Author Topic: Should I take a defined benefit pension buyout?  (Read 2357 times)

Fire1018

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Should I take a defined benefit pension buyout?
« on: June 28, 2022, 11:07:16 AM »
I have a defined pension benefit that is not COLA adjusted.  When I am 65 (in about 15 years), I will be eligible for the following choices:

Single Life annuity ~$38,500/year
50% joint and survivor annuity $36K/year
75% joint and survivor annuity $34.5K/yr
100% joint and survivor annuity $33.7K/yr

or I can take a lump sum of $530K when I FIRE.

Should I take the lump sum or annuity?  The financial advisors always tell everyone to go with the lump sum, but I always wonder if that's just so they can make a commission on it.

What are your opinions?

uniwelder

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Re: Should I take a defined benefit pension buyout?
« Reply #1 on: June 28, 2022, 11:15:56 AM »
Are you married?  If yes, how old is your spouse?  If you were take a guess on your health, do you think you might live longer than expected or less?

If you can get 530k when you FIRE, when do you think that would be?  Is that when you're 65 or right now?

edited to add--- Looking at your other posts, it seems like you're about to retire now.  In that case, I'd definitely take the lump sum.  I think it would be worth more in the long run, taking regular invested growth into account, than the annuity.
« Last Edit: June 28, 2022, 11:19:33 AM by uniwelder »

patchyfacialhair

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Re: Should I take a defined benefit pension buyout?
« Reply #2 on: June 28, 2022, 12:28:32 PM »
What do the rest of your finances look like? Do you have a nest egg such that this pension is a cherry on top? Will you qualify for SS?

I ask because if hypothetically you'll be FI outside of SS and this pension, then I'd advocate for the annuity. It would provide a nice safety margin in terms of just regular guaranteed income without cashing out investments, even though it would lose value to inflation after each year.


MDM

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Re: Should I take a defined benefit pension buyout?
« Reply #3 on: June 28, 2022, 12:32:12 PM »
Much depends on what you get for "i" and "L" in the table below.
Three ways to evaluate "pension now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by Future Value (FV) of the lump sum" (FV 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$530000
Payment starting nowPmt_now0$/payment
Interest ratei4.0%/yr
number of years until annuity beginsn15yr
number of payments/yearfreq1/yr
When payments are made for each ntype10 = at end, 1 = at start
Future ValueFV$954500
Interest generated by Future ValueFV(i,n,P) * i38180$/payment
Longevity of future annuityL30yr
Constant withdrawal of FV over time LPmt_future53076$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year (of 30) Trinity-style withdrawalW(FV,L,i,g)41574$/yr
41574$/payment
See rows 73-94 of the 'Misc. calcs' tab in the case study spreadsheet to enter your numbers.

ATtiny85

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Re: Should I take a defined benefit pension buyout?
« Reply #4 on: June 28, 2022, 01:34:11 PM »
I would take the lump sum as my default. I would prefer to get everything under my control and get my entire portfolio aligned as I want.

Given that, I would then see if the math and my overall situation as it gets closer to decision time would drive me to take the annuity.

I am a little biased, because I have a pension without a lump sum option. Also non COLA. If it had COLA i think my default state would be to take the annuity, since then I could directly subtract off that known value from my expected expenses.

dcheesi

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Re: Should I take a defined benefit pension buyout?
« Reply #5 on: June 28, 2022, 04:00:21 PM »
What do the rest of your finances look like? Do you have a nest egg such that this pension is a cherry on top? Will you qualify for SS?

I ask because if hypothetically you'll be FI outside of SS and this pension, then I'd advocate for the annuity. It would provide a nice safety margin in terms of just regular guaranteed income without cashing out investments, even though it would lose value to inflation after each year.
This is what i'm wondering about. My retirement is all defined-contribution (401k, roth IRA, some taxable), while my fiancée's is all pension. Normally I'd tell her to take the lump sum, but it seems like an annuity might be somewhat of a hedge against various market exposures we'll face with my portfolio (as well as more paranoid 3am thoughts, like 1337 h@x0r d00ds stealing all the assets in our accounts, etc.)?

MDM

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Re: Should I take a defined benefit pension buyout?
« Reply #6 on: June 28, 2022, 04:26:07 PM »
...an annuity might be somewhat of a hedge against various market exposures we'll face with my portfolio....
True, just as a market portfolio could be a hedge against the single point failure of the annuity provider going bankrupt.

mspym

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Re: Should I take a defined benefit pension buyout?
« Reply #7 on: June 28, 2022, 05:17:05 PM »
Not so much leet haxxors as getting swindled by people who prey on the elderly and confused. They can clear out an investment account very quickly, having an annuity for income can be handy as there is regular money they can’t access. Otoh, how likely is the annuity company to go belly-up?

patchyfacialhair

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Re: Should I take a defined benefit pension buyout?
« Reply #8 on: June 29, 2022, 09:15:37 AM »
...an annuity might be somewhat of a hedge against various market exposures we'll face with my portfolio....
True, just as a market portfolio could be a hedge against the single point failure of the annuity provider going bankrupt.

This is true too. OP, is your pension guaranteed by PBGC? You wouldn't get all of you pension but you'd get most of it, in the unfortunate event that your employer bankrupts or something.

dcheesi

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Re: Should I take a defined benefit pension buyout?
« Reply #9 on: June 29, 2022, 09:41:23 AM »
...an annuity might be somewhat of a hedge against various market exposures we'll face with my portfolio....
True, just as a market portfolio could be a hedge against the single point failure of the annuity provider going bankrupt.
Exactly. Of course I realize that pension fund viability may not be completely uncorrelated w/ the markets (the fund has to invest somewhere). But the failure scenarios are different enough that I feel like they mitigate each other's risks to some extent. Certainly better than having all of your eggs in one fund-manager's "basket".
« Last Edit: June 29, 2022, 10:09:40 AM by dcheesi »

MDM

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Re: Should I take a defined benefit pension buyout?
« Reply #10 on: June 29, 2022, 10:29:11 AM »
Certainly better than having all of your eggs in one fund-manager's "basket".
Excellent reason not to use an actively managed fund having relatively few stocks.  If the basket is a Total World Stock Index Fund, for example, that is somewhat different.

If the OP's lump sum will grow by 4%/yr or more nominal (in other words, including inflation), then that will work better than the annuity (assuming the life span used in that previous post), and vice versa. 

ATtiny85

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Re: Should I take a defined benefit pension buyout?
« Reply #11 on: June 29, 2022, 10:57:55 AM »
It’s not something I would consider, but if there is a desire to leave some money to someone when you die, that should at least be jotted down during your decision making. This is outside of the survivor benefit part.

I would never consider potential heirs as influencing what I do, but some people do. Everything we have is going to a charity, and they’ll be happy with whatever.

Fire1018

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Re: Should I take a defined benefit pension buyout?
« Reply #12 on: June 29, 2022, 09:08:35 PM »
Thanks for all the great advice!  I'm going to FIRE next month, so I've been busy maximizing my health care benefits today.  I didn't realize I would be able to cash out the pension without actually retiring so I haven't put too much thought into it.  It is with a regulated utility guaranteed by the PBGC, so it will probably be there when I need it.  I like the thought of having another secure annuity to fall back on, but because it isn't COLA adjusted it will gradually become a smaller chunk of my annual expenses, especially with the current inflation rates!  Not having the COLA adjustments is a big consideration.  I also like the thought of having another large chunk of cash to put into the down markets.

I have pretty good genes on my side, so I'll probably live longer, but I'm planning on us both living to 100 just for the heck of it!

Here's some additional info:
I'm married with two kids and DW (49) is on SSDI
I will be eligible for a large SS benefit as I have maxed out FICA taxes for the last 25 years

Taxable savings ~$200K
Pretax 401(k)/IRAs ~$1.4M
Roth ~$325K
College Funds ~$130K
Cash ~$100K

Everything but the cash is invested in stock (which is down ~$500K over the last 6 months!)
« Last Edit: June 29, 2022, 09:18:11 PM by Fire1018 »

Cassie

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Re: Should I take a defined benefit pension buyout?
« Reply #13 on: June 30, 2022, 01:41:05 AM »
My pension is priceless and I am glad I have it. It does have a COLA fortunately.

Dicey

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Re: Should I take a defined benefit pension buyout?
« Reply #14 on: June 30, 2022, 01:56:54 AM »
DH retires on July 1. He will get approx. $65k/year + COLA. The lump sum amount was only about $350k IIRC, so taking the pension was a no brainer. In your shoes, I'd lean toward taking the lump sum, too. The market's on sale right now!

former player

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Re: Should I take a defined benefit pension buyout?
« Reply #15 on: June 30, 2022, 02:30:11 AM »
When I retired my standard pension arrangements included a pension plus lump sum and I took the unusual step of actually exchanging the lump sum for more pension.  The big difference between my situation and yours is that my pension gets COLA increases for life and inflation is never going to be a concern for me.  (The pension is also as secure as it is possible to get in this country.)  In your case, aged 50 and with potentially many decades ahead inflation would be a big issue.

Also, over that period of time you need to consider whether living standards will increase too - as the country in general gets richer then a defined monetary sum will buy relatively less as against what is earned by people who are still engaging in economic activity.  Being in the stock market is a way of participating in the economic activity of the country and so keeping up with any increases in general wealth.  I've forgone that general increase in wealth through my pension but I have other investments (index funds and rental properties) to do that.

The lump sum you are being offered is probably about what the administrators of your scheme think giving you a pension in the future will cost them, and within that cost will be an amount to cover their costs in running the pension scheme and investing its assets.  Taking the lump sum now would mean that you were not paying those costs over the next few decades, so there might also be a marginal advantage there in investing the money yourself in low cost index funds.

reeshau

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Re: Should I take a defined benefit pension buyout?
« Reply #16 on: June 30, 2022, 03:24:46 AM »
OP, are you getting any pension benefits as part of FIREing?  You say you aren't getting payments until 65, but did you have additional years of seniority added as part of a package, or something like that?

I ask because benefits like that are NOT covered by the PBGC.  My former company went through bankruptcy, with our pensions going to the PBGC.  The ones who were worst off were those who took early retirement packages.  These were more than what you describe, with promises of full pension payments beginning as young as 52.  Under the hood, though, these payments came from the pension fund itself, and when the PBGC stepped in, they were not covered.  So, these people made headlines, losing up to 70% of their promised payouts.

I have a partial pension because I didn't have so many years of seniority.  As it is, I have 100% coverage.  Looking at your payouts, I think you would be, too, with payouts beginning at 65.  (And hooray for an old-age payout that won't get bumped back to help keep SS afloat!)

ATtiny85

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Re: Should I take a defined benefit pension buyout?
« Reply #17 on: June 30, 2022, 06:44:53 AM »
OP, are you getting any pension benefits as part of FIREing?  You say you aren't getting payments until 65, but did you have additional years of seniority added as part of a package, or something like that?

I ask because benefits like that are NOT covered by the PBGC.  My former company went through bankruptcy, with our pensions going to the PBGC.  The ones who were worst off were those who took early retirement packages.  These were more than what you describe, with promises of full pension payments beginning as young as 52.  Under the hood, though, these payments came from the pension fund itself, and when the PBGC stepped in, they were not covered.  So, these people made headlines, losing up to 70% of their promised payouts.

I have a partial pension because I didn't have so many years of seniority.  As it is, I have 100% coverage.  Looking at your payouts, I think you would be, too, with payouts beginning at 65.  (And hooray for an old-age payout that won't get bumped back to help keep SS afloat!)

Thanks for sharing. I need to look a little deeper in my plan documents to if there are any catches, as there are several different options and nuances to the plan I am under.

And those of you with COLA pensions…I am a bit envious! Mine looks pretty good on paper right now, but when I actually start to pull at age 67, who knows.

wageslave23

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Re: Should I take a defined benefit pension buyout?
« Reply #18 on: June 30, 2022, 06:51:23 AM »
You need to do the math on it. If you really think you are going to live to 100, then you should probably take the pension. You would need about 3% return on the $500k to breakeven at that point. 3% risk free return is hard to find outside of the pension. Figure 2.5% average inflation over the next 50 yrs and see if your finances can support your budget with the pension. If they can't then you need to take the lump sum in order to take on more risk for hopefully greater returns. If you can support your lifestyle with the pension then no need to take on more risk.

Dicey

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Re: Should I take a defined benefit pension buyout?
« Reply #19 on: June 30, 2022, 09:08:11 AM »
You need to do the math on it. If you really think you are going to live to 100, then you should probably take the pension. You would need about 3% return on the $500k to breakeven at that point. 3% risk free return is hard to find outside of the pension. Figure 2.5% average inflation over the next 50 yrs and see if your finances can support your budget with the pension. If they can't then you need to take the lump sum in order to take on more risk for hopefully greater returns. If you can support your lifestyle with the pension then no need to take on more risk.
Pensions are promises. Payouts are sure things. The stock market pays an average return of about 7%. I'd rather have the money in my control.

Chris Pascale

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Re: Should I take a defined benefit pension buyout?
« Reply #20 on: July 06, 2022, 11:16:57 AM »
I have nothing to add after reading through everything.

What are you leaning toward?

Model96

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Re: Should I take a defined benefit pension buyout?
« Reply #21 on: July 09, 2022, 03:27:57 AM »
I would take the annuity that suited me, and consider myself lucky to have access to a defined benefit option.

By the River

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Re: Should I take a defined benefit pension buyout?
« Reply #22 on: July 11, 2022, 12:42:31 PM »
My wife is retiring with a no-cola pension that offers a buyout.  We are taking the lump sum and purchasing a single premium immediate annuity with about 40% of the lump sum and investing the rest.  I like this option as it's not 100% buyout or 100% annuity. 

theoverlook

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Re: Should I take a defined benefit pension buyout?
« Reply #23 on: July 12, 2022, 08:09:40 AM »
Since you don't get any COLA adjustments, then when doing projections on returns on investing the lump sum payout should also not be inflation adjusted. If you did a 100% stock portfolio and assume average returns of 10%, and don't touch it, the lump sum turns into $2.2M in 15 years. So in 15 years you're comparing an annual payment of $38,500 to a portfolio of $2.2M. At that point you could take 4% out and receive $88k/year at pretty low risk. That's quite a difference.

 

Wow, a phone plan for fifteen bucks!