Author Topic: Pension Buyout  (Read 7150 times)

cshaw

  • 5 O'Clock Shadow
  • *
  • Posts: 49
  • Location: Idaho
Pension Buyout
« on: October 10, 2015, 10:45:09 AM »
An interesting opportunity just presented itself to me and I'm curious what folks on here have to say.

I left a company a little over 2 years ago where I worked for 15 years or so.  There was a pension, but the details were always difficult to interpret so I kind of put it on the back burner.

This company has been bought out a few times and the current parent company has offered to buy folks out of their pension.  Here are the details:

Iím 46.  For the plan purpose my retirement date is 67.  If I do nothing, my pensionís single life annuity is $980/month.

The buyout consists of 4 options:
1)   $48K lump sum now.
2)   $244/month single life Annuity now.
3)   $237/month 50% Joint and Survivor Annuity (Spouse gets half if/when I die before her)
4)   $233/month 75% Joint and Survivor Annuity (Spouse gets 75% if/when I die before her)

Iím leaning toward the $48K lump sum now and doing a direct rollover into my 401K.  This is one of the ways they will distribute the lump sum and my plan does take direct rollovers.  My line of thinking is that $48K doubles in 10 years and doubles again in another 10 years assuming a 7ish percent return. I like having control over my retirement funds.

I was planning on being FIRE in 10-12 years w/o this.

Appreciate folksí thoughts.
Cliff

FIRE Artist

  • Handlebar Stache
  • *****
  • Posts: 1071
  • Location: YEG
Re: Pension Buyout
« Reply #1 on: October 10, 2015, 10:49:43 AM »
Would the annuity be inflation adjusted?  A 4% safe withdrawal rate today would be $160/month, so I would be inclined to take the annuity starting now if it was inflation adjusted. 

MDM

  • Senior Mustachian
  • ********
  • Posts: 11493
Re: Pension Buyout
« Reply #2 on: October 10, 2015, 11:06:54 AM »
The "correct" answer depends on various things, e.g., longevity, taxation, and investment returns.  From a quick look at the options, if the $48K is tax free now then it is at least a reasonable option.  See the 'Misc. calcs' tab on the case study spreadsheet for some ways to calculate this - again, based on those assumptions about  longevity, taxation, and investment returns.

Good luck!

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 585
  • Age: 43
  • Location: Houston, TX
Re: Pension Buyout
« Reply #3 on: October 10, 2015, 11:47:12 AM »
Tread carefully. There is a reason they want to buy you out. To save money for them. Not saying it might not work but there is definitely something in it for them or they wouldn't be offering.


Sent from my iPhone using Tapatalk

cshaw

  • 5 O'Clock Shadow
  • *
  • Posts: 49
  • Location: Idaho
Re: Pension Buyout
« Reply #4 on: October 10, 2015, 12:08:45 PM »
Good thoughts so far, I appreciate them.  And there is certainly something in it for them: they indicate upfront their motivation is the decrease their future liabilities.

I don't see anything to indicate it is inflation adjusted.  I lean toward the 401K direct rollover option because it is tax free (deferred) where is any annuity I start drawing now increases my state and federal tax basis.  I'll certainly look at the case study spreadsheet provided.

Thanks.

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1493
  • Age: 76
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Pension Buyout
« Reply #5 on: October 11, 2015, 07:36:27 AM »
An interesting opportunity just presented itself to me and I'm curious what folks on here have to say.

I left a company a little over 2 years ago where I worked for 15 years or so.  There was a pension, but the details were always difficult to interpret so I kind of put it on the back burner.

This company has been bought out a few times and the current parent company has offered to buy folks out of their pension... Iím 46.  For the plan purpose my retirement date is 67...

The 20-year time gap between now and when you would start collecting on that pension would be a deciding factor for me.  There is no guarantee whatsoever that the pension will be there for you 20 years from now.  Take the money -- lump sum or annuity-- and run.

Good luck.

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4932
Re: Pension Buyout
« Reply #6 on: October 11, 2015, 08:08:55 AM »
An interesting opportunity just presented itself to me and I'm curious what folks on here have to say.

I left a company a little over 2 years ago where I worked for 15 years or so.  There was a pension, but the details were always difficult to interpret so I kind of put it on the back burner.

This company has been bought out a few times and the current parent company has offered to buy folks out of their pension... Iím 46.  For the plan purpose my retirement date is 67...

The 20-year time gap between now and when you would start collecting on that pension would be a deciding factor for me.  There is no guarantee whatsoever that the pension will be there for you 20 years from now.  Take the money -- lump sum or annuity-- and run.

Good luck.
Actually, there is a quarantee, most pensions are insured via the U.S. Government.  I personally would not take the money.  Pensions can be very valuable.

MrsPete

  • Magnum Stache
  • ******
  • Posts: 3505
Re: Pension Buyout
« Reply #7 on: October 11, 2015, 08:26:23 AM »
It's a gamble either way. 

Yes, companies stopped offering pensions because they're expensive, but they also stopped because employees (consumers) wanted to avoid the uncertainty you're facing right now. 

I do tend to agree with the poster who says, Why're they offering you this deal?  What's in it for them? 

If you stick with the pension, you'll start collecting at 67 ... what's the average life expectancy for a man?  Around 80?  Obviously, that's a guess ... but let's say you'll collect for approximately 13 years x 12 months in a year x 980/month ... if you opt to pension, you'd collect approximately $152,880. 

Of course, that's if the company remains in business and the pension remains solvent. 
Is the pension taxed?  That would make a big difference. 

On the other hand, if you collect $48,000 now, you anticipate it'd double and then double again, you'd have $192,000. 

Of course, that assumes that the market gives you the 7% return you mentioned, and it assumes you don't touch it for anything else.  One big plus here is that if you should die early, your wife still has control of that money.  With the pension, unless you take some substantial reductions, your wife could potentially be left out of this money. 

At a glance, it looks like you should take the money now; but, as I said, it is a gamble either way. 

Davids

  • Pencil Stache
  • ****
  • Posts: 977
  • Location: Somewhere in the USA.
Re: Pension Buyout
« Reply #8 on: October 11, 2015, 09:29:43 AM »
I would take the money now, there is no guarantee the pension will be available 20 years from now.

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 585
  • Age: 43
  • Location: Houston, TX
Re: Pension Buyout
« Reply #9 on: October 11, 2015, 12:47:32 PM »
Saw this recently: https://www.kitces.com/blog/irs-notice-2015-49-cracks-down-on-accelerated-lump-sum-pension-buyout-offers/

Apparently a LOT of employers are trying to ditch their pension obligations.  This applies only to people currently taking their payments, but it gives some insight into how much they would like to get rid of these obligations.

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1493
  • Age: 76
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Pension Buyout
« Reply #10 on: October 11, 2015, 01:01:49 PM »
An interesting opportunity just presented itself to me and I'm curious what folks on here have to say.

I left a company a little over 2 years ago where I worked for 15 years or so.  There was a pension, but the details were always difficult to interpret so I kind of put it on the back burner.

This company has been bought out a few times and the current parent company has offered to buy folks out of their pension... Iím 46.  For the plan purpose my retirement date is 67...

The 20-year time gap between now and when you would start collecting on that pension would be a deciding factor for me.  There is no guarantee whatsoever that the pension will be there for you 20 years from now.  Take the money -- lump sum or annuity-- and run.

Good luck.
Actually, there is a quarantee, most pensions are insured via the U.S. Government.  I personally would not take the money.  Pensions can be very valuable.

Pensions are not insured for their full value.  If you take lump-sum payout, you're getting a sure thing.  One could also say the same about taking that payout as an immediate annuity that starts paying now.

MDM

  • Senior Mustachian
  • ********
  • Posts: 11493
Re: Pension Buyout
« Reply #11 on: October 11, 2015, 01:17:07 PM »
Pensions are not insured for their full value.

Is that statement always true?  From http://www.pbgc.gov/about/faq/pg/general-faqs-about-pbgc.html it appears not:
Quote
Q: What is the maximum amount that PBGC can guarantee by law?

A:  PBGC's maximum benefit guarantee is set each year under provisions of ERISA. The maximum guarantee applicable to a plan is fixed as of that plan's termination date except for cases where termination occurs during a plan sponsor's bankruptcy, in which case the maximum guarantee may be fixed as of the date the sponsor entered bankruptcy. An earlier date also may apply to certain airline industry plans.

For 2013, the maximum guaranteed amount is $4,789.77 per month ($57,477.24 per year) for workers who begin receiving payments from PBGC at age 65. The maximum guarantee is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a surviving spouse or other beneficiary. The maximum guarantee is higher if you are over age 65 when you begin receiving benefits from PBGC.

In other words, if you are age 65 and receiving less that $57,477/yr then PBGC gives you your full pension, correct?  Or is there something else?

Capsu78

  • Pencil Stache
  • ****
  • Posts: 765
  • Location: Chicagoland
Re: Pension Buyout
« Reply #12 on: October 11, 2015, 01:32:06 PM »
I like this guys level of detail and used it to make my decision to keep my pension:

https://www.kitces.com/blog/how-to-evaluate-the-pension-versus-lump-sum-decision-and-strategies-for-maximization/?utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_medium=email&utm_campaign=7788c4c21b-NEV_MAILCHIMP_LIST&utm_term=0_4c81298299-7788c4c21b-57040425

This article explains why this door is quickly closing:
https://www.kitces.com/blog/irs-notice-2015-49-cracks-down-on-accelerated-lump-sum-pension-buyout-offers/?utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=8aba2bf167-NEV_MAILCHIMP_LIST&utm_medium=email&utm_term=0_4c81298299-8aba2bf167-57040425#more-8215

While more than 50% of the folks I talked to from my old organization rolled over the lump sum, I decided to keep mine based on the "smallish" rollover amount which wasn't going to move my Net worth/ IRA needle signifigantly enough.   If retirement planning is placing your chips on a craps table, I choose to view my pension as a bet on myself that I will have a longer than average life in retirement.

Edit: Sorry didn't read through whole post before posting...I do think this guys level of detail is the best of any articles I have read on the topic.
« Last Edit: October 11, 2015, 01:35:06 PM by Capsu78 »

Capsu78

  • Pencil Stache
  • ****
  • Posts: 765
  • Location: Chicagoland
Re: Pension Buyout
« Reply #13 on: October 11, 2015, 01:38:27 PM »

"Of course, that assumes that the market gives you the 7% return you mentioned, and it assumes you don't touch it for anything else.  One big plus here is that if you should die early, your wife still has control of that money.  With the pension, unless you take some substantial reductions, your wife could potentially be left out of this money." 

Mine is written that in the event of a pre retirement death, my beneficiary gets the equivalent of a buy out. I think that is pretty common so read your plan. 

Capsu78

  • Pencil Stache
  • ****
  • Posts: 765
  • Location: Chicagoland
Re: Pension Buyout
« Reply #14 on: October 11, 2015, 01:41:08 PM »
Pensions are not insured for their full value.

Is that statement always true?  From http://www.pbgc.gov/about/faq/pg/general-faqs-about-pbgc.html it appears not:
Quote
Q: What is the maximum amount that PBGC can guarantee by law?

A:  PBGC's maximum benefit guarantee is set each year under provisions of ERISA. The maximum guarantee applicable to a plan is fixed as of that plan's termination date except for cases where termination occurs during a plan sponsor's bankruptcy, in which case the maximum guarantee may be fixed as of the date the sponsor entered bankruptcy. An earlier date also may apply to certain airline industry plans.

For 2013, the maximum guaranteed amount is $4,789.77 per month ($57,477.24 per year) for workers who begin receiving payments from PBGC at age 65. The maximum guarantee is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a surviving spouse or other beneficiary. The maximum guarantee is higher if you are over age 65 when you begin receiving benefits from PBGC.

In other words, if you are age 65 and receiving less that $57,477/yr then PBGC gives you your full pension, correct?  Or is there something else?

That is my understanding- airline pilots got hammered because their pensions often exceeded $100K and they were rolled back to the PBGC max.

MDM

  • Senior Mustachian
  • ********
  • Posts: 11493
Re: Pension Buyout
« Reply #15 on: October 11, 2015, 02:48:19 PM »
I like this guys level of detail and used it to make my decision to keep my pension:

https://www.kitces.com/blog/how-to-evaluate-the-pension-versus-lump-sum-decision-and-strategies-for-maximization/
Yes - good article and good comments section also.  A couple of the comments noted that "taxes matter."  To take Kitces' example, $600K in an IRA with tax-free returns but ordinary tax on withdrawals differs from $600K in a taxable account with whatever tax rates on interest, dividends and capital gains. 

Calculations in the case study spreadsheet mentioned above match Kitces' 4.2% when taxation is ignored.  One can enter overall tax rates and see how that affects the answer.

ETwagon

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Re: Pension Buyout
« Reply #16 on: October 26, 2015, 10:45:37 AM »
cshaw, 
           I received this exact same payment structure and buyout offer from a company I used to work for. My wife and I crunched the numbers and I took the lump sum based on several things. The number one was I have control of it's destiny.

Just curious, per chance is this company's headquarters in Geneva Switzerland?   

Guses

  • Pencil Stache
  • ****
  • Posts: 915
Re: Pension Buyout
« Reply #17 on: October 26, 2015, 11:10:47 AM »
It's a gamble either way. 

If you stick with the pension, you'll start collecting at 67 ... what's the average life expectancy for a man?  Around 80?  Obviously, that's a guess ... but let's say you'll collect for approximately 13 years x 12 months in a year x 980/month ... if you opt to pension, you'd collect approximately $152,880. 

Of course, that's if the company remains in business and the pension remains solvent. 
Is the pension taxed?  That would make a big difference. 

On the other hand, if you collect $48,000 now, you anticipate it'd double and then double again, you'd have $192,000. 


It is difficult to compare the options in your example because the pension collected between 67-80 is in 2036+ dollars whereas the buyout is in 2015 dollars.

If you are slated to receive 980$ per month in 2036 dollars, that means about 640$ per month in 2015 dollars (using PV calculator with 2% inflation rate). The options presented to you are really as follows:

1- Collect 48K$ in capital now + an equivalent of 160$ per month in inflation protected return with 4% SWR.
2-4 Collect 233-244$ per month now. Not inflation protected.
5- Collect the equivalent of 640$ per month starting in 2036. Not inflation protected.

It depends on much you care about inflation protection (I do) and having immediate access to funds or cash flow (I also do).

To me, options 2-4 seem really shitty given that you give up the lump sum, control of the capital and inflation protection.

Between option 1 and 5, it depends on much you anticipate growing your capital and what role inflation plays. I would go with option 1 myself.