Author Topic: Pension Plan vs. Investment/Buy Out "Product" Question  (Read 3307 times)

Rollin

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Pension Plan vs. Investment/Buy Out "Product" Question
« on: May 20, 2015, 11:02:21 AM »
I am in a defined benefit pension plan that will provide approximately $28,000/year upon my (early) retirement.  I also have an option to have that converted to an investment plan which would them allow me to leave it in the current entity's plan or take control of it myself.  Under the self-control option I have been told that there may be an opportunity to take that lump sum (approx. $300,000) and bid out to see if the $28,000/year can be matched.

At the moment with interest rates so low it probably won't pan out that way, but I'll look into it more next year.  It doesn't seem feasible that I could generate $28,000/year on $300,000, but I don't know all the details as yet.  The big draw at the moment is that instead of under the pension plan the payments stop the month I "kick it", but under the bidding out option they continue for my surviving spouse (up to a point).  That sounds like a win situation.

Are any of you familiar with this, know of any more positives, or are aware of any drawbacks?

hodedofome

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #1 on: May 20, 2015, 12:01:24 PM »
Don't know all the ins and outs of your plan but all things being equal, I'd take a guaranteed >9% return over managing it myself.


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MDM

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #2 on: May 20, 2015, 01:03:16 PM »
Don't know all the ins and outs of your plan but all things being equal, I'd take a guaranteed >9% return over managing it myself.
+1

The "if it seems to good to be true..." question does however come to mind.

Rollin

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #3 on: May 20, 2015, 01:23:21 PM »
Don't know all the ins and outs of your plan but all things being equal, I'd take a guaranteed >9% return over managing it myself.
+1

The "if it seems to good to be true..." question does however come to mind.

I agree and will find out more.  I think that the benefit for them is that they get to keep the money after both my wife and I kick it (that is s term my funny mom uses and I like).

Gone Fishing

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #4 on: May 20, 2015, 02:07:16 PM »
How old are you now, and old would you be when the $28k kicks in?  Is the $300k a current cash value or a projection of the future cash value?  If it is a projection of the future cash value, an increase in rates could actually reduce the lump sum value of a defined benefit pension.

Just for clarity, that would not a 9% return, but rather a 9% payment, quite a difference.  At any rate it is certainly not guaranteed as it would depend on you staying alive.


Rollin

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #5 on: May 20, 2015, 02:11:12 PM »
How old are you now, and old would you be when the $28k kicks in?  Is the $300k a current cash value or a projection of the future cash value?  If it is a projection of the future cash value, an increase in rates could actually reduce the lump sum value of a defined benefit pension.

Just for clarity, that would not a 9% return, but rather a 9% payment, quite a difference.  At any rate it is certainly not guaranteed as it would depend on you staying alive.

53 now, and retire next April when I'll be 54.  That $300,000 (approximated) is what the dollar amount is that they'd give to me in April of 2016.

MDM

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #6 on: May 20, 2015, 02:37:53 PM »
How old are you now, and old would you be when the $28k kicks in?  Is the $300k a current cash value or a projection of the future cash value?  If it is a projection of the future cash value, an increase in rates could actually reduce the lump sum value of a defined benefit pension.

Just for clarity, that would not a 9% return, but rather a 9% payment, quite a difference.  At any rate it is certainly not guaranteed as it would depend on you staying alive.

53 now, and retire next April when I'll be 54.  That $300,000 (approximated) is what the dollar amount is that they'd give to me in April of 2016.
In that case, $28K/yr instead of $300K lump sum would be ~9% return if you live another 40 years.  It would be "only" ~8.6% if you live another 30 years.  And if you live only 10 years, it would be -1.35%.

Return can be calculated as the interest rate needed to pay a $300K mortgage over X years at $28K/yr.  You would withdraw both the $300K principal plus all earnings over those years.

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #7 on: May 20, 2015, 02:59:25 PM »
Just playing with https://gie.fidelity.com/estimator/gie/gielanding it appears you might have to take a significant hair cut (around $10k/yr) to purchase a policy with a survivor benefit on the open market.  It will be interesting to see what they offer you next year. 

Other options include:

Self insuring-Will your wife realistically need the extra $28k/yr between SS and other assets if you are not around?

Using a portion of the $28k/yr to purchase a life insurance policy suffcient to replace the $28k or a portion of it in the event of your demise.   

Unless I am way off with my estimations, I would be inclined to take the $28k and self insure (assuming you have a decent six figure+ portfolio, SS benefits, etc.)   

I'll be interested in what others have to say...

hodedofome

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Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #8 on: May 20, 2015, 03:44:16 PM »
I'm not a pension expert but most pensions make an assumption of 8% returns over the long haul and the employee 'gets' a 5% return. I only know the investing side of pensions, not the benefits side. So basically the pension expects to make 8% returns on their assets and the employee gets 5% returns while they are contributing to it during their working life.

I cashed out my wife's teacher retirement when she decided to stay home with our kids because her account was only going to grow by 5% a year, and I was confident I could do better than that on my own.


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Rollin

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Re: Pension Plan vs. Investment/Buy Out "Product" Question
« Reply #9 on: May 20, 2015, 06:29:48 PM »
Just playing with https://gie.fidelity.com/estimator/gie/gielanding it appears you might have to take a significant hair cut (around $10k/yr) to purchase a policy with a survivor benefit on the open market.  It will be interesting to see what they offer you next year. 

Other options include:

Self insuring-Will your wife realistically need the extra $28k/yr between SS and other assets if you are not around?

Using a portion of the $28k/yr to purchase a life insurance policy suffcient to replace the $28k or a portion of it in the event of your demise.   

Unless I am way off with my estimations, I would be inclined to take the $28k and self insure (assuming you have a decent six figure+ portfolio, SS benefits, etc.)   

I'll be interested in what others have to say...

I can do the pension plan that is a reduced payment while I'm alive for the tradeoff of keeping the benefit going should I go (longterm:).

I have not answered the question as to whether she needs it or not, but if all else is equal or close) I wouldn't want to leave it on the table.