Author Topic: Retirement Imminent/Lump Sum vs. Pension?  (Read 7348 times)

ibleedirish

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Retirement Imminent/Lump Sum vs. Pension?
« on: January 02, 2015, 12:33:02 PM »
Hi everyone,
My parents are retiring in the next 3 months, and have to choose whether to take a lump sum or pension. I've been trying to help them with the decision, and thought I'd throw their details out there to the community and get your thoughts. Their stats:

Dad: 58 years old retiring effective March 1, 2015
Mom: 56 years old, both healthy
They are 100% debt free

Assets:
Traditional IRA - $175,000
Roth IRAs - $25,000
401-K - $350,000
Cash - $50,000
Fixed Assets - $400,000 This includes 2 brand new cars, a fancy RV that will be a large part of their retirement entertainment, and a $300k paid for house.

Monthly expenses: $5700

Retirement Options
Monthly Pension - Before Age 62 -$4,300 monthly
                                    After Age 62 - $4,000 monthly
                                    Surviving Spouse Benefit - $2,600 monthly

Lump Sum would be - $860,000

Questions
1. Would you take the lump sum or pension? Why?
2. Would anyone be concerned about taking the lump sum and investing that in the market, as high as it is right now?

Thank you for the input and happy new year!


Mommyof2

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #1 on: January 02, 2015, 12:41:15 PM »
I'm wondering if they are debt free, why their expenses are so high especially with a pad for home but that was it the question asked.

I have heard it is always better to take the lump sum but they should probably discuss with their accountant and investment advisor.

ibleedirish

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #2 on: January 02, 2015, 12:52:01 PM »
Mommyof2

Thank you, I have have similar questions about the budget. But for the sake of the discussion lets just assume it is what it is for now. Thoughts?

RetiredAt63

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #3 on: January 02, 2015, 01:01:59 PM »
They could do a comparison - take the parameters of the pension (value, indexing, etc.) and see what an annuity that is identical would cost to purchase.  Then how does the lump sum differ? More or less?  And how reliable is the company/whatever that is providing the pension?

Moshe Milevsky looks at the math in The 7 most important equations for your retirement.  Geeky but good.

Franklin

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #4 on: January 02, 2015, 01:11:29 PM »
My rough calculation shows that the lump sum would garner about $5k per month based on 7% market return.  If it was as easy as that then obviously the lump sum is a better choice.  However, it would be lumpy and not guaranteed.  So your parent's risk tolerance would come into play.

If they brought expenses down perhaps they could take the monthly pension (and eventually SS) and reinvest a little.  This would give them the best of both worlds.

Very interested in the responses because I'm looking at a similar scenario in the future.

dandarc

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #5 on: January 02, 2015, 01:19:36 PM »
What is the social security outlook for them?  They could start taking that in as little as 4 years, so that is a significant factor.

I was initially thinking payments due to the 5.5%+ equivalent withdrawal rate to the lump sum, but that comes with a big risk if the "surviving spouse" payment kicks in much earlier than expected.  If SS is going to be significant, taking the lump sum might not be a bad idea to reduce risk.

Gone Fishing

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #6 on: January 02, 2015, 01:25:31 PM »
Looks like your folks have prepared well for retirement.  Good on them!  As such, they can probably afford to take a little more risk in the market vs someone right on the edge.

Need some info on what they expect their SS income to be.  The SS income is pretty much guaranteed for their life time.  Another big question is if they would like to leave an inheritance and if so how much.  If they take the pension, the $860k is essentially gone (unless they invest the payments).  Some folks are fine spending every penny, others get great pleasure from passing on their wealth to their children and charity.

If it were me, I would cash out the pension, invest it an a conservative low fee income fund, and consider the SS as the guaranteed income .  If the idea of exposing the entire $860k to the market is too much, I would buy a smaller annuity, perhaps $200-$500k and invest the difference. 

The whole idea being that annuities (and pensions) are expensive.  Some guaranteed income in a "normal" retirement is a good thing for the mental well being especially as they age; however, too much is just throwing away money on unneeded "insurance".  Another consideration is your parent's temperments.  Do they get extremely nervous during a downturn?  Or are confident the market will recover?  The answer to this will help determine what the best course of action for them will be.     

ibleedirish

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #7 on: January 02, 2015, 01:38:47 PM »
Thank you So Close, I'm working on getting those social security figures for you.

Anyone have any reservations about the lump sum with the market being up?

Gone Fishing

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #8 on: January 02, 2015, 01:52:01 PM »
One additional point to consider is the degree / level of indexing of the pension amount, if any.  It can be expensive to replace that in an annuity, so make sure you're comparing apples to apples.

+1 Annuities have more bells and whistles than you can imagine and can drive you mad trying to compare when you start adding options.  If it sounds too good to be true it probably is.  When comparing annuity payouts to the pension, try to keep it as simple as possible. 

ibleedirish

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #9 on: January 02, 2015, 02:02:31 PM »
Dad's SS: $1,800/month
Mom's SS: $900/month
They both plan to take SS at age 62.

Thanks everyone, this is great stuff so far. Very helpful

Allen

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #10 on: January 02, 2015, 02:08:00 PM »
The math is close but I vote cash out.

Why?  Because they can and do still screw with pensions after you are retired.  Once it's cashed out it is yours, in an accident it can be passed down to heirs instead of just forfeit, and no MBA can rob you somehow.

And anything they can do to cut their expenses will dramatically increase their odds of never running out of money.  They do seem well positioned though, especially with SS.

ibleedirish

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #11 on: January 02, 2015, 05:39:36 PM »
Any other votes? Pension vs Lump Sum?

Prairie Stash

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #12 on: January 02, 2015, 06:37:47 PM »
Lump. The survivor benefit is nice, but possibly small for your mom. If they go pension can you get life insurance on your dad? If something happens to your dad in the next 10 years what would your mothers budget look like? Plan for the worst, hope for the best.

Guizmo

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #13 on: January 02, 2015, 06:40:58 PM »
Pension.

At 4% SWR, $860k gives you a monthly allowance of $2,866.

This pension is giving them at least $4,000 monthly.

Prairie Stash

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #14 on: January 02, 2015, 10:31:52 PM »
4% assumes it's indexed to inflation. 4300/month is a 6% payout with nothing at the finish, no inflation protection. It's apples to oranges comparing SWR

Cassie

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #15 on: January 03, 2015, 02:41:14 PM »
Pension unless they think the company is going to go bankrupt.   Is it a public or private employer?

fields

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #16 on: January 03, 2015, 02:52:53 PM »
I'm wondering why there is one lump sum for both of them.  Can you look at them separately?  What if one took the lump sum and the other the pension?  Would that help balance the risk?

ibleedirish

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Re: Retirement Imminent/Lump Sum vs. Pension?
« Reply #17 on: January 03, 2015, 03:04:33 PM »
Fields: My dad worked outside the home. Mom was a stay at home warrior. The pension/lump choice is for my dad's retirement.

Cassie: Private (debatable now i guess). General Motors. Already went bankrupt. Could they again? I don't see why not.


Guizmo: I hear what you are saying re: take the pension because of the difference in SWR. But I feel like that ignores the possibility of one or both passing away early. Thats a lot of $$$ to leave on the table if either passes away early... I'm concerned that if dad passes, mom already has the lower Social Security check, and then the lower survivor benefit. 

I view normal retirement (I guess they still are early by most standards) a little different than FIRE in terms of the 4% rule.  They are interested in leaving an inheritance, but I wouldn't say that leaving the WHOLE nest egg is a big priority. So I expect that they'll draw a little more than the 4% over the years. 

If they take the lump sum, would any of you hold some of it out of the market for a year? Two? Logically, I know market timing is a  bad thing but emotionally.....  Thats a lot of (very important) jack to put out there to take an immediate hit