Author Topic: Pension lump sum to 401k opportunity  (Read 929 times)

AccidentalMiser

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Pension lump sum to 401k opportunity
« on: August 21, 2018, 11:39:21 AM »
So, my megacorp has implemented several changes to our defined benefit plan over the past few years, including no longer funding the accounts of those in my cohort and diverting our pension contribution to our 401ks instead (which I prefer).

Now they are offering us our pension as a lump sum rollover to our 401k as a "one and done" single opportunity offering.

So, my choices are 75k rollover now or about $500/month for life starting in 2022. (when I'll RE at 55.)

For me, I have asked myself whether or not I would buy a $500 annuity in 4 years for $98k (75k compounded at 7%/yr).  The answer to that is NO for me so I'm planning to take the lump sum now and invest it. 

Also, we have fidelity brokerage link in our 401k plan so I can invest it however I want to (not stuck with crappy funds like a lot of folks are.) I also have several houses/apartments which constitute a non-stock market income stream of about net 2k/month.

So, what would you do?  Anything else I should consider?

Thanks!

Scortius

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Re: Pension lump sum to 401k opportunity
« Reply #1 on: August 21, 2018, 02:00:57 PM »
So, my megacorp has implemented several changes to our defined benefit plan over the past few years, including no longer funding the accounts of those in my cohort and diverting our pension contribution to our 401ks instead (which I prefer).

Now they are offering us our pension as a lump sum rollover to our 401k as a "one and done" single opportunity offering.

So, my choices are 75k rollover now or about $500/month for life starting in 2022. (when I'll RE at 55.)

For me, I have asked myself whether or not I would buy a $500 annuity in 4 years for $98k (75k compounded at 7%/yr).  The answer to that is NO for me so I'm planning to take the lump sum now and invest it. 

Also, we have fidelity brokerage link in our 401k plan so I can invest it however I want to (not stuck with crappy funds like a lot of folks are.) I also have several houses/apartments which constitute a non-stock market income stream of about net 2k/month.

So, what would you do?  Anything else I should consider?

Thanks!

Just another way to think about it perhaps... $500/mo is $6k per year. Based on a naive 4% rule, that would require $150k invested. Of course, that would be for an inflation adjusted $6k/year, so it's probably a close call. Given your relatively younger age, the possibility of higher inflation with rising interest rates, and the better investment options available in your 401k, it's probably a good idea to switch, but I could see an argument for keeping the pension.

ZMonet

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Re: Pension lump sum to 401k opportunity
« Reply #2 on: August 21, 2018, 03:52:46 PM »
It sounds like you've thought this through and I'd have to say I would do the same in your situation.  You already have another income stream in the rentals so diversification isn't a huge issue and you could always direct the $75k to whatever type of investment you want.  I think the only way I would go with Megacorp and the $500/month is if that option was overwhelmingly in your favor.  It isn't.

Financial.Velociraptor

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Re: Pension lump sum to 401k opportunity
« Reply #3 on: August 21, 2018, 04:35:04 PM »
I'd take the lump sum even if it isn't economically beneficial (at least by a small amount).  Megacorp could be engaging in accounting and financial shenanigans.  Your pension could end up painfully underfunded by the time you can collect.  Bird in hand and all...

I can't take mine until 55 but it is only going to be worth a lump sum of about 22k.

not_a_trex

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Re: Pension lump sum to 401k opportunity
« Reply #4 on: August 21, 2018, 06:37:04 PM »
Another thing to consider with the pension is what happens to any leftover money when you die? Is anyone able to inherit it or will the remainder be rolled back into the pension pool? With the lump sum you would have absolute control over inheritance.

stashing_it

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Re: Pension lump sum to 401k opportunity
« Reply #5 on: August 21, 2018, 10:14:06 PM »
I was 33 when I switched companies in January and took ~54K then rather than wait 27 years until I was 60.   If I recall correctly, at that time the pension would have been worth ~1200/month.   

My best estimate working the lump sum calculator showing the lump sum value at different points of time between now and 27 years from now had it growing at 4%

My reasons for taking the lump sum were
-  I figured stock market average @ 7% would beat 4% long term
-  And I didn't want to lock up that money with a single company and have the pension suddenly disappear like occurred with the Auto companies


And actually, when I plug it into the Net Present Value calculator here
https://www.calculatestuff.com/financial/npv-calculator

Assuming 12,000 per year from year 27-year 49  (age 60-82)  it gets a 54,000 net present value when the discount rate is 4.5%    At a discount rate of 6% it's only worth 32,000 now.     So i'm happy with my decision to take the lump sum.



If I was much closer to getting the pension, I might have made a different decision, because then I would have considered the fact that the pension could be diversifying my income stream away from just equities (and bonds)

reeshau

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Re: Pension lump sum to 401k opportunity
« Reply #6 on: August 22, 2018, 02:02:50 AM »
If I was much closer to getting the pension, I might have made a different decision, because then I would have considered the fact that the pension could be diversifying my income stream away from just equities (and bonds)

I also have a partial pension, but didn't have a lump sum option.  It's already with PBGC, so I am past those issues.  (in fact, it passed to them fully intact)  I thought it would be helpful to amplify what @stashing_it said:  the comparison to make here is not against stock appreciation, but against your bond performance, unless you are planning 100% equities in your portfolio.  For me, this is essentially my fixed income investment, and it allows me to run very high percentage in equities, otherwise.  Particularly given the current low interest rate environment, a pension can perform quite well compared to bonds.  (with the caveat that you are depending on that company's continued financial health, of course)

AccidentalMiser

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Re: Pension lump sum to 401k opportunity
« Reply #7 on: August 22, 2018, 05:52:18 AM »
Another thing to consider with the pension is what happens to any leftover money when you die? Is anyone able to inherit it or will the remainder be rolled back into the pension pool? With the lump sum you would have absolute control over inheritance.

Like most pensions, the payments would be for mine and Mrs. AM's lives then stop without survivor benefits to our heirs. 

Thanks to everyone for  your thoughtful replies.  I will take the lump as I had planned to do.