Author Topic: My past employer is offering me a lump sum pension buyout, do I take it?  (Read 3929 times)

snuka

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I have a small pension plan from a prior employer due to pay me $505.93/month beginning 10/1/2034 when I am 65. I just got a glossy package in the mail telling me that I can take a lump sum payout of $30,072.56 on 12/1/2016. This amount would need to be rolled over in to an IRA to avoid the 10% penalty.  I just turned 47.  Should I take the payout and invest it myself in Vanguard index funds or wait to collect the $506 per month when I'm 65?

bacchi

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #1 on: September 21, 2016, 12:04:14 PM »
How old are you now?

You need to figure out the growth from now until age 65 first.

badbear

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #2 on: September 21, 2016, 12:18:48 PM »
Will the pension income adjusted for inflation or not?

How large/financially stable is the company?

Are there survivor benefits for a spouse? If so, what %?

There are various lump sum value calculators for pensions/annuities out there. You might try some of those and compare the value.


SKL-HOU

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #3 on: September 21, 2016, 12:20:22 PM »
If I did the calculations right, you need to invest and get about 8% interest until age 65 (18 years) to get approximately $500/mo at a 4% withdrawal rate.

acroy

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #4 on: September 21, 2016, 12:23:14 PM »
Take the money
Lowest risk option!
(great problem to have, congratulations!)

boarder42

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #5 on: September 21, 2016, 12:38:40 PM »
take the money.  math was done above.  allows for much more flexibility on your part.  roll into a vanguard IRA and move on living

undercover

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #6 on: September 21, 2016, 12:55:06 PM »
Yep, take the money. The pension is not a bad option - will probably either mimic or outperform a Vanguard fund...but I'd still say it's close enough to take it now.

badbear

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #7 on: September 21, 2016, 12:56:53 PM »
A buyout is probably in your best interest, as others have suggested, especially if it's not an inflation-adjusted pension. It might be worthwhile to try to negotiate a higher lump sum, especially if you can provide some pension valuation calculations that show a higher lump sum value.

TexasRunner

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #8 on: September 21, 2016, 01:05:58 PM »
Survivor benefits?  Married?  If no (to either) take it.  My 2cents.

BrickByBrick

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #9 on: September 21, 2016, 03:13:56 PM »
Just adding to the chorus:

If you're married and the pension would pass to your spouse that is something you really need to consider when making this decision.  If not, or if you determine your spouse would be just fine with your existing investments (and/or that you can do better personally) - then take the payout.

Personally, I would take the payout regardless and invest it.

MDM

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #10 on: September 21, 2016, 09:11:10 PM »
If you want to do some "what if?"s yourself, there are (at least) three ways to determine "how good must the lump sum investment return be to equal the pension payments?" (assuming further that that is a question one wishes to answer).  See the table below, in which the 6.3% interest rate corresponds to a 2% COLAed pension that would last for 25 years.  See rows 69-89 in the 'Misc Calcs' tab of the case study spreadsheet if you would like to use different numbers.

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" (Future Value 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$30073
Payment starting nowPmt_now0$/payment
Interest ratei6.286%/yr
number of yearsn18yr
number of payments/yearfreq12/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$92957
Interest generated by Future ValueFV(i,n,P) * i487$/payment
Longevity of future pensionL25yr
Constant withdrawal of FV over time LPmt_future615$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)6071$/yr
506$/pmt

snuka

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #11 on: September 22, 2016, 12:03:36 PM »
How old are you now?

You need to figure out the growth from now until age 65 first.

I just turned 47.

KCM5

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #12 on: September 22, 2016, 12:11:46 PM »
If that pension is inflation adjusted, I'd keep it in the pension. If not, I'd take it out.

Based on the payout amounts, I suspect that it is not inflation adjusted.

FIRE_at_45

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #13 on: September 22, 2016, 10:27:12 PM »
I happen to be in a similar position myself right now.  I'd call the pension company and ask them how they arrived at the calculation.  In my case they use 3 different bonds that are currently at historic lows.  I had a chance at a buyout 3 years ago and decided to keep the pension adjusted kick ass DB plan.  Now, I'm thinking differently so I approached them about a recalculation.  Since the bond interest rates have plummeted, they have to invest more now to provide the same DB pension later (that's how they calculate it).  For me I feel like I just got the lottery because it went up to a tune of 18% compounded annually for 3 years.  Just shit luck but I'll take it!

If you have this information it should help you with the decision of whether you want to wait until later for a buyout (if that's even possible in your case).  The other thing to ask is how long do you have to decide.  When my ex reaches 50 I must stay with the DB.  You may have some similar language. 

For me it's all about having control of the money and having it sooner than 60.  In Canada, I can draw off my locked-in pension at 55, not 60 and that's a big factor. 

$30,000 isn't anything to scoff at.  Good luck with your decision!

SweetTPi

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Re: My past employer is offering me a lump sum pension buyout, do I take it?
« Reply #14 on: September 23, 2016, 09:07:30 AM »
I recently took a pension buyout, for 2 reasons. 

First, the math worked (and it was smaller with a much longer time frame than yours). 

The second reason was actually emotions based; There is a risk associated with assuming that the pension plan will still be there paying out the promised benefits in X years (35! years for me).  I decided that while I wasn't counting on a pension at all in my plans, the reward of guaranteed money was not worth the risk.