Immediate Pension Benefit Offering
Immediate Pension Benefit Offering
A former employer is offering to start paying my pension in 5/15 instead of in 12/23. I can either
1. take a lump sum in 5/15 and get nothing ever again,
2. start taking an annuity in 5/15, or
3. start taking an annuity in 12/23.
I've leaning heavily toward option 1, but would appreciate any input.
The lump sum (option 1) would be about 102 times the monthly payment I would get from option 3. The early annuity payment (#2) would be about 53% of the normal (#3) amount.
With options 2 or 3, there is a wide variety of choices for terms (single life annuity, indexed life annuity, join & survivor annuities of various kinds, etc.). For the sake of simplicity, the ratios I mentioned above are based on the single life annuity (all the other choices have lower monthly payments, of course). I'll provide more details if they' re relevant.
The lump sum (#1) must be put into an IRA or it will be subject to all the rules you'd have with an early 401k distribution (20% withholding, 10% penalty, etc.)
I figure that I can invest the lump sum in an IRA of Vanguard's standard four-fund portfolio (probably 70/30 or 60/40 stocks/bonds). I'll probably double the money before 12/23. Then, I can probably take 4% of that, increasing with inflation, for the rest of my life. That would mean that I'd initially get only about 68% (102*2*4%/12) of the normal (#3) amount. However, those payments would increase over time, plus I'd likely have something to leave my heirs.
FWIW, I'm 53 years old & have about four times my salary invested for retirement, most of it in Vanguard index funds. My wife is a few years older than me.
What else should I consider before making my choice?
1. take a lump sum in 5/15 and get nothing ever again,
2. start taking an annuity in 5/15, or
3. start taking an annuity in 12/23.
I've leaning heavily toward option 1, but would appreciate any input.
The lump sum (option 1) would be about 102 times the monthly payment I would get from option 3. The early annuity payment (#2) would be about 53% of the normal (#3) amount.
With options 2 or 3, there is a wide variety of choices for terms (single life annuity, indexed life annuity, join & survivor annuities of various kinds, etc.). For the sake of simplicity, the ratios I mentioned above are based on the single life annuity (all the other choices have lower monthly payments, of course). I'll provide more details if they' re relevant.
The lump sum (#1) must be put into an IRA or it will be subject to all the rules you'd have with an early 401k distribution (20% withholding, 10% penalty, etc.)
I figure that I can invest the lump sum in an IRA of Vanguard's standard four-fund portfolio (probably 70/30 or 60/40 stocks/bonds). I'll probably double the money before 12/23. Then, I can probably take 4% of that, increasing with inflation, for the rest of my life. That would mean that I'd initially get only about 68% (102*2*4%/12) of the normal (#3) amount. However, those payments would increase over time, plus I'd likely have something to leave my heirs.
FWIW, I'm 53 years old & have about four times my salary invested for retirement, most of it in Vanguard index funds. My wife is a few years older than me.
What else should I consider before making my choice?
Re: Immediate Pension Benefit Offering
I'm generally not a fan of long time horizons and non-COLA'd annuities. I think you're on the right track, but I don't think it's reasonable to think you'll double your lump sum in 9 years or so. You might; you might not.bkweathe wrote:I figure that I can invest the lump sum in an IRA of Vanguard's standard four-fund portfolio (probably 70/30 or 60/40 stocks/bonds). I'll probably double the money before 12/23.
Regardless, this decision needs to be made in the context of your entire retirement plan, Social Security strategy, anticipated retirement expenses, etc. Also, specific numbers regarding the lump sum and annuity amounts, as well as current portfolio amounts, would be helpful. Please consider providing the information as outlined in the "asking for portfolio advice" section: http://www.bogleheads.org/forum/viewtop ... f=1&t=6212.
Re: Immediate Pension Benefit Offering
I generally favor the annuity if age, health and longevity genes are good. Also, if the company seems healthy. People sometimes get dazzled by the size of the lump sum since it is often more money in one lump that they ever could get their hands on. I waited 8 years for one pension and 5 years for a smaller one. I have no regrets. I also took the 50% survivor option and am waiting till age 70 to collect SS (3 more years) to build income for my wife, in case I die first.
Now I was in a position to do this without hurting our standard of living. That option isn't available to everyone. I like the diversity of management some for me and some for people guaranteeing the pensions. Feeling like investing the lump and coming out a winner is taking a risk and I have enough risk built into my portfolio. My focus in on funding my retirement until age 90 not doubling my portfolio.
Good luck with your choice.
Now I was in a position to do this without hurting our standard of living. That option isn't available to everyone. I like the diversity of management some for me and some for people guaranteeing the pensions. Feeling like investing the lump and coming out a winner is taking a risk and I have enough risk built into my portfolio. My focus in on funding my retirement until age 90 not doubling my portfolio.
Good luck with your choice.
Re: Immediate Pension Benefit Offering
There have been a lot of prior threads on pension buyout offers; last year there seemed to be one every few weeks! There was a lot of lively discussion, but I think most people would agree that:
1) a pension almost always offers a better payout than would be available by converting a lump sum into an single payout immediate annuity (SPIA). You can check out your offer against an SPIA here. This is especially true for single women, since pensions are usually (always?) gender-neutral.
2) If your current employer offers you the choice of a monthly pension check vs. a lump sum, the best choice for you will depend on how long you need your nest egg to last (i.e., good vs. bad health, married vs. single, parents lived well past the population median age, etc.), your goals (longevity protection vs. leaving an inheritance), and your ability to adjust expenses downward if the market hits a bump in the road (if you can't take downside risk, a pension would usually come out ahead).
3) If you have a frozen pension from your current or previous employer, inflation is a big issue - how much will your pension be worth by the time you get to start drawing it? The longer until payments start, the better a current lump sum looks! Lack of a COLA also further elevates inflation as a big risk for a traditional pension.
If you make some assumptions about life expectancy you can use Excel and the IRR or XIRR function to calculate what rate of return you would need to make on a lump sum payout to balance of the stream of monthly payments from the pension. Then you can decide if that is realistic or not. FYI, in my opinion doubling a lump sum between now and 12/23 is definitely not a slam dunk.
I turned down a pension buyout offer last fall from a former employer. I'm currently eligible to take a reduced pension and will be able to get my full benefit at age 60 due to meeting a years-of-service hurdle. (Since I'm still working, I haven't starting drawing the reduced pension amount). The buyout offer assumed that I would not get my full pension benefit until 65 - so the immediate monthly payment offer was for less than I could draw with my current reduced pension. The lump sum was definitely not enough to tempt me to accept the buyout offer. However, I ran into a former coworker recently and he mentioned that the company had frozen the pension for current employees. The rumor going around the office now is that there will be another round of buyout offers and that the pot will be sweetened. I'll just have to wait and see.
1) a pension almost always offers a better payout than would be available by converting a lump sum into an single payout immediate annuity (SPIA). You can check out your offer against an SPIA here. This is especially true for single women, since pensions are usually (always?) gender-neutral.
2) If your current employer offers you the choice of a monthly pension check vs. a lump sum, the best choice for you will depend on how long you need your nest egg to last (i.e., good vs. bad health, married vs. single, parents lived well past the population median age, etc.), your goals (longevity protection vs. leaving an inheritance), and your ability to adjust expenses downward if the market hits a bump in the road (if you can't take downside risk, a pension would usually come out ahead).
3) If you have a frozen pension from your current or previous employer, inflation is a big issue - how much will your pension be worth by the time you get to start drawing it? The longer until payments start, the better a current lump sum looks! Lack of a COLA also further elevates inflation as a big risk for a traditional pension.
If you make some assumptions about life expectancy you can use Excel and the IRR or XIRR function to calculate what rate of return you would need to make on a lump sum payout to balance of the stream of monthly payments from the pension. Then you can decide if that is realistic or not. FYI, in my opinion doubling a lump sum between now and 12/23 is definitely not a slam dunk.
I turned down a pension buyout offer last fall from a former employer. I'm currently eligible to take a reduced pension and will be able to get my full benefit at age 60 due to meeting a years-of-service hurdle. (Since I'm still working, I haven't starting drawing the reduced pension amount). The buyout offer assumed that I would not get my full pension benefit until 65 - so the immediate monthly payment offer was for less than I could draw with my current reduced pension. The lump sum was definitely not enough to tempt me to accept the buyout offer. However, I ran into a former coworker recently and he mentioned that the company had frozen the pension for current employees. The rumor going around the office now is that there will be another round of buyout offers and that the pot will be sweetened. I'll just have to wait and see.
Re: Immediate Pension Benefit Offering
It would be good to check to see if you have the option of talking half the lump sum and half one of the pensions.
Another thing to check on is what happens to the funds if you don't take the lump sum and you die. With the lump sum your estate would inherit it but with the other options if you die without a spouse(or the spouse dies at the same time like in an accident) then your estate might not get anything. That is part of how a pension or annuity works so in trying to fairly compare the numbers you might take this into consideration.
I will have the lump sum or pension choice for a very small pension and one of the things I am looking at is to take the lump sum, keep it invested, then eventually buy an annuity myself when I am in my 70's. If interest rates are higher then the annuity would be larger than an annuity that could be bought today and there would be fewer years for inflation to be a problem.
Using the lump sum funds to help you delay when you start social security would be another option to look at if you are not already planning on doing that.
There is a wiki about this in case you have not seen it yet.
https://www.bogleheads.org/wiki/Lump_sum_vs_pension
Another thing to check on is what happens to the funds if you don't take the lump sum and you die. With the lump sum your estate would inherit it but with the other options if you die without a spouse(or the spouse dies at the same time like in an accident) then your estate might not get anything. That is part of how a pension or annuity works so in trying to fairly compare the numbers you might take this into consideration.
I will have the lump sum or pension choice for a very small pension and one of the things I am looking at is to take the lump sum, keep it invested, then eventually buy an annuity myself when I am in my 70's. If interest rates are higher then the annuity would be larger than an annuity that could be bought today and there would be fewer years for inflation to be a problem.
Using the lump sum funds to help you delay when you start social security would be another option to look at if you are not already planning on doing that.
There is a wiki about this in case you have not seen it yet.
https://www.bogleheads.org/wiki/Lump_sum_vs_pension
Re: Immediate Pension Benefit Offering
I wouldn't build that assumption into your thinking. It's a bit too optimistic IMO.bkweathe wrote:I'll probably double the money before 12/23.
Gill
Cost basis is redundant. One has a basis in an investment |
One advises and gives advice |
One should follow the principle of investing one's principal
Re: Immediate Pension Benefit Offering
I set up a little spreadsheet (explained in this post) that arrives at the same answer as using the IRR function, but with less data entry. Assuming a life expectancy of 83 (male born 2/25/1962 according to SSA Life Expectancy Calculator) the annual return is 4.7% for option # 2 (annuity begins May 2015) and 5.1% for option # 3 (annuity begins Dec 2023).cherijoh in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2394472#p2394472]this post[/url] wrote:If you make some assumptions about life expectancy you can use Excel and the IRR or XIRR function to calculate what rate of return you would need to make on a lump sum payout to balance of the stream of monthly payments from the pension. Then you can decide if that is realistic or not.
Code: Select all
May 2015 Dec 2023
-------- --------
102,000 same payoff amount
53.00 same age now
83.00 same life expectancy
53.25 61.75 age annuity begins
357 255 number of monthly payments
4.6816% 5.0796% annual interest rate to be determined
0.3820% 0.4138% monthly interest rate
103,173 157,357 when annuity begins has grown to
530 1,000 will then provide monthly payment of
Re: Immediate Pension Benefit Offering
I'm surprised that none of the actuaries who read this forum have piped up yet, but assuming a single age for an annuity can substantially undervalue an annuity; death rates are not evenly distributed around the median. The correct approach is to weight each payment by the probability of receiving it, which depends on the life expectancy tables.
I believe that this calculator does it correctly: http://money.cnn.com/tools/annuities/
I believe that this calculator does it correctly: http://money.cnn.com/tools/annuities/
Re: Immediate Pension Benefit Offering
I believe my method moderately overvalues the annuity, it doesn't "substantially undervalue" it. I discussed this in the post, Re: lump sum now vs pension later?. Here's another illustration based on the SSA Period Life Table, 2010: It shows 91,267 males alive at age 53 with a life expectancy of 26.93 years. [ 1 ] It also shows the number expected to be alive at each subsequent age. From this it's possible to calculate the probability of an annuity recipient being alive to receive a payment at any age and weight the payment accordingly.ourbrooks in previous post wrote:... assuming a single age for an annuity can substantially undervalue an annuity ... The correct approach is to weight each payment by the probability of receiving it, which depends on the life expectancy tables.
Using the original poster's case # 2, but assuming the annuity begins immediately with a single payment made at the end of each year for 27 years, my method produces an annual return of 4.16%. [ 2 ] But computing the correct way produces a lower return of only 3.57%. [ 3 ]
- I don't know why the 26.93 life expectancy from the table differs from the 29.6 obtained from using the SSA Life Expectancy Calculator.
- Since the this is an immediate annuity, the return can be calculated with the Excel RATE function.
Code: Select all
4.16% =RATE(27, 12 * 530, -102000, 0, 0)
- This is computed by using the Excel IRR function applied against the amounts in the Wtd Payment column below. $102,000 is the lump sum option amount (negated so the IRR function will work) for age 53; and for subsequent ages the $6,360 annual payment (12 X $530) multiplied by the probability of being alive.
Code: Select all
Age Alive Probability Wtd Payment --- ---------- ----------- ----------- 53 91,266.715 (102,000.00) 54 90,663.898 99.340% 6,317.99 55 90,013.476 98.627% 6,272.67 56 89,310.921 97.857% 6,223.71 57 88,554.993 97.029% 6,171.03 58 87,749.585 96.146% 6,114.91 59 86,900.520 95.216% 6,055.74 60 86,010.224 94.241% 5,993.70 61 85,075.723 93.217% 5,928.58 62 84,089.526 92.136% 5,859.85 63 83,043.115 90.989% 5,786.93 64 81,926.103 89.766% 5,709.09 65 80,729.326 88.454% 5,625.69 66 79,443.550 87.045% 5,536.09 67 78,063.616 85.533% 5,439.93 68 76,588.604 83.917% 5,337.14 69 75,019.763 82.198% 5,227.82 70 73,354.999 80.374% 5,111.81 71 71,584.283 78.434% 4,988.41 72 69,697.035 76.366% 4,856.90 73 67,689.203 74.166% 4,716.98 74 65,558.346 71.832% 4,568.49 75 63,300.386 69.358% 4,411.14 76 60,904.150 66.732% 4,244.16 77 58,362.924 63.948% 4,067.07 78 55,682.198 61.010% 3,880.26 79 52,871.973 57.931% 3,684.43 80 49,939.429 54.718% 3,480.07 81 46,884.185 51.371% 3,267.16 82 43,710.219 47.893% 3,045.98 83 40,435.319 44.305% 2,817.77 84 37,083.595 40.632% 2,584.20 85 33,682.102 36.905% 2,347.17 86 30,260.842 33.156% 2,108.75 87 26,854.440 29.424% 1,871.37 88 23,503.140 25.752% 1,637.84 89 20,252.538 22.190% 1,411.32 90 17,151.733 18.793% 1,195.23 91 14,249.745 15.613% 993.01 92 11,591.555 12.701% 807.77 93 9,213.953 10.096% 642.08 94 7,142.039 7.825% 497.70 95 5,386.926 5.902% 375.39 96 3,951.558 4.330% 275.37 97 2,818.943 3.089% 196.44 98 1,956.716 2.144% 136.36 99 1,323.164 1.450% 92.21 100 873.325 0.957% 60.86 101 561.574 0.615% 39.13 102 351.085 0.385% 24.47 103 212.912 0.233% 14.84 104 124.929 0.137% 8.71 105 70.722 0.077% 4.93 106 38.501 0.042% 2.68 107 20.083 0.022% 1.40 108 9.996 0.011% 0.70 109 4.724 0.005% 0.33 110 2.108 0.002% 0.15