take lump sum pension payout?

[heartygrain]

Hi All,
I really enjoy reading these forums, there are so many helpful people here.  Just wondering what you all think of this situation.

My wife is 43 and her previous employer has sent us an offer to buyout her pension.  There are 3 options:

1. A lowered monthly payment, because she would be getting it early, of $178/mo starting now for life.  I figured that to be $178 x 12 x 40 years = 85k.  This would be taxed as regular income and would never change. After inflation that $178 is going to be nothing 20 or 30 years from now and it's not much now.

2. $30k lump sum which we would rollover to an IRA to avoid taxes.  With 7% gains that could be $450K after 40 years.  It's likely we would tap the earnings long before that, but even still, that's a boatload of money.

3. The last option was to do nothing and collect the pension when eligible.  They did not say what the value would be but I think it starts at age 55.  If use the 85k figure as the amount the company expects to pay out, I estimate the monthly payment to be $250 or so.  Obviously, I need to get some more clarity around option 3.  I'm guessing they did not provide a lot of detail because this is their least preferred option.

To me, it seems like a no brainer to take the 30K lump sum.  Am I missing anything?

[MDM]

To me, it seems like a no brainer to take the 30K lump sum.  Am I missing anything?

Yes, you are treating option #1 as if you put the money under your mattress while in option #2 you invest wisely and get good returns.  Check the FV function in Excel (or other spreadsheet program) and it will show that options 1 and 2 are much closer.  Need more info about #3....

[heartygrain]

Thank you, I see what you are saying.  If we invest the $178 monthly and gain 7% they are roughly equivalent.

[RichMoose]

I would definitely ask for more clarification on Option 3. What age does is start, would the payout be indexed to inflation, what is the estimated payout based on the pension plans actuary values?

Based on your age, it's very likely that Option 3 would be the best for you. And also what the company doesn't want to do because it leaves the pension on their books.

[SnackDog]

If you take the lump sum today, crash your car tomorrow and get sued for negligence you could lose it all.   The pension payments can not be taken away, although I think if the employer collapses the pension could be lost depending on what state pension insurance scheme applies.

[dividendman]

While SnackDog makes a point that you could lose the money if you had it today, assuming you are a somewhat intelligent person, it's more likely the current *employer* will go into bankruptcy or do something else to change the pension in the future.

A bird in the hand is worth two in the bush - take the cash. I always like being in control of my own destiny (as much as possible).

[surfhb]

It's a no brainer.....take the payout and invest wisely

[plank]

Are there survivor benefits in option 1?  That would tip the scales toward option 1 if so.

[heartygrain]

Thank you for the advice.  The monthly benefit payment is actually $188 as a single life annuity.  We can choose a 50% or 75% joint and surviving spouse annuity with a slightly lower payout.  If she doesn't accept it now she will be eligible to start it at 55.  I need to check on the value of the estimated benefit if she waits until 55.  And I'll check if it is indexed for inflation, too.

We don't need the $188/month and we have 800k in other retirement accounts, so this is a small piece of the total picture, if that matters.

[RichMoose]

I have a similar dilemma: 300,000 commuted value (today) have I accumulated between ages 23-38. Will pay 12,000 at 50years old. And Pays 24,000 at 65 years. I have another pension that started at 38 years till current (age 49).  Impossible to predict which is better - I'd have to know average earning and age of death  to know best choice  I was thinking of keeping for security/peace of hominid issues. But I hate the thought of it disappearing upon my death - no estate to offspring.   In Canada. Thoughts?

I personally think of a pension as the bond portion of a total portfolio. If you have significant retirement savings outside of your pension plan, I would take the pension and think of it as the stable portion of your retirement income. Especially if the pension is indexed or partially indexed to inflation. However, if its your only savings, I would cash it out if you can do it all non-taxable (eg. you are under the established CRA limits and can put it all in your LIRA or if you're outside your limits you have the necessary RRSP room).

Can you provide some more information on your income, expenses, assets, and liabilities?

[Dodge]

Thank you, I see what you are saying.  If we invest the $178 monthly and gain 7% they are roughly equivalent.

$30,000 growing in an IRA, vs adding $178 monthly to a taxable account?  For tax purposes alone, I'd go with the lump sum.  If you get returns more in the 11.5% range, like we had in the last 30 years, instead of 7%, the gap gets much bigger:



vs



I vote for the lump sum.

[YoungInvestor]

As a general rule, the different ways you can get your payout in should be equivalent (or just about equivalent) based on the fund's assumptions (for mortality, RoI, fees, etc.).

Obviously, fees should be a lesser component if you pick the lump sum, but there may be other reasons  why either option is better in your own situation.

[Goldielocks]

"Previous Employer" + ">15 years to "retirement age" = "Cash out"   in my books.

If under 15 years, or your current employer, the danger of bankruptcy without your being aware of it is less.
The exception is if it is one of the new "guaranteed" pensions, not linked to the business finances. (eg. money have been placed in trust outside of the company influence for future pension commitments)

20+ years?  Yep, I voted for control over the Cash lump sum as my decision.

Taking a monthly amount now versus Cash - that is for your calculator, assumptions, and personal preference to decide.