Author Topic: Lump sum pension to 401k opportunity  (Read 556 times)

AccidentalMiser

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Lump sum pension to 401k opportunity
« on: August 21, 2018, 11:34:19 AM »
So, my megacorp has implemented several changes to our defined benefit plan over the past few years, including no longer funding the accounts of those in my cohort and diverting our pension contribution to our 401ks instead (which I prefer).

Now they are offering us our pension as a lump sum rollover to our 401k as a "one and done" single opportunity offering.

So, my choices are 75k rollover now or about $500/month for life starting in 2022. (when I'll RE at 55.)

For me, I have asked myself whether or not I would buy a $500 annuity in 4 years for $98k (75k compounded at 7%/yr).  The answer to that is NO for me so I'm planning to take the lump sum now and invest it. 

Also, we have fidelity brokerage link in our 401k plan so I can invest it however I want to (not stuck with crappy funds like a lot of folks are.) I also have several houses/apartments which constitute a non-stock market income stream of about net 2k/month.

So, what would you do?  Anything else I should consider?

Thanks!

MustacheAnxiety

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Re: Lump sum pension to 401k opportunity
« Reply #1 on: August 21, 2018, 12:22:37 PM »
Is the $500 a month fixed or adjusted for inflation?  If the pension is adjusted for inflation, I would keep it. If not it is a pretty close call.

Are there any tax implications for you? The max employer + employee contribution to a 401(k) in one year is $55,000.  But there are probably special rules for rolling over defined benefit money. I just don't know them.

Here is my analysis on keeping the pension, if inflation adjusted:
1) 75000 compounded at 6.5% (the average real return of the market, but likely generous given today's high valuations) is $96,485.
$96,485 will generate $321.61 at a 4 percent withdrawal rate.  But you have access to the lump sum if you need it and there is a good chance the money will be around for charity/heirs when you pass.  On the other hand the money could also run out before you pass.

2) With information of unknown accuracy from https://www.immediateannuities.com (assuming your 51st birthday is today and you are male) the pension is roughly double the best offer for an annuity that takes 75K today has payouts starting in 4 years and adjusts for inflation. It is a bit more than a 25% premium over an annuity that pays out a fixed monthly amount.  As a rule, I think annuities are a bad deal but you are getting something substantially better than any annuity will offer you.

AccidentalMiser

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Re: Lump sum pension to 401k opportunity
« Reply #2 on: August 21, 2018, 01:25:46 PM »
Thanks, @ mustacheanxiety.  There are no tax implications.  It also doesn't count against my 2018 401k contribution limit.

The pension is not adjusted for inflation. 

I appreciate your input.

Someone also PMd me with an opposite opinion.  By way of addressing their main concern I will say that the megacorp I work for is a government utility with its own pension fund.  I would consider the liklihood of my company going out of business is low but not zero.  There are always rumors of potentially selling off the assets and privatizing but I don't see that happening.  That said, I didn't see a lot of things that have happened in the last few years.

My returns are generally higher than 6.5%.  I'm also not inclined to see the 4% SWR as something I'm likely to follow, it'll probably be higher early and lower later.  I just like that it gives me options if I have it as a lump sum. 

It's a great problem to have, that's for sure!

MustacheAnxiety

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Re: Lump sum pension to 401k opportunity
« Reply #3 on: August 22, 2018, 10:17:45 AM »
Hi Miser, with the clarification that the $500 benefit is not inflation adjusted the calculations in (1) would not hold.  An almost guaranteed return, even one not pegged to inflation still commands a premium but in your case I now agree, take the money the premium is better than available annuities but still too high.

I modeled your situation in Cfiresim with the following inputs and results. 

http://cfiresim.com/
Retirement: 2022-2061
Investment: 75K
Allocation: 80% Stock, 20% bonds
Withdrawal: 6K not inflation adjusted
Years Investigated: 1940-2017 (There is so much deflation between 1871 and 1940 I didn't find those years informative in a no inflation scenario given current fed/US monetary policy, but if you add those years in your success rate drops to 77%)

This yields 100% success with a median ending portfolio of 335K and lowest ending portfolio of $31,634.