Retiring in 4 months - Company terminating retirement plan...

[BigEasy]

Friends,

I've been with Mega Corp for over 30 years and plan to retire August 2015. Just received a "Notice of Intent to Terminate the Pension Plan" effective 2016. They are filing information to the IRS and Pension Benefit Guaranty Corporation (PBGC). Seems like many companies are moving to this.

Mega Corp goes on the state that "This termination in no way affects your rights to financial benefits you have earned under The Plan - You are 100% vested in your benefit."

From what I've been able to learn by various subject searches, they are positioning themselves to either purchase an annuity from an insurance company for a monthly payment, or allow me to take a lump sum payment. If I choose a monthly payment, it would not be protected by the PBGC, only a State Agency.

If I take a lump sum, I would have to receive a 7% return to equal the monthly payment.


What should I be concerned with in the coming announcements? Should I take the lump sum and be done with it? What sort of "due diligence" is required when I get the name of the insurance company?

Thanks,
Big Easy

[Zamboni]

^I don't know the answers to your questions but my ex-company is doing something similar.  The glossy brochures they have sent make it clear that they would prefer me to take a lump sum, but like you I'd have to clear pretty high market returns to make it a break even (even if I die "young," the longer I live, the better off I am sticking to the monthly payments.)

If you learn anything about the process for guaranteeing the monthly payments, please let us all know! Right now I am planning to stick with receiving the monthly payments as outlined in the original benefit plan.

[BigEasy]

I can actually retire before all of this termination takes place. Leaning toward the monthly payment of 7% return. I have $1.7 mil in investible assets with no debt, and my wife has a government pension.

More news in July and will let you guys know what happens...Looks like many companies are doing this!

Big Easy

[mikesinWV]

Just to confirm, they are not turning the plan over to the PBGC, correct?  If so, the PBGC does have a cap on the amount they pay retirees.  It's bitten many airlines pilots in the as*. 

[BigEasy]

They are not turning over the plan over to PGBC. It appears that they will give you a lump sum or purchase an annuity with an insurance company to equal accrued benefits.

Then they wash their hands of the whole thing.

Big Easy

[Spork]

This happened to me many years ago.  In my case the various scenario choices all seemed really fuzzy to me EXCEPT for the lump sum, which stated a known value.  Given that, I took the lump sum.  It wasn't enough money to change my life, but it was enough that I could guestimate my own rate of return based on my previous investments.   

I'm not sure if it was the best choice, but it was the one that was easiest for me to put understandable numbers to.

[JLee]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

[Gone Fishing]

I can actually retire before all of this termination takes place. Leaning toward the monthly payment of 7% return. I have $1.7 mil in investible assets with no debt, and my wife has a government pension.

More news in July and will let you guys know what happens...Looks like many companies are doing this!

Big Easy

Add up your wife's monthly pension payment and what you both expect to draw in SS.  How does this number compare to your expected monthly expenses in retirement?   

[thd7t]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

This is basically like a 7% SWR, which isn't too sustainable.  The monthly payments may be adjusted for COL periodically, in which case they turn out to be better.  The other question for OP is if he has enough money either way.

[JLee]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

This is basically like a 7% SWR, which isn't too sustainable.  The monthly payments may be adjusted for COL periodically, in which case they turn out to be better.  The other question for OP is if he has enough money either way.

That is true, but if you factor in "X" years at 7% payment vs "X" years at 7% WR (drawing down principal if necessary), which one would result in the most funds remaining?

[thd7t]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

This is basically like a 7% SWR, which isn't too sustainable.  The monthly payments may be adjusted for COL periodically, in which case they turn out to be better.  The other question for OP is if he has enough money either way.

That is true, but if you factor in "X" years at 7% payment vs "X" years at 7% WR (drawing down principal if necessary), which one would result in the most funds remaining?

Solid question.  It seems this way to me, but I could be wrong: Take the defined benefit, at "X" years, continue to take for life.  Or take lump sum, at "X" years, maybe have money left.  I guess we should run this through firecalc for a 30 year period or so.
EDIT: firecalc gives a 38% chance of success over 30 years with a 7% WR.  Average finishing number -$64k

[JLee]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

This is basically like a 7% SWR, which isn't too sustainable.  The monthly payments may be adjusted for COL periodically, in which case they turn out to be better.  The other question for OP is if he has enough money either way.

That is true, but if you factor in "X" years at 7% payment vs "X" years at 7% WR (drawing down principal if necessary), which one would result in the most funds remaining?

Solid question.  It seems this way to me, but I could be wrong: Take the defined benefit, at "X" years, continue to take for life.  Or take lump sum, at "X" years, maybe have money left.  I guess we should run this through firecalc for a 30 year period or so.
EDIT: firecalc gives a 38% chance of success over 30 years with a 7% WR.  Average finishing number -$64k

What are you using for the lump sum for the calculation? That does look like you may be better off pulling the money from them, though.

[beltim]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

This is basically like a 7% SWR, which isn't too sustainable.  The monthly payments may be adjusted for COL periodically, in which case they turn out to be better.  The other question for OP is if he has enough money either way.

Most private pensions do not have any inflation adjustments.  Whether or not this particular plan offers one is  probably what will make the difference on which is the better option.

[dycker1978]

Just remember that an annuity is not usually guaranteed for any set time.  Meaning, if something were to happen to you in 10 years, you would have gotten what ever it is you got from the annuity, and the rest is gone.  This is not always the case, some are guaranteed for a certain amount of time, and some will provide survivor benefits to the remaining partner.  It is worth taking a look to see what this will provide.

[Capsu78]

Is the pension administration managed in house (I would be surprised) or by a 3rd party?  My corporate pension served "Notice to terminate pension" after I had left and they bought me 3 annuities to gross up to the amount I would earn with a minimum payout if I died before declaring,  a spousal benefit I would need my wifes authorization to not take, for a higher benefit.  They have now changed administrators 2 x and currently they offer 8-10 different ways to take the payout.  There is no COLA.

It took 18 month for the corporation to obtain "OK to terminate" as the Wall St barbarians that came in wanted to raid the overfunded pension fund- fortunately the plan had been written by conservative Canadians who set things up so that the company plan assets was never owned by the corporation... lots of inside baseball and a lawsuit and finally the courts told the money guys "no can do"  and they slithered off with their already gained millions.

So 2 takeaways- 1- They want you off the plan and 2- things will take time.   We kept the pension(s) figuring that if they really want me off the plan maybe they will sweeten the pot at some point.  Since I turned 55 I have had the ability to cash out in a lump some at any moment in time, so in my case at least, the clock is on my side, not theirs- YMMV   

[BigEasy]

OP here,

My dilemma is that I know what my lump sum or monthly payment is if I retire in August. What I don't know is how long this will drag out getting approvals from the IRS and PBGC. Sounds like it may take at least 12-18 months to resolve,due to typical corporate foot dragging.

The monthly pension payment would approximately equal 20% of my required living expenses. I have income from other sources, including investments.

I'll be 62 in August, but will delay SS due to earnings over $16K in side gigs. No debt and kids are college educated and on their own...

Not stressed as I'm enjoying a glass of wine, sitting on my dock, listening to 60's music...Getting psyched for a music gig this weekend...

Big Easy

[mikesinWV]

It sounds like you do have other investments that you could tap in an emergency.  If that is the case, taking this as an annuity would make sense.  You've already determined you would need a 7% return which could be difficult to achieve over the long run. 

Delay that SS as long as possible to maximize your payment. 

[thd7t]

Why would the monthly payment be better in the long run than a lump sum?  If a 7% return will equal the monthly payments, it seems the general growth and monthly income would be the same, except you would own the lump sum instead of someone else.

This is basically like a 7% SWR, which isn't too sustainable.  The monthly payments may be adjusted for COL periodically, in which case they turn out to be better.  The other question for OP is if he has enough money either way.

That is true, but if you factor in "X" years at 7% payment vs "X" years at 7% WR (drawing down principal if necessary), which one would result in the most funds remaining?

Solid question.  It seems this way to me, but I could be wrong: Take the defined benefit, at "X" years, continue to take for life.  Or take lump sum, at "X" years, maybe have money left.  I guess we should run this through firecalc for a 30 year period or so.
EDIT: firecalc gives a 38% chance of success over 30 years with a 7% WR.  Average finishing number -$64k

What are you using for the lump sum for the calculation? That does look like you may be better off pulling the money from them, though.

Sorry, used $100k with $7k/year WR, just to keep it simple.

[Capsu78]

Big Easy,
Recently I was trying to run some tax scenarios (at least at todays rates).. Between 2 pensions- my wife and I met at work- and 2 upper tier SS payments I computed the minimum anticipated tax implication.  I realized that the not large pensions might just cover the SS income tax + property tax on our paid off home.

Mentally, I am growing more comfortable with the thought that the pensions will cover the tax bills on an nearly indefinite basis and mentally lower my monthly expense needs.  "This" pays for "That" so to speak....a cash out/invest lump/ grow it with attendant market risk has some favorable math associated with it- however I have other investments already doing that.  I am opting for the simpler plan for now as I let the pension value mature. 

Read all the articles that say pensions are getting rarer and rarer and realizing having one might just be a good thing.     

[Fastfwd]

Do you have kids or charities you care about? Lump sum is there if you die next year; annuity vanishes

[Chuck]

I would take the lump sum. The annuity may guarantee you 7% returns, but what if inflation takes off? What if we go on a ripping bull market?

7% is the average market return, which means you are just as likely to lose as to win. With those odds in mind, I would much rather OWN my nestegg.

[deeshen13]

but what if inflation takes off? What if we go on a ripping bull market?

7% is the average market return, which means you are just as likely to lose as to win. With those odds in mind, I would much rather OWN my nestegg.

Chuck, which is the most +EV (expected value) is not the sole aspect of this decision, which would probably lead to a pretty close present value choice anyways -- as you mention.  Other aspects of OP's situation need to be considered (and some have been mentioned): 1) Current portfolio to annual expenses ratio 2) Current portfolio asset allocation 3) Bequeath desires (lump-sum funds will pass on, annuity will not) 4) Capital Market Expectations, and so on.

As for your "what-ifs", inflation could take off, or a deflationary decade could follow.  A bull market could rip, or a bear market could tear.  But that doesn't really help making the best choice now.

Ceteris paribus, I suspect keeping the annuity is probably slightly preferable given A) OP seems to have a high net worth/expenses ratio B) can (and must) treat the PV of the annuity has part of his total asset allocation and C) He hasn't mentioned a strong bequeath desire.

Moreover, there's a reason the company moderately prefers you take the lump-sum.  The risk profile for OP and other plan recipients as a retiree is going to be at least average to below-average.  Hence, earning 7% with a below-average risk tolerance isn't easy.

But, for argument's sake, lets  take the premise that OP could earn 8% or 9% on average in the capital markets by taking the lump-sum.  The 8% or 9% with much more volatility is not going to necessarily be preferable.  A 7% zero-volatility return is going to have a higher Sharpe Ratio than the alternative almost every time.

Good luck.

[Catbert]

I would tend to go with the annuity for its diversity in your income sources.  You'll have SS, government pension, portfolio returns and now an annuity. 

I'm about your age and am just beginning to realize how difficult it may be to manage a portfolio in 20 years.   Even ignoring dementia cognitive ability does decline with age (starting around 50 IIRC).  The 65 y.o. you may be glad to manage the lump sum.  The 85 y.o. you may be happier with the simplicity of an annuity.

[Capsu78]

Do you have kids or charities you care about? Lump sum is there if you die next year; annuity vanishes

Actually, once you drill down into many, if not most annuities, there is a minimum payout if your death precedes declaring your benefit- todays value of the annuity, not "were so happy you lose!"
You only lose it all after you have placed your bet, but that often includes diminished payouts to spouse.  I spot at least 6 different options to take mine, not including the ttiming variable.
SS is another story, so once again, diversification of income streams.

[spud1987]

Employee benefits lawyer here:

The annuity and lump sum are intended to be actuarially equivalent.

The amount of the lump is determined using a discount rate, which is usually based on Treasury rates. A lower discount rate means a higher lump sum. Since rates are low right now, lump sums are relatively high compared to the past.

As you point out, the annuity is no longer protected by the PBGC, but is instead guaranteed by an insurance company. Also, certain states also guaranty insurance companies so you may have an additional level of protection.

Companies typically prefer lump sum payouts since it passes the risk from them to you. In this case, they are passing the risk to either you are the insurance company, so they probably don't have a preference (unless the insurance company is charging ridiculous fees to carry the annuity).

Another consideration is your health. If you are sick or have a family history of premature death, a lump sum is often a better option.

In sum, you are considering all the right factors, but the decision is highly personalized.

Lawyer disclaimer: this is not intended to be legal advice.

[BigEasy]

OP here,

Relating to bequeaths for my kids, they'll inherit all our financial assets along with various real estate holdings. They'll be OK without that company lump sum.

Taking the annuity will give us a SWR of 7% without any effort or hassel with a known income stream. We're ok without the lump sum or annuity. Just simplifying things😄

Big Easy

[partgypsy]

I am not a financial expert, but the way I see things, if you can arrange that social security and pension/annuities cover your basic living expenses, that is a great thing. Then that means you are protected from ups and downs of the stock market, not needing to draw down or reduce the amount you are taking out, letting it grow, or deciding what you want to do.
Just as people try to diversify risk in a stock market portfolio, I think diversifying risk (by paying off house before retirement, by using annuities, social security or even rental income to cover basic living expenses) is great in that it all does not hinge on current stock market performance. I am hoping/planning that what is in my retirement investment account will cover about 1/3 of my living expenses. I like the idea, that if everything goes south, I could probably survive off what I am getting with projected ss and pension funds when the time comes. So if things are more pessimistic, I can use the investment fund, or live more simply. If it is more optimistic, I can go on more trips or help my children more.