Author Topic: Pension or lump sum  (Read 6234 times)

Artistlife

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Pension or lump sum
« on: November 04, 2013, 12:17:51 PM »
My husband is getting ready to retire at 55 years of age.  We are lucky in that he can collect a pension or take a lump sum.  We have been living a semi- mustachian lifestyle.  Our house is paid for and our only debt is a car payment on a Honda Fit that I use for business. We have two children, the oldest is on his own and the youngest is in college but most of that is paid for. For the past year we have been living on half of husbands paycheck and putting the rest into deferred comp where we have about 125,000 dollars.  We also have an IRA that is about the same.  My career as an artist is really taking off and my husband plans on helping me when he retires.

 We have a couple of choices with his pension We can take the monthly payment, which is about what we live on now.  Use his pension as our base salary, then use my income and deferred comp for any shortfalls.  We realize that inflation will eat away at his pension but I am counting on my  income to grow to make more investments.  This is without counting on our IRA or social security.

The other choice is to take the lump sum and invest it, so the returns will grow ahead of inflation.  We are not that skilled at investing and I do not like paying the fees or the volatility of the stock market.  According to a financial adviser the lump sum, if invested correctly, could give us a payout close to the monthly annuity and stay ahead of inflation. 

My head is spinning over these decisions and I would appreciate any advice from this community. 


infogoon

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Re: Pension or lump sum
« Reply #1 on: November 04, 2013, 01:16:13 PM »
What are the long-term prospects of the company?

My father took a lump sum and invested it, rather than the monthly payment plan. He was working for a huge, failing company and didn't trust them to keep sending checks for more than a few years.

Artistlife

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Re: Pension or lump sum
« Reply #2 on: November 04, 2013, 01:30:29 PM »
Thank you for replying.  He is with a regional park system.  They used to be very well run but there has been a lot of changes lately.  I did read today that the pension plan is 70% funded.

TheDude

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Re: Pension or lump sum
« Reply #3 on: November 04, 2013, 01:55:36 PM »
My wife has a pension from the school system I tend to think it will be around for the long haul. I would probably say that about a regional park system also as it is most likely backed by taxpayers. Are they taking any steps to fix the 70% funding? Is there any inflation adjustments with the pension?

If I were in  your shoes I would evaluate in two ways.

1. If you were to take the lump sum and invest it into an immediate annuity how would that compare to the pension payout?

2. If you were to take the lump sum and at it to you already defined investing scheme. How much would cash flow be at a 4% withdraw rate?

There questions with help you evaluate the cash flow provided by the pension vs what you could do on you own.

SnackDog

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Re: Pension or lump sum
« Reply #4 on: November 04, 2013, 02:00:57 PM »
Lump sum generally has huge advantages over pension payout. The main ones are inflation protection and liquidity. Invest the lump sum carefully and you should be fine. Invest it poorly and it could disappear. I would stick it in an index fund and forget about it. Liquidity is nice in case you need quick access to a lot of cash (health emergency, etc).

The only instance I would take the payment is if you thought that type of income would nice round out other investments for diversity. A pension is guaranteed as long as the payer entity survives and doesn't run into trouble. A lump sum can disappear in a legal dispute, like most other invested sums.

Artistlife

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Re: Pension or lump sum
« Reply #5 on: November 04, 2013, 02:25:06 PM »
I do feel pretty confident about the financial health of the park system.  The pension is paid out as an annuity but there are no adjustments for inflation in the payouts. The investment broker who has our IRAs was over today and stated that if we invested all of our retirement into a diversified conservative funds we would almost match the monthly payout of the pension.  That is if we averaged an 8% return.  I am new to the mustache community and am sorely lacking in investment knowledge, thus my semi-mustachian status.  This big decision is coming up soon and I am learning all I can about what would be best.  I really appreciate this forum and the advice.


livetogive

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Re: Pension or lump sum
« Reply #6 on: November 04, 2013, 04:26:52 PM »
We need to see what the pension payment would be vs the lump sum,  but unless you're creating a tax event I'd almost always take the lump sum.

I used to work in municipal banking. 

1. No matter how good the park services health is,  parks are not viewed as essential and are easy to cut.   Most banks won't lend against Park assets for this reason.  So you're not as safe as you think you are because maybe the road construction union or whatever just created a deficit that you'll end up covering.

2.  You are almost guaranteed to get a better risk reward profile investing on your own behalf than if you rely on them to do it for you,  but again we have to see the IRR of the annuity
« Last Edit: November 04, 2013, 04:30:56 PM by TurboLT »

livetogive

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Re: Pension or lump sum
« Reply #7 on: November 04, 2013, 04:29:36 PM »
Thank you for replying.  He is with a regional park system.  They used to be very well run but there has been a lot of changes lately.  I did read today that the pension plan is 70% funded.

I'm on a phone so it's hard to edit,  but after rereading this I'd say take the lump sum and run.  I'd want a rate in the 8-10% range to go 5 years with that kind of credit and I imagine you plan to live longer than that.

Rural

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Re: Pension or lump sum
« Reply #8 on: November 05, 2013, 05:29:58 PM »
You're not likely to get an 8% return on investment over any significant length of time. Take that into account; do you need something close to the pension payout? If so, the pension payout may be your only option for getting it.

Eric

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Re: Pension or lump sum
« Reply #9 on: November 05, 2013, 05:51:33 PM »
How long do you have to make this decision?  Do you think you can learn enough in that time frame to make you comfortable with such a large investment?  I personally would take the lump sum and invest it.  But I'm comfortable with investing and the stock markets.  If you're not, and you're going to pull your money out of the market out of fear or uncertainty at the first 5% or 10% dip, then you'll be better off taking the pension annuity payments.  Inflation is a worry, but you'll also add Social Security payments on top of that amount at some point in the future.  That will certainly ease a lot of inflation worries.

Just realize that the absolute worst outcome is to take the lump sum with the intention of investing it but then lose your nerve and not keep it invested.

I'm a big fan of Jim Collins and his approach to investing.  Here's his stock market primer:

http://jlcollinsnh.com/stock-series/

bogart

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Re: Pension or lump sum
« Reply #10 on: November 05, 2013, 07:05:09 PM »
You can go to this website:
http://www.immediateannuities.com/

... and get a sense of what kind of immediate annuity, that is to say, pension (equivalent), you could buy with the relevant lump sum, which is another way to get a sense of how good (or bad) a deal the pension is.

Personally, based on this: 
Quote
the lump sum, if invested correctly, could give us a payout close to the monthly annuity
I'd take the pension.  You've identified yourself as risk averse, etc. etc. (as am I), and that seems to me to be the more sensible plan, recognizing that it will be one part of (not all of) your retirement plan.  But that's me.

Artistlife

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Re: Pension or lump sum
« Reply #11 on: November 05, 2013, 08:35:54 PM »
So much good information, thank you everyone for your generosity!  My husband and I have talked this over in length and are leaning towards the pension.  The lump sum, earning 8% would pay close to the pension payout but that was at pulling out 7% a year.  We are both healthy and I have a career that is growing very quickly.  My spouse is smart and talented and could have lots of opportunities for future income.  We have deferred comp and IRA's and when our youngest graduates from college in 2/12 years our expenses will go way down.  We are currently living comfortably on half of his salary, which is very close to what the pension will pay out.  I would feel more comfortable learning how to invest with my income while we live on his pension.  Hopefully that strategy along with IRA's and social security will keep up with inflation.

My 93 year old father in law told me yesterday that he had set aside a very generous chunk of change and that he wanted us to feel at peace.  That is very generous of him but I hope he makes it to 120.


frugaldrummer

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Re: Pension or lump sum
« Reply #12 on: November 07, 2013, 10:50:58 AM »
I think that's smart.

I too will have to decide eventually between a pension without inflation adjustments, or a lump sum.  Given my previous experiences with this company, I'm pretty sure the lump sum will not be enough to do better than the pension with my long-lived genes.  And since you have other funds that you could invest more aggressively to give you a cushion against inflation, seems like the best of both worlds.

OptimusFrugal

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Re: Pension or lump sum
« Reply #13 on: November 09, 2013, 10:55:33 PM »
My two cents.  I didn't see any mention of the tax implications of the two choices, so I'll bring it up. 

In retirement reducing your income to the minimum required has great benefit in reducing your tax bill.   

1. Getting a whopping single payout one year might push you into an ugly tax bracket and eat 35% of your savings.  So the pension would be a winner in that case.

2. I also have a deferred comp plan.  My plan had different rules for almost every year that I contributed.  I trusted the word of the plan admin and didn't read every page of every years plan.  On leaving the company I was shocked to find out that several years of contributions were distributed the day after I quit.   So my income for my first year of retirement exceeded my normal income from my job!

I hope that helps.