Author Topic: Pension or cash out to 401k?  (Read 1331 times)

CatInTheHat

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Pension or cash out to 401k?
« on: March 18, 2017, 01:29:21 PM »
After working for a few years at Boeing out of college, I was part of a pension plan.  The company is currently trying to get rid of the liability by buying people out.  The pension is worth $7100 per year payable monthly.  That amount is calculated to kick in at age 65 and is good till I die.  The company is now offering a check that I can rollover tax free today into a current 401k account for $20,370.  I calculated the value at a conservative return of 5% to equal approximately $95000 when I turn 65 in 31 years. I've also taken a stab at calculating the present value of the annuity as well as the future value of it at age 65 at approximately the same value.  What is the right course of action?  I think I'll make more than the 5% over 30 years, and the value is payable now so if I croak my old lady will have all the value.  I think it is best to take the rollover.  What do you think?  Am I thinking clearly?

Hargrove

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Re: Pension or cash out to 401k?
« Reply #1 on: March 18, 2017, 04:31:51 PM »
7100/year in returns today is what you get from 100k invested (after adjusting for inflation) on a 7% index return (ok, 7.1%). That's nothing remotely similar to a 20k check (throwing off 1420/yr). They wouldn't make the offer if they didn't get money out of it.

If the pension were fixed at 7100 when you retire, I'd say take the check and you'll beat it in an index fund. If you're saying it continues to grow, it would have to grow at about 1.5% to be worth less than the check, if you invested for 7% inflation-adjusted returns on a good investment of the check.

What is the annuity's growth rate?

Annuity growth rate > 1.5% and the pension is worth more. >3.5% and I would totally keep it, especially if you have significant other investments (290k value from 3.5% growth vs 160k at 7% from check)
Annuity growth rate < 1.5%? I would take the money and invest it better than the pension fund will, but roll it out of a 401k if that 401k sucked.
« Last Edit: March 18, 2017, 04:36:21 PM by Hargrove »

MDM

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Re: Pension or cash out to 401k?
« Reply #2 on: March 18, 2017, 04:35:04 PM »
Much like "when should I start taking Social Security?", all you need to know is
- when you will die
- what return you will earn on the lump sum. 

Easy, right? ;)

See the table below for some ways to look at this.  You can use your own numbers on rows 70-90 of the 'Misc. calcs' tab in the case study spreadsheet.

One way 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$20370
Payment starting nowPmt_now0$/payment
Interest ratei5.408%/yr
number of yearsn31yr
number of payments/yearfreq1/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$104249
Interest generated by Future ValueFV(i,n,P) * i5638$/payment
Longevity of future pensionL30yr
Constant withdrawal of FV over time LPmt_future7100$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)5667$/yr
5667$/payment

CatInTheHat

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Re: Pension or cash out to 401k?
« Reply #3 on: March 18, 2017, 05:41:37 PM »
Thanks guys I will have a look. The future annuity is fixed at 7100 and not inflation adjusted. 

Hargrove

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Re: Pension or cash out to 401k?
« Reply #4 on: March 18, 2017, 05:45:29 PM »
Thanks guys I will have a look. The future annuity is fixed at 7100 and not inflation adjusted.

Oh. So

Quote
I've also taken a stab at calculating the present value of the annuity as well as the future value of it at age 65 at approximately the same value

means not the same 95k value as the check, but about the same 7k annually?

If that's true it sounds like the 401k check is an outrageously good deal.