Pension buyout help

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Topic Author
ckates7
Posts: 15
Joined: Wed Jul 03, 2013 4:29 pm

Pension buyout help

Post by ckates7 »

I've got a question for you guys that my parents have asked my opinion on.

Both of my parents are about 60 years old, and just got offered pension buyouts from their respective employers. So their options are that they can take a lump sum out ($$,$$$) each and reinvest it on their own, or keep it in their pension, but it will not gain anything for the rest of the time they have it.

They asked me about putting it into IRA's, but I made them aware that they could only put in a maximum amount of $6,500 so it really wouldnt compound.

I'm looking for some opinions on options for them to look into. Not specific investments, but ideas that would be the most cost effective, and stable as it's nothing they are wanting to put high risk into.

Thanks guys!
Herekittykitty
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Joined: Wed Apr 16, 2014 8:11 pm
Location: Flyover Country

Re: Pension buyout help

Post by Herekittykitty »

There are people here who can give you a good quantitative analysis and I'm not one of them. But I'm hopping in and responding right now as I can tell you for sure - the people you want to be hearing from here will be asking for more information - including the numbers/details of the pension offers and the rest of their retirement assets. You might want to get that information together and edit it into your post.

Because you may be asking the wrong question. Your question is what to do with money from the offered pension buy out. What I think the question should be is whether or not either or both of them should be taking the pension buy out offers at all.

Pension buy outs are often a better deal for the company than for the employee. If you can give us more information, there are people here who can help figure out whether that is the case in either or both of the pension buy out offers.

In the meantime - your parents should not do anything they don't understand. And they should certainly not assume the buy out offers are in their best interest or could produce more income, better security, or whatever. Maybe so, maybe not. They should be certain before acting.
I don't know anything.
Topic Author
ckates7
Posts: 15
Joined: Wed Jul 03, 2013 4:29 pm

Re: Pension buyout help

Post by ckates7 »

Herekittykitty wrote:There are people here who can give you a good quantitative analysis and I'm not one of them. But I'm hopping in and responding right now as I can tell you for sure - the people you want to be hearing from here will be asking for more information - including the numbers/details of the pension offers and the rest of their retirement assets. You might want to get that information together and edit it into your post.

Because you may be asking the wrong question. Your question is what to do with money from the offered pension buy out. What I think the question should be is whether or not either or both of them should be taking the pension buy out offers at all.

Pension buy outs are often a better deal for the company than for the employee. If you can give us more information, there are people here who can help figure out whether that is the case in either or both of the pension buy out offers.

In the meantime - your parents should not do anything they don't understand. And they should certainly not assume the buy out offers are in their best interest or could produce more income, better security, or whatever. Maybe so, maybe not. They should be certain before acting.
You are correct, I meant to be asking whether or not the pension buyout should be taken at all..
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Frugal Al
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Joined: Fri May 28, 2010 10:09 am

Re: Pension buyout help

Post by Frugal Al »

ckates7 wrote:They asked me about putting it into IRA's, but I made them aware that they could only put in a maximum amount of $6,500 so it really wouldnt compound.
The $6500 limit would not apply to a rollover from a qualified pension plan. As Herekittykitty points out, you haven't provided enough details to provide an analysis and recommendation. If the pension is a significant portion of your parent's retirement funding, taking a lump sum should not be taken lightly.
Calm Man
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Joined: Wed Sep 19, 2012 9:35 am

Re: Pension buyout help

Post by Calm Man »

OP, it is great that your parents are asking you questions and that you are trying to help. That said, I strongly recommend that you refer them to this site or possibly a fee only planner. Without realizing it, you have given them a completely incorrect explanation about rollovers to IRAs which might adversely affect their decision to take the lump sum, which I generally prefer. There is nothing wrong with not knowing this at your age and frankly you are way ahead of your peer group. This, however, is a very important decision for them.
Topic Author
ckates7
Posts: 15
Joined: Wed Jul 03, 2013 4:29 pm

Re: Pension buyout help

Post by ckates7 »

Calm Man wrote:OP, it is great that your parents are asking you questions and that you are trying to help. That said, I strongly recommend that you refer them to this site or possibly a fee only planner. Without realizing it, you have given them a completely incorrect explanation about rollovers to IRAs which might adversely affect their decision to take the lump sum, which I generally prefer. There is nothing wrong with not knowing this at your age and frankly you are way ahead of your peer group. This, however, is a very important decision for them.
Thank you for clearing this up. Again, this is why I came on here to ask these questions as I'm not qualified enough to make this decision. As far as details on the buyout option, what are you guys looking for that I may be of assistance to further answer these questions?
kaudrey
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Joined: Fri Nov 22, 2013 1:40 pm

Re: Pension buyout help

Post by kaudrey »

OP - There are a variety of issues with such a decision.

One is to determine if the buyout is a financially sound offer. You can tell this by looking at what it would cost to buy an annuity that would give you the same payout. You can price annuities at websites such as www.immediateannuities.com

As an example: Assume the offer is for $500 a month or $80K now. Is that a good deal? If you can buy an annuity for $80K that will pay you $600 a month, then it is a bad deal to take the $500 a month, because you can do better on the open market. If, on the other hand, you'd have to spend $100K to get $500 a month, then it is a good deal to take the $500, because you can't replicate that. Any numbers you use would have to be adjusted for things like COLAs and survivor benefits.

Having said that, many other things factor into which option is better for specific people: how much in retirement savings do they have, do they have other sources of income, what is their budget and how are they going to meet that budget (i.e. do they need this money to live on), do they have an adequate emergency fund, how is their health?

These, and many other things, factor into the decision, which is why the other posters indicated we'd need a lot more information before we could comment specifically on this instance.

You can do a search on these boards as well, as this question gets asked all the time.

Hope that helps a little.
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