Author Topic: Should I start collecting Pension or continue defering  (Read 5207 times)

mrmichaels

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Should I start collecting Pension or continue defering
« on: April 03, 2015, 02:30:59 AM »
I have a question about whether I should continue to defer my pension from a previous employer or start collecting.  Iím 44 years old and my wife is 40.  For the rest of 2015 the deferred amount will collect an 8% guaranteed return.  Starting January of 2016 the return is being reduced to 6%.  The forecastís Iíll include below were based on the 8% return. 
Potential reasons for collecting now are 1) the pension money is an asset of that company and if the company folds the money goes with it 2) its better to get the money into my name.
If I started collecting now I can get
1)   $988/month single life annuity (if I die wife gets nothing)
2)   $955/month 50% Joint survivor (if I die my wife continues to collect 50%)
3)   $931/month 100% Joint survivor (wife continues to collect 100%  if I die)
If I wait 15 years and start collecting in August 2030 Iíd collect (based on the 8% so itís actually less now)
1)   $3763/month single life
2)   $3500/month 50% Joint survivor
3)   $3274/month 100% Joint survivor
Obvioulsy If I started collecting Iíd need to be responsible and diligent with the money.  So the thought is Iíd either use it to pay extra toward my mortgage or invest into a Roth for my wife and me.  Iíd really love to hear your opinion on this and any advice you can offer.

Thanks in advance


GeorgiaCPA

  • 5 O'Clock Shadow
  • *
  • Posts: 15
  • Location: Roswell, Georgia
Re: Should I start collecting Pension or continue defering
« Reply #1 on: April 03, 2015, 07:46:04 AM »
I'm not sure what I would do given the situation, but here is an argument AGAINST taking the pension now:

Assuming that this occurs on your 44th birthday and you can invest the entire years proceeds on your birthday, and that the alternative is to take the pension on you 60th birthday (15 years).  I am using a simple TVM calculation on an annual basis.

You take 100% J&S and receive $11,172 per year.  Also assume that you can keep 75% of the pension payments after tax (generous) and you can invest those balances at 8% (based on your assumed forecasts).  For the next 15 years you add $8,379 to your investment account on your birthday (including your 44th b-day).  After 15 years you would have accumulated approximately $275K, which at 8% would spin off $1,829 (well above the SWR if you care about that sort of thing).  Including the $931 you would generate $2,760 per month, which is less than your $3,274 projection.  If you averaged 6% returns your combined payments would generate $2,071 per month and at 10% you would generate $3,692 per month.

The argument FOR taking the pension would be along the lines of having cash in the bank versus promises from a corporation that vaporize upon death.  They could freeze the plan, declare bankruptcy, etc and then your projected cash flows would really be affected.  You would need to be very diligent about consistently investing the pension to make it work for you.

Sit down and map out the cash flows as they pertain to your exact situation and see what makes the most sense.  The penalty for taking 50% J&S is so nominal that it really doesn't make much of a difference either way, but you could always factor in a life insurance policy to cover the difference.

Dee18

  • Handlebar Stache
  • *****
  • Posts: 1624
Re: Should I start collecting Pension or continue defering
« Reply #2 on: April 03, 2015, 08:10:34 AM »
My opinion would depend on whether the pension is protected by the Pension Benefit Guarantee Corporation.  Someone on MMM told me about this when I expressed concerns about the long term prospects for my pension.  Mine is guaranteed so I am delaying it for now.

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1494
  • Age: 71
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Should I start collecting Pension or continue defering
« Reply #3 on: April 03, 2015, 09:37:17 AM »
I have a question about whether I should continue to defer my pension from a previous employer or start collecting.  Iím 44 years old and my wife is 40.  For the rest of 2015 the deferred amount will collect an 8% guaranteed return.  Starting January of 2016 the return is being reduced to 6%.  The forecastís Iíll include below were based on the 8% return. 
Potential reasons for collecting now are 1) the pension money is an asset of that company and if the company folds the money goes with it 2) its better to get the money into my name.
If I started collecting now I can get
1)   $988/month single life annuity (if I die wife gets nothing)
2)   $955/month 50% Joint survivor (if I die my wife continues to collect 50%)
3)   $931/month 100% Joint survivor (wife continues to collect 100%  if I die)
If I wait 15 years and start collecting in August 2030 Iíd collect (based on the 8% so itís actually less now)
1)   $3763/month single life
2)   $3500/month 50% Joint survivor
3)   $3274/month 100% Joint survivor
Obvioulsy If I started collecting Iíd need to be responsible and diligent with the money.  So the thought is Iíd either use it to pay extra toward my mortgage or invest into a Roth for my wife and me.  Iíd really love to hear your opinion on this and any advice you can offer.

Thanks in advance

The bolded type above is enough of a reason for me to decide to take the money now and run.  In fact, I did just that a few years ago.  Since I did not actually need to spend that money, I put it all into a brokerage account as it came in and invested it for the future when/if I actually need it.

A bird in the hand, you know!

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Should I start collecting Pension or continue defering
« Reply #4 on: April 03, 2015, 10:03:17 AM »
My opinion would depend on whether the pension is protected by the Pension Benefit Guarantee Corporation.  Someone on MMM told me about this when I expressed concerns about the long term prospects for my pension.  Mine is guaranteed so I am delaying it for now.

Even if your pension is protected by the PBGC, if the PBGC ends up taking over the pension that means the company either went bankrupt or they have severely underfunded the pension assets.  You will collect something closer to 30 cents to the dollar.  So that $30k a year pension you were collecting will be closer to $9k a year.  My dad worked for Fortuneoff and after working there 15 years his pension went down from 1100 a month @ age 65 to around $370 a month after the company declared bankruptcy and the PBGC took it over.

greatrussian

  • 5 O'Clock Shadow
  • *
  • Posts: 15
  • Age: 347
    • Great Russian Money
Re: Should I start collecting Pension or continue defering
« Reply #5 on: April 03, 2015, 04:11:52 PM »

Assuming that you are in the US, can you confirm whether your plan is qualified or non-qualified?

A qualified plan is required to hold assets in a trust so that it isn't solely dependent on the company to provide the benefit.

A non-qualified plan is not required to hold assets, but is subject to IRS rules (409A) which limit how and when the benefit can be paid.

Since you are asking whether you should start collecting - it suggests to me that you have a qualified plan, and your fear of losing benefits is partially unfounded.

Doulos

  • Stubble
  • **
  • Posts: 116
  • Age: 41
Re: Should I start collecting Pension or continue defering
« Reply #6 on: April 03, 2015, 04:51:37 PM »
Can you get lump sum?
$988 to expected life of 79.  (not sure what number pensions use)
being 44 now, you are talking 35 years.
$988 x 12 x 35 = 414960.
What you have happening is them assuming they pay you a fixed rate for 35 years that adds up to this $414,960 (roughly).

That will be back calculated to a value today.  If you are talking %, they probably already have this value in mind.
8% of 1 year puts that total at $148200.

If that is the total, and you invest this yourself, it puts you closer to FIRE right now.  Which is great.  It also solves problem 1 & 2.  Ensures your wife gets everything, etc.
With a $148,200 lump sum, To get that same return ($414,960) investing yourself if you assume 7% growth it would only take 15 years.
If you took that 988 per month and invested it at that same 7%, it would take 18 years to hit $414,960, but then you would still keep getting payments, assuming you and your company both survive.

Either way, I would suggest a life insurance policy to cover the money as opposed to taking a $57 hit. 
A good term life policy that pays more than $500k+ is cheaper than that $57 per month.

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Should I start collecting Pension or continue defering
« Reply #7 on: April 03, 2015, 05:00:46 PM »
Since you are asking whether you should start collecting - it suggests to me that you have a qualified plan, and your fear of losing benefits is partially unfounded.

This is absolutely an incorrect statement, just because a plan is qualified and it has to follow strict ERISA guidelines does not mean loss of benefits are remote.  The assets are held in a trust but the funding requirements are based on actuarial assumptions which is set at the inception of the plan and is not required to be updated, for example some plans assume a rate of return of 8% when in reality it only returns 4% on average.  This can make a plan significantly underfunded, other optimistic assumptions such as turnover and tenure can significantly cause a plan to be underfunded.

If qualified plans are so well funded and chances of insufficient funding are remote why is there even the need for a PBGC that other pension plans have to pay into?

Again just ask all the retirees that had their pensions taken over PBGC that were all qualified plans if they are getting close to what has been promised to them.  Case in point was Enron's qualified retirement accounts which all went close to zero because it was mostly held in Enron stock.

MDM

  • Walrus Stache
  • *******
  • Posts: 9619
Re: Should I start collecting Pension or continue defering
« Reply #8 on: April 03, 2015, 06:06:57 PM »
I'm not familiar with the details of PBGC taking over payments from a bankrupt company so this is just a question: it seems from http://www.pbgc.gov/wr/benefits/guaranteed-benefits.html that the PBGC will pay up to ~$5K/mo at age 65.

Is that correct, and if so does that mean OP is safe (assuming the PBGC remains in place)?

mrmichaels

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Should I start collecting Pension or continue defering
« Reply #9 on: April 04, 2015, 12:33:25 AM »
Thanks for all the responses.  It's a tough choice for me.

I can not take a lump sum distribution.  My only choice is the monthly installments.  Last time I checked which was a few months back the "pot" amount was around $140,000.

MDM

  • Walrus Stache
  • *******
  • Posts: 9619
Re: Should I start collecting Pension or continue defering
« Reply #10 on: April 04, 2015, 12:59:20 AM »
It's a tough choice for me.
It's not just you.  To make the correct financial choice you have to know at least
 - your investment return on the money
 - when you will die.

Beyond that, you could also look at
 - tax effects (including changes in marginal tax bracket, effect on SS income, etc.)
 - value of the money to you at different points in your life (e.g., will you enjoy it more when younger, or appreciate it more when older?)
 - and probably others.

Fortunately, if your situation is anything like ours (and it appears to have some similarities), the curve of total amount vs. starting age is rather flat over many different ages.  In other words, it may not matter all that much in the end.

I might choose to defer it as long as possible within the OP scenario (i.e., between now and 15 years from now) so that when/if you decide to retire completely this pension can be a bridge to age 59 1/2 and your penalty-free access to tax-deferred money.

Some spreadsheet work (and knowledge of how this company calculates pension payments for starting between now and 15 years from now) could show you how much it might matter to you.

The term life insurance suggested by Doulos also is worth considering.

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1494
  • Age: 71
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Should I start collecting Pension or continue defering
« Reply #11 on: April 04, 2015, 06:56:58 AM »
I have a question about whether I should continue to defer my pension from a previous employer or start collecting.  Iím 44 years old and my wife is 40.  For the rest of 2015 the deferred amount will collect an 8% guaranteed return.  Starting January of 2016 the return is being reduced to 6%.  The forecastís Iíll include below were based on the 8% return. 
Potential reasons for collecting now are 1) the pension money is an asset of that company and if the company folds the money goes with it 2) its better to get the money into my name.
If I started collecting now I can get
1)   $988/month single life annuity (if I die wife gets nothing)
2)   $955/month 50% Joint survivor (if I die my wife continues to collect 50%)
3)   $931/month 100% Joint survivor (wife continues to collect 100%  if I die)
If I wait 15 years and start collecting in August 2030 Iíd collect (based on the 8% so itís actually less now)
1)   $3763/month single life
2)   $3500/month 50% Joint survivor
3)   $3274/month 100% Joint survivor
Obvioulsy If I started collecting Iíd need to be responsible and diligent with the money.  So the thought is Iíd either use it to pay extra toward my mortgage or invest into a Roth for my wife and me.  Iíd really love to hear your opinion on this and any advice you can offer.

Thanks in advance

If you start collecting now, in 15 years you will have collected approximately $175,000.  If you invest the money instead of using it to pad your present lifestyle, your pot will have increased to at least $250,000.  Probably more.

In 15 years, that $250,000 at a 4% SWR will yield you $10,000 a year in passive income.  And you won't have the risk of a pension implosion.

If you start collecting now and wanted to accelerate FIRE, the $12K a year that you would be getting would immediately lower your FIRE stash requirement by $300,000 ($12K x 25).

So, there's some pluses about taking the pension now for you to consider.

Good luck.

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Should I start collecting Pension or continue defering
« Reply #12 on: April 04, 2015, 05:26:40 PM »
I'm not familiar with the details of PBGC taking over payments from a bankrupt company so this is just a question: it seems from http://www.pbgc.gov/wr/benefits/guaranteed-benefits.html that the PBGC will pay up to ~$5K/mo at age 65.

Is that correct, and if so does that mean OP is safe (assuming the PBGC remains in place)?

For the PBGC to pay up to $5K/month at age 65 that mean your original pension would have to be the close to 15-20k a month to begin with.  Again they only pay around 30 cents to the dollar of what your original pension would have been, at best.

beltim

  • Magnum Stache
  • ******
  • Posts: 2842
Re: Should I start collecting Pension or continue defering
« Reply #13 on: April 04, 2015, 06:02:45 PM »
I'm not familiar with the details of PBGC taking over payments from a bankrupt company so this is just a question: it seems from http://www.pbgc.gov/wr/benefits/guaranteed-benefits.html that the PBGC will pay up to ~$5K/mo at age 65.

Is that correct, and if so does that mean OP is safe (assuming the PBGC remains in place)?

For the PBGC to pay up to $5K/month at age 65 that mean your original pension would have to be the close to 15-20k a month to begin with.  Again they only pay around 30 cents to the dollar of what your original pension would have been, at best.

I can't find any sources that verify this.  With a few restrictions, the sources I find (like the actual PBGC web site) says that the amount paid by the PGBC is what you had earned to date.  So if you haven't yet retired, the benefit you've earned may be a lot less than what if would have been if you had continued working until 65.  Maybe that's the source of your 30 cents on the dollar?

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Should I start collecting Pension or continue defering
« Reply #14 on: April 04, 2015, 08:23:48 PM »
Here is just one example of what happens when the PBGC takes a plan over, again it is very dependent on how much a plan is underfunded but the 30 cents to the dollars is a pretty good estimate.

"Pilots will take the biggest hit, taking benefits that might have been $75,000 a year down to about $25,000. That's partly because of limits on PBGC payments and partly because it reduces payments to those who retire before age 65. Before 2007 pilots faced a mandatory retirement age of 60. The limit was raised to 65 that year.

Kit Darby, who runs Air Inc., a career resource company for airline pilots, is one of those pilots who took a hit on an earlier bankruptcy when he retired from United at age 60. Before United's bankruptcy, had had been on track for about $7,000 a month in pension benefits, he ended up with $2,300."

Source http://money.cnn.com/2011/12/01/news/companies/american_bankruptcy_employees/

MDM

  • Walrus Stache
  • *******
  • Posts: 9619
Re: Should I start collecting Pension or continue defering
« Reply #15 on: April 04, 2015, 09:12:13 PM »
That's partly because of limits on PBGC payments and partly because it reduces payments to those who retire before age 65.
I think beltim's question (and I know mine) gets at the definition of "partly" in the two places it is used above.  Note that the degree of underfunding doesn't seem to matter - but until we know exactly that it works that isn't certain either.  Anybody cite a reference to show that definition?

beltim

  • Magnum Stache
  • ******
  • Posts: 2842
Re: Should I start collecting Pension or continue defering
« Reply #16 on: April 04, 2015, 10:46:22 PM »
Here is just one example of what happens when the PBGC takes a plan over, again it is very dependent on how much a plan is underfunded but the 30 cents to the dollars is a pretty good estimate.

"Pilots will take the biggest hit, taking benefits that might have been $75,000 a year down to about $25,000. That's partly because of limits on PBGC payments and partly because it reduces payments to those who retire before age 65. Before 2007 pilots faced a mandatory retirement age of 60. The limit was raised to 65 that year.

Kit Darby, who runs Air Inc., a career resource company for airline pilots, is one of those pilots who took a hit on an earlier bankruptcy when he retired from United at age 60. Before United's bankruptcy, had had been on track for about $7,000 a month in pension benefits, he ended up with $2,300."

Source http://money.cnn.com/2011/12/01/news/companies/american_bankruptcy_employees/

Right this is a great example of what we're saying - the PBGC guarantees pensions already earned at 100% up to the max.  Kit Darby hit the max for someone who retired at age 60.
« Last Edit: April 04, 2015, 10:49:35 PM by beltim »