Pension Buyout

[MrAlanBreck]

Hi All,

I just got a letter from my previous employer with an offer to liquidate my pension now.  The pension offers:

450 a month every month after 65.  Survivorship for spouse.

Their buyout offer is 15,500, given in October.

I'm planning on taking it, but my main concerns are getting taxes on the lump sum.

Currently we put 12,000 a year into a 401k.  We put about 4000 a year into standard investments.  This is only going to increase, as we've just gotten through some heavy medical expenses.

From what I see.  I can put:

6000 to max out the 401k
5,500 into a traditional IRA

This leaves about 4k that is taxed. 

I'm also wondering if I should hold out and see if they give a better offer in a few years.  They really want to get rid of their pensions, and may give a more aggressive offer. Then again, I might lose out completely.

Let me know if any assumptions are incorrect.  Any thoughts or advice would be appreciated.

Edit:  I am mid-30s

[Aggie1999]

If you take the buyout you can't direct transfer the money into a tIRA? My employer tells me when I leave the company the pension balance I have can be transferred to a tIRA tax free if I so choose. Of course my situation is not a buyout.

[Hargrove]

What's the strength of the company?

The buyout is worth ~413/mo invested at 10% with 3% inflation using the 4% rule from age 35-65.

[EarthSurfer]

I recently was asked by a friend to help her evaluate a buyout offer from a former employer. While I'm well above average with investment math, I quickly learned that annuities are complex.

It is best evaluated to have the offer by a professional with the proper calculators. My financial advisor spent far longer explaining the results than punching in the numbers.

In my friend's case, the numbers were close assuming she lived to her life expectancy of 86 yrs with a net return of 5% (assuming 7% growth less 2% inflation).

The annuity offered through her former employer was more full featured and top rated, and she could not purchase a similar annuity at the discount rate offered.

Given she is not a good investor, it is likely keeping the annuity option is best for her.

The real downside to a good lifetime annuity is the lack of any death benefit (unless purchased). There is no money left for the estate or heirs.

I used to think I understood annuities, and now I realize how little I actually know! Personally, I try to avoid investments I don't understand.

[Mr Mark]

Buyout number seems pretty reasonable to me if you and spouse are mid 30s and the monthly payout isn't going to be increased for inflation (i.e. the $450 is the nominal payout you will get in 30 yrs time future dollars) .

[Lucky Recardito]

If you take the buyout you can't direct transfer the money into a tIRA? My employer tells me when I leave the company the pension balance I have can be transferred to a tIRA tax free if I so choose. Of course my situation is not a buyout.

^^^ You should be able to roll the money into a tIRA and avoid any taxes now. And no impact to your $18K limit for your 401k contributions, because you contributed to this pot in prior years and it's already accounted for.

We did this just last year with a small pension buy-out from my husband's previous employer. We were able to elect that it would be a rollover, and had the payout check made out to Vanguard "FBO (for the benefit of) Husband." When it arrived, he filled out a form (I think we called Vanguard to make sure we downloaded the right thing) and mailed the check and the form to Vanguard. Easy-peasy, with no trouble at tax time -- the documents we received from the pension correctly indicated it was a rollover and there was no tax impact.

ETA: The math on Husband's rollover was similar to yours, and with a similar timeline (age mid-30s) -- for us, we didn't worry much about the annuity math (since it worked out pretty much 'meh'). We wanted to roll it over because we didn't want to track a pension at an old employer for the next 30+ years for a few hundred dollars per month in income... and because we plan to retire sometime before age 50, and would prefer to keep our options open with our $$ (since we'll already have SS likely kicking in as a small baseline annuity by our late 60s).

[Davids]

I would take the buyout. No guarantee it will be available in 30 years.