years results in a total gain of $825,044 (plus $1900/mo).

If you invested $257k directly for nine years, a 7% return would provide a gain of $224,663 before taxes and inflation.  Leaving it alone for another nine years would put you with a total gain of $645,723 and a total balance of $902,723.

I would likely take the monthly amount.

Good point from others that the 4% rule doesn't apply if the monthly amount remains the same--I didn't think of that.  In that case then the above would apply best.  I didn't check the math but I think that comparing what you can do with 1900 a month vs what you can do with 224K is a good comparison.