Author Topic: Take the pension or take the cash  (Read 3848 times)

patrickza

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Take the pension or take the cash
« on: September 05, 2017, 05:05:43 AM »
I've always thought I had my office pension figured out. I would work until age 41, then let my pension sit until official retirement age of 62 when it would be worth $20k a year.

Now I've just found a piece of information that says pensions left to sit don't get any inflation adjustments until age 55. That means that my pension will eaten away by inflation for 14 years. At 2% that's a loss of about 25% of my potential pension. If inflation rises the loss could be bigger. 5% would effectively halve the pension, and 10% leave me with a just a quarter. Of course if deflation occurs I'd be better off, but somehow I don't see that happening.

The other option is to take the withdrawal settlement of +-$200k and invest it myself.

Other information:
-I'm from a country that has no social security etc to speak of. My wife and I do plan to move to Europe when we're older, so that should take care of medical as we get old.
-I expect to have a net worth of $800k at age 41, all invested, I don't own a home.
-I don't expect to be spending more than $20k a year at age 41, and have some hobby income that should cover $4k of that.
-The $200k is tax free, the pension payments most likely won't be depending on where we eventually settle.
-My wife loves her job and plans to keep working but scale back significantly.

What would you do?

1) Let the money sit and take the pension knowing even in the worst case I'll never end up on the street.
2) Cash out and invest it all myself and smile at the two commas in my investment account.
« Last Edit: September 05, 2017, 05:55:20 AM by patrickza »

MustachioedPistachio

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Re: Take the pension or take the cash
« Reply #1 on: September 05, 2017, 05:37:04 AM »
Back-of-the-napkin calculations:

If you withdraw the $200,000 at 41 and invest it earning 6% per year, by the time your are 65 that'll be worth $810,000.
Annuitizing that (like a pension payout) yields $60,000 a year, or ~$25,000 in today's dollars, versus the $20,000. Would the yearly pension of $20K be subject to taxes? If so, that further favors the cash out.

Basically, if you think you'll earn more than 5% per year on average, cash out the pension.

Assuming that your $800K net worth is liquid, adding on the $200,000 pension payout will bring you up to $1.0MM net worth. With the 4% rule, $40,000 is at your fingertips: double the $20K you estimate you'll spend.

Sounds to me like you are set!

snowball

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Re: Take the pension or take the cash
« Reply #2 on: September 05, 2017, 06:09:24 AM »
I cashed mine out when I left my previous job, even though its value would have continued to grow and I wouldn't have had the inflation problem you're looking at.  I did that partly because I never want to be one of those people you read about who were promised a pension that seemed reliable at the time, but who then gets screwed over when it's time to collect, because by then the plan is struggling.  It seems fine now, but I can't predict the health of a pension plan three decades in the future!

In the end, if my investment of the lump sum doesn't manage to replace/exceed the equivalent pension income I would have gotten, oh well - I'd still rather take full responsibility for my own future.  (I bet it will exceed it, though.)

But I could have made a good argument for leaving mine alone, too.  Yours, maybe not so much.  Letting it be eaten away by long-term inflation like you describe horrifies me - I would definitely cash it out in your place.  :)  (But you can see I'm biased towards DIY for this sort of thing already.)

coppertop

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Re: Take the pension or take the cash
« Reply #3 on: September 05, 2017, 08:51:37 AM »
I have a pension I received through a QDRO - it is my former husband's pension.  The judge awarded me 80% of it because he quit his job and thumbed his nose at me and our three kids.  Even so, since he only worked there for about five years, my monthly benefit will only be about $315.  Also, since it is not 'my' pension, if anything  happens to me, neither my current husband nor my kids will get a dime.  I am retiring at age 62 in December.  I'm going to cash out and invest the $50,000.  The only thing I have to figure out is how to invest it.  I will roll it into my existing retirement account at Vanguard.  I think in my case, this is a no-brainer, since the money will definitely be lost if I don't live quite a long time. 

BTDretire

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Re: Take the pension or take the cash
« Reply #4 on: September 05, 2017, 09:21:52 AM »
I have a pension I received through a QDRO - it is my former husband's pension.  The judge awarded me 80% of it because he quit his job and thumbed his nose at me and our three kids.  Even so, since he only worked there for about five years, my monthly benefit will only be about $315.  Also, since it is not 'my' pension, if anything  happens to me, neither my current husband nor my kids will get a dime.  I am retiring at age 62 in December.  I'm going to cash out and invest the $50,000.  The only thing I have to figure out is how to invest it.  I will roll it into my existing retirement account at Vanguard.  I think in my case, this is a no-brainer, since the money will definitely be lost if I don't live quite a long time.
You seem to have made your decision on leaving something for the kids, and that's OK. If that wasn't your criteria it might not be as much of a no brainer, especially if there is any inflation adjustment on the payout. It also depends on your NW and if you have enough income.
  The $50k is generating 7.6% for life, that's pretty good.
 Are there any adjustments to the $315 monthly income?
Is the company strong enough to continue payout?

coppertop

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Re: Take the pension or take the cash
« Reply #5 on: September 05, 2017, 10:14:11 AM »
My former spouse's former employer is a bank.  The money is at Fidelity, and I am told the pension is quite well funded. There will be no adjustments, however.  It is what it is.

I am less concerned about my kids, who are all professionals and are employed, than I am about my husband, who is four years younger than I am and who is no longer working.  Actually, he does work - on our property, remodeling, gardening, splitting wood etc.  I would be retiring regardless of this pension money; it's just the cherry on the top.  We are quite frugal.  When I unexpectedly became a single mom of three at age 42, in 1998, the only job I was able to get paid $32,000.  We weren't rich by any means, but we did okay - despite the sporadic appearance of the $100 child support/alimony my ex was required to pay.  My current husband can squeeze a penny until Lincoln screams.  He is a talented carpenter, gardener, plumber, etc.  He changes the oil and transmission fluid in our vehicles.  We eat a vegetarian diet = inexpensive.  No worries there. 

My mom died of cancer at age 50.  My father received the paltry "death benefit" from the SSA.  My sister was 17 at the time.  She received no check for that February because our mom was alive for six days in February.  She received a check for March and April, but none for May, because she turned 18 on May 26.  And that was it.  I have made my decision and it seems like the best decision to me under these particular circumstances.  If anything happens to me, the money is lost.  It's the "bird in the hand" theory.   

MDM

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Re: Take the pension or take the cash
« Reply #6 on: September 05, 2017, 11:14:45 AM »
Cash out, if you think you will earn more than ~4%, based on the following from the case study spreadsheet:

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$200000
Payment starting nowPmt_now0$/payment
Interest ratei4.0%/yr
number of yearsn21yr
number of payments/yearfreq1/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$455754
Interest generated by Future ValueFV(i,n,P) * i18230$/payment
Longevity of future pensionL30yr
Constant withdrawal of FV over time LPmt_future26356$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year (of 30) Trinity-style withdrawalW(FV,L,i,g)20645$/yr


Bateaux

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Re: Take the pension or take the cash
« Reply #7 on: September 05, 2017, 12:49:39 PM »
I'm facing a simular dilemma if I FIRE.  I'm thinking Cash and invest myself.

SimpleSpartan

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Re: Take the pension or take the cash
« Reply #8 on: September 05, 2017, 01:05:33 PM »
Dude take the money and retire at 41 with a million in the bank and don't look back.

scottish

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Re: Take the pension or take the cash
« Reply #9 on: September 05, 2017, 03:42:10 PM »
I used to work for Nortel.   Folks who had pensions wound up with a lump sum of 50 cents on the dollar when the bankruptcy court finished with the case.

Take the money.   Always take the money.

BTDretire

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Re: Take the pension or take the cash
« Reply #10 on: September 05, 2017, 05:40:24 PM »
After MDM's analysis, I looked back, I thought you were 62, I missed the 41.
So, yes, you have a chance to have the money and grow it.

coppertop

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Re: Take the pension or take the cash
« Reply #11 on: September 06, 2017, 09:13:18 AM »
After MDM's analysis, I looked back, I thought you were 62, I missed the 41.
So, yes, you have a chance to have the money and grow it.
I am the one who is 62 - I hijacked the thread, I guess.

Blonde Lawyer

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Re: Take the pension or take the cash
« Reply #12 on: September 06, 2017, 09:24:02 AM »
I have a pension I received through a QDRO - it is my former husband's pension.  The judge awarded me 80% of it because he quit his job and thumbed his nose at me and our three kids.  Even so, since he only worked there for about five years, my monthly benefit will only be about $315.  Also, since it is not 'my' pension, if anything  happens to me, neither my current husband nor my kids will get a dime.  I am retiring at age 62 in December.  I'm going to cash out and invest the $50,000.  The only thing I have to figure out is how to invest it.  I will roll it into my existing retirement account at Vanguard.  I think in my case, this is a no-brainer, since the money will definitely be lost if I don't live quite a long time.

Please double check with legal counsel whether cashing out is an option for you.  Some QDROs specifically require you to take the monthly payment so if you die first it can revert.

BussoV6

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Re: Take the pension or take the cash
« Reply #13 on: September 07, 2017, 01:23:23 AM »
Patrick, I think we are from the same country. It sounds like a good idea to get your money out. Is the $200K an after-tax amount? If so, I assume the before-tax amount is significantly larger.

Can you transfer the before-tax amount to an RA that could be structured to invest in low-cost international ETFs?

 

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