Author Topic: Pension Plan offering one-time opportunity of full benefit in a single lump-sum.  (Read 3923 times)

SueBeWon

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My husband, age 54, received a notice from a former employer offering him a voluntary, one-time opportunity to receive his full pension plan benefit in a single lump-sum payment.  He can roll over all of it, take all of it in cash, or a combination of the two. He has until November 14 to respond.

Since he doesn't have a 401k I am thinking he should roll it all over into a Vanguard 401k.  Yes?
He doesn't anticipate taking money out of it until he has to.

Also, how to pick which 401k to put it in?  I don't even know what the choices are.  Should he just go to Vanguard.com and open an account?

Any advise is greatly appreciated! Thank you. :)


SueBeWon

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Well I guess he can only roll it over into a Traditional IRA or a Roth IRA...401k is not a choice!

Another Reader

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

Lski'stash

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

Agreed. Often, pensions that pay out year-after-year will pay more out than the employee put in. Find out what the estimated benefit per year is going to be and calculate that out till age 90 or so and see if it's more than rolling the money over would make.

MDM

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Should he just go to Vanguard.com and open an account?
Yes, that would be a good start.  Opening two accounts would be even better.  One would be "his" IRA - the "I" does stand for Individual so that has to be in one person's name.  The other would be a joint brokerage account the two of you can use for any taxable investing.
If you don't know what fund to pick, one (out of many) reasonable ways to start would be to put everything (IRA or taxable) into VSMGX - I'll let you look that up. :)
You can always refine that choice later if desired.

Quote
Any advise is greatly appreciated! Thank you. :)
Previous suggestions to look before you leap at the lump sum are good.  See the 'Misc. calcs' tab on the case study spreadsheet for some help doing the math.

TomTX

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Critical information is missing.

1) How much is the lump sum payout?

2) When could he start drawing the pension?

3) What will the pension pay out annually?

4) Does the pension have any additional benefits, such as medical coverage? If so, detail what those are.

5) Is the pension fixed when he starts a draw, or will there be inflation/cost of living adjustments increasing the payout over time?

Retired To Win

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

Agreed. Often, pensions that pay out year-after-year will pay more out than the employee put in. Find out what the estimated benefit per year is going to be and calculate that out till age 90 or so and see if it's more than rolling the money over would make.

It is way naive, I think, to just assume that the pension will still be there when the OP's husband is ready and eligible to start collecting on it, 10 years or more from now.  The OP's original post starts from the assumption that the single lump-sum payout will be taken.  In her shoes, I would most definitely stick with that!

SueBeWon

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

The way that they are calculating the lump sum payout is:
$708.60           Age 65 Single Life Annuity
X87.8747         Present Value Factor-what is this?
$62,268.01      Lump Sum payable 12-1-15


If he doesn't take the lump sum, and at age 65 started receiving $708.60 per month for, say, 25 years until he dies at age 90, then that equals 708.60 X 25 X 12 = $212,580.

My husband has read through the whole packet, and there is no mention of cost of living adjustments.

He did, however, find this little nugget buried in the pages: "Please note that the IRS is expected to publish a new mortality table for calculating lump sum payments. It is anticipated that this table will generally reflect longer expected lifetimes and possibly result in larger lump sum payments. This table is expected to be effective for lump sums paid in 2017. As a result, it will not apply to the lump sum currently available as part of this offer."

We have received these "one-time" offers from them for the last few years.  However, this is the first year that they have actually sent a packet of information also. 

So, my husband is leaning toward NOT taking the lump sum payment.  I was thinking of this money as just sitting there being lazy and not earning any interest.  I thought we should take the money and make it start working for us.

YoungInvestor

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

The way that they are calculating the lump sum payout is:
$708.60           Age 65 Single Life Annuity
X87.8747         Present Value Factor-what is this?
$62,268.01      Lump Sum payable 12-1-15


If he doesn't take the lump sum, and at age 65 started receiving $708.60 per month for, say, 25 years until he dies at age 90, then that equals 708.60 X 25 X 12 = $212,580.

My husband has read through the whole packet, and there is no mention of cost of living adjustments.

He did, however, find this little nugget buried in the pages: "Please note that the IRS is expected to publish a new mortality table for calculating lump sum payments. It is anticipated that this table will generally reflect longer expected lifetimes and possibly result in larger lump sum payments. This table is expected to be effective for lump sums paid in 2017. As a result, it will not apply to the lump sum currently available as part of this offer."

We have received these "one-time" offers from them for the last few years.  However, this is the first year that they have actually sent a packet of information also. 

So, my husband is leaning toward NOT taking the lump sum payment.  I was thinking of this money as just sitting there being lazy and not earning any interest.  I thought we should take the money and make it start working for us.

The present value factor is likely the sum of:

(1+i)^(-t) * tPa

Where:
t=time from now (in years/months)
i=assumed interest rate(annual/monthly basis)
tPa = probability of him making it until t years/months from now

Summed over next month until the end of their mortality table .

Without knowing the mortality assumptions or even if the pension is payable to a surviving partner (the formula above would be tweaked), it's hard to guess their i.

SueBeWon

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

Agreed. Often, pensions that pay out year-after-year will pay more out than the employee put in. Find out what the estimated benefit per year is going to be and calculate that out till age 90 or so and see if it's more than rolling the money over would make.

It is way naive, I think, to just assume that the pension will still be there when the OP's husband is ready and eligible to start collecting on it, 10 years or more from now.  The OP's original post starts from the assumption that the single lump-sum payout will be taken.  In her shoes, I would most definitely stick with that!



************************************************************************

I think my husband is still on the fence about whether or not to take the lump sum.  Sorry I was unclear!  He and I are just feeling our way along on this.  I think the more we are learning, the more he wants to leave it where it is. He wants to know how much this $62,000 will grow.  Would it grow to $212,000 in 25 years?  Is that even the right way to look at it?

Anyway, the information packet that he received said that "The Pension Benefit Guaranty Corporation (PBGC) is a federal agency which guarantees benefits under the plan up to certain maximum limits in the event the pension plan terminates without sufficient assets and the employer is in financial distress.  This maximum limit is set by law and changes each year. Your benefit payable under the plan is covered by the PBGC. However, if you receive your benefit in a lump-sum payment, the PBGC no longer guarantees your benefit after your payment date. For more information....go to  www.pbgc.gov."
« Last Edit: October 11, 2015, 12:17:47 PM by SueBeWon »

SueBeWon

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The company is not offering this for his benefit.  They are trying to reduce their pension responsibility as cheaply as they can.  You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive.   How much he would receive, at what age, and whether the pension is COLA'd are all important considerations.  The health of the company is also an issue.

The way that they are calculating the lump sum payout is:
$708.60           Age 65 Single Life Annuity
X87.8747         Present Value Factor-what is this?
$62,268.01      Lump Sum payable 12-1-15


If he doesn't take the lump sum, and at age 65 started receiving $708.60 per month for, say, 25 years until he dies at age 90, then that equals 708.60 X 25 X 12 = $212,580.

My husband has read through the whole packet, and there is no mention of cost of living adjustments.

He did, however, find this little nugget buried in the pages: "Please note that the IRS is expected to publish a new mortality table for calculating lump sum payments. It is anticipated that this table will generally reflect longer expected lifetimes and possibly result in larger lump sum payments. This table is expected to be effective for lump sums paid in 2017. As a result, it will not apply to the lump sum currently available as part of this offer."

We have received these "one-time" offers from them for the last few years.  However, this is the first year that they have actually sent a packet of information also. 

So, my husband is leaning toward NOT taking the lump sum payment.  I was thinking of this money as just sitting there being lazy and not earning any interest.  I thought we should take the money and make it start working for us.

The present value factor is likely the sum of:

(1+i)^(-t) * tPa

Where:
t=time from now (in years/months)
i=assumed interest rate(annual/monthly basis)
tPa = probability of him making it until t years/months from now

Summed over next month until the end of their mortality table .

Without knowing the mortality assumptions or even if the pension is payable to a surviving partner (the formula above would be tweaked), it's hard to guess their i.

This is not payable to a surviving partner.  That is what they mean by Single Life Annuity.  They have options for 50% Joint and Survivor Annuity and 75% Joint and Survivor Annuity.  But, we are not looking at those options.

Another Reader

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The easiest way to value this is to go to the Vanguard web site and look at the annuity access page.  Find out how much of a deferred fixed single life annuity this lump sum will buy from them.  If you are not a Vanguard customer, a relative of friend who is can get a quote.  My guess is it will cost you more to generate this by buying the annuity yourself. 

MDM

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I think my husband is still on the fence about whether or not to take the lump sum.  Sorry I was unclear!  He and I are just feeling our way along on this.  I think the more we are learning, the more he wants to leave it where it is. He wants to know how much this $62,000 will grow.  Would it grow to $212,000 in 25 years?  Is that even the right way to look at it?
The table below is from the spreadsheet mentioned above - you can download your own copy and adjust the assumptions as desired.

Calculation logic:
 - The lump sum grows from now until the time the annuity would start, reaching some Future Value (FV).  At that time, you can either
    - withdraw the constant amount of interest generated by the FV but leave the FV intact.
    - withdraw a constant amount of "interest plus part of the FV" over  the longevity of the pension, ending with $0 invested.
    - withdraw an inflation-adjusted amount "interest plus part of the FV" over  the longevity of the pension, ending with $0 invested.

You can compare those 3 withdrawal amounts to the guaranteed pension amount.

One major assumption: the investment return is constant.  We know that won't happen, but we don't know how much better or worse reality will be.

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)
  - the "Constant withdrawal of FV over time L" (principal goes to zero)
  - "Trinity-style withdrawal of FV over time L" (inflation-adjusted spending and principal goes to zero)
Lump sum nowPV$62268
Payment starting nowPmt_now0$/payment
Interest ratei6.0%/yr
number of yearsn11yr
number of payments/yearfreq12/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$120278
Interest generated by Future ValueFV(i,n,P) * i601$/payment
Longevity of future pensionL20yr
Constant withdrawal of FV over time LPmt_future857$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)8457$/yr
705$/mo

Another Reader's suggestion is yet another way to compare.  Of course, what you really need is a working crystal ball.... ;)

Capsu78

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Another thread rolling over in General discussion:

http://forum.mrmoneymustache.com/welcome-to-the-forum/pension-buyout/

I would read the 2 articles by Kitces and restart your decision process.  Sounds like the IRS is going to make maintaining employees and former employees more expensive for companies by changing the actuarial tables to more current ones.  This will force them to increase the funding levels so no wonder CFO's are flocking to get as many people off the books as possible. 

SueBeWon-  Your "$708.60           Age 65 Single Life Annuity"  is scary close to my deal from an 18 year career that ended 18 years ago.  Yet your "anticipated" pay out is 15% higher than my offer!   So you may want to tell them your "interested" in learning more and ask them to create an actual settlement offer for you to consider- in my case several of our former employees were shocked when the actual offer came in lower than the teased lump sum.  You would also be well served to make sure they have all the correct information- start date- end date, income history etc and that it has been loaded into their computer properly.  In my case I left when the benefits department handled pensions internally, then a decade later outsourced it to a third party, then changed outsource providers again last year when we were offered.  Details matter particularly if your spouse worked in multiple divisions, jumped back and forth among "classifications"  (In my case Manufacturing/sales/another division in manufacturing/ marketing in yet another division- you get the drift- different areas might have had different formulas and the 24yo service rep in the 3rd party outsource group probably has never used the product you spent your life work on!