Pension buyout offer - Accept or reject
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Pension buyout offer - Accept or reject
I worked the first 15 years of my career for a large airplane manufacturer and qualified for their pension plan. No longer with the company.
Company is now trying to reduce their pension liability and has offered a buyout of $57000. If I decline, I will begin receiving the pension of $750/month at age 65. I am now 53, married and in excellent health with no debt, $1.5M savings + $500K home equity.
Should I consider taking the buyout? Offhand to me, it seems ridiculously low.
I have no need for the money at this time and would invest 100%, certain to never touch it.
Company is now trying to reduce their pension liability and has offered a buyout of $57000. If I decline, I will begin receiving the pension of $750/month at age 65. I am now 53, married and in excellent health with no debt, $1.5M savings + $500K home equity.
Should I consider taking the buyout? Offhand to me, it seems ridiculously low.
I have no need for the money at this time and would invest 100%, certain to never touch it.
Re: Pension buyout offer - Accept or reject
you can run the numbers. But usually, as your your intuition told you, the answer is that the buy-out offer is too low. Companies are allowed to value the payout using corporate bond rates now. But really, from your perspective, it is a risk free investment because of the government backing through the PBGC (as long as the pension is within government limits). So usually it is best to REJECT the buyout offer.
hope this helps
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hope this helps
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Re: Pension buyout offer - Accept or reject
Unless I felt for some reason that they wouldn't be able to meet their obligations with the pension, then id personally keep it. Could you do better on your own? Sure but obviously they don't think they can.
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Re: Pension buyout offer - Accept or reject
Sounds way low. If you can be assured the pension will have sufficient reserves to pay benefits decades from now, stay with the pension.
Re: Pension buyout offer - Accept or reject
Even if the plan goes under, you are good to go with the PBGC. For a 53 year old and a 50% J/S pension being picked up by PBGC in 2014, the pension is fully covered up to $1824.
Re: Pension buyout offer - Accept or reject
do those numbers allows for 12 years of inflation or market growth of $57K ?
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Re: Pension buyout offer - Accept or reject
Thanks for the replies. By the way, the $750/month pension is and always will be $750. It is never adjusted in any way.
Re: Pension buyout offer - Accept or reject
I assume that the $57K could be rolled into an IRA. I would invest the $57K for 12 years, expecting about 10% average annual return. But that is just me.
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Re: Pension buyout offer - Accept or reject
Yes it can be rolled into an IRA.
10% seems optimistic for me to use to determine the value after 12 years.
10% seems optimistic for me to use to determine the value after 12 years.
Re: Pension buyout offer - Accept or reject
long term market averages are about 10%. Besides it can continue to grow.
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Re: Pension buyout offer - Accept or reject
You are SUCH an optimistinvestor wrote:I assume that the $57K could be rolled into an IRA. I would invest the $57K for 12 years, expecting about 10% average annual return. But that is just me.
investor
Re: Pension buyout offer - Accept or reject
You would need an annual return of 5.3% for a $57,000 lump sum to provide a $750 monthly payment from age 65 to 82.6. [ * ] This is calculated using the method in part 3 of my post Re: Yet Another Pension Buyout Scenario. Here it is with your figures plugged in:
* 82.6 is the life expectancy of a male age 53.5 (born 5/19/1961) according to the SSA Life Expectancy Calculator.
Code: Select all
57,000.00 payoff amount
53.5 age now
82.6 life expectancy [ * ]
65.0 age annuity begins
211 number of monthly payments
5.3286% annual interest rate to be determined
0.4336% monthly interest rate
103,551.96 when annuity begins has grown to
750.00 will then provide monthly payment of
Re: Pension buyout offer - Accept or reject
Should one factor in the risk of never being able to claim the pension - death before eligibility. Then there is no payout.
Re: Pension buyout offer - Accept or reject
Without my attempting to parse the other post, does it take into account that the OP will have the lump sum still earning interest (and decreasing, of course) after he is 65?#Cruncher wrote:You would need an annual return of 5.3% for a $57,000 lump sum to provide a $750 monthly payment from age 65 to 82.6. [ * ] This is calculated using the method in part 3 of my post Re: Yet Another Pension Buyout Scenario. Here it is with your figures plugged in:* 82.6 is the life expectancy of a male age 53.5 (born 5/19/1961) according to the SSA Life Expectancy Calculator.Code: Select all
57,000.00 payoff amount 53.5 age now 82.6 life expectancy [ * ] 65.0 age annuity begins 211 number of monthly payments 5.3286% annual interest rate to be determined 0.4336% monthly interest rate 103,551.96 when annuity begins has grown to 750.00 will then provide monthly payment of
I would not take the lump sum, myself, provided the OP thinks the pension will still be there.
Re: Pension buyout offer - Accept or reject
Is there a survivor benefit?johnubc wrote:Should one factor in the risk of never being able to claim the pension - death before eligibility. Then there is no payout.
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Re: Pension buyout offer - Accept or reject
Yes there is a survivor benefit, thanks for reminding me.
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Re: Pension buyout offer - Accept or reject
#Cruncher, Thanks for the great analysis. It is actually a more difficult decision than I thought now that I see this data.
For years now I have rarely thought about the pension and when I did, assumed that it might be enough to pay the utility bills but not much more by the time I was able to start receiving it. My inclination is still to decline the buyout, especially considering that it has a survivor benefit.
For years now I have rarely thought about the pension and when I did, assumed that it might be enough to pay the utility bills but not much more by the time I was able to start receiving it. My inclination is still to decline the buyout, especially considering that it has a survivor benefit.
Re: Pension buyout offer - Accept or reject
Pension buy-outs are rarely in your favor. They target people who don't have savings and are hungry for immediate cash, which does not apply to you.woodyguthrie wrote:#Cruncher, Thanks for the great analysis. It is actually a more difficult decision than I thought now that I see this data.
For years now I have rarely thought about the pension and when I did, assumed that it might be enough to pay the utility bills but not much more by the time I was able to start receiving it. My inclination is still to decline the buyout, especially considering that it has a survivor benefit.
Your pension not only provides a survivor benefit, but it's also probably PBGC insured. You can't get 5.3% from riskless assets and you can live well beyond the age of 82.6. In my opinion, you should not accept the buy-out.
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Re: Pension buyout offer - Accept or reject
This thread is now in the Personal Finance (Not Investing) forum (pension buyout).
Re: Pension buyout offer - Accept or reject
Thank you for the nice spreadsheet help. I'm weighing a cash out or keep option for my wife once she separates from employment. Here are her numbers:#Cruncher wrote:You would need an annual return of 5.3% for a $57,000 lump sum to provide a $750 monthly payment from age 65 to 82.6. [ * ] This is calculated using the method in part 3 of my post Re: Yet Another Pension Buyout Scenario.
Code: Select all
37,317.00 payoff amount
35.1 age now
82.1 life expectancy
60.0 age annuity begins
265 number of monthly payments
5.9354% annual interest rate to be determined
0.4817% monthly interest rate
156,981.30 when annuity begins has grown to
1,050.00 will then provide monthly payment of
5.94% guaranteed sounds nice, but in the long run that could be a loser to inflation.
Last edited by Hub on Thu Nov 20, 2014 7:19 am, edited 2 times in total.
Re: Pension buyout offer - Accept or reject
Taking the pension has a lot of inflation risk, but if you take the lump you can likely invest it and keep ahead of inflation.
I will have to make a similar decision before too long and I am also looking at these options in weighting my choices.
1) Take the lump sum then use it to live on in my 60 's in order delay when I start social security. This is like buying an inflation adjusted annuity.
2) Take the lump sum then buy an annuity later if it makes sense then. If interest rates are higher then you might bet a much larger annuity that way. Be sure to look at various ages. The older you are the more it will pay and the fewer years you will have for inflation to be a problem.
3) Taxes. I will likely be in the rage where every dollar of extra income makes more of my social security taxable so my effected tax rate could be pretty high. Doing Roth conversions before I start social security could help this.
I will have to make a similar decision before too long and I am also looking at these options in weighting my choices.
1) Take the lump sum then use it to live on in my 60 's in order delay when I start social security. This is like buying an inflation adjusted annuity.
2) Take the lump sum then buy an annuity later if it makes sense then. If interest rates are higher then you might bet a much larger annuity that way. Be sure to look at various ages. The older you are the more it will pay and the fewer years you will have for inflation to be a problem.
3) Taxes. I will likely be in the rage where every dollar of extra income makes more of my social security taxable so my effected tax rate could be pretty high. Doing Roth conversions before I start social security could help this.
Re: Pension buyout offer - Accept or reject
Another way to look at it is what it would cost to buy an equivalent annuity on the open market. When I plugged in $57,000 at immediateannuities.com, I got $314 per month.
Assuming something like current interest rates, you'd have to more than double your money between ages 53 and 65 to be able to get the same monthly amount from the annuity as you would from the pension.
Something to keep in mind about pensions/annuities is that they're supposed to pay out as long as you live. Cruncher's numbers only go out to the median life expectancy; there's a 50% chance you'll live longer, get more payments, and need an even better investment return to match the pension.
Essentially, pensions and annuities are a bet about how long you'll live between you and whoever is paying the pension or annuity. I'd love to talk to someone who made the bet and lost, to see how they feel about it, but my Ouija board doesn't seem to be working.
Assuming something like current interest rates, you'd have to more than double your money between ages 53 and 65 to be able to get the same monthly amount from the annuity as you would from the pension.
Something to keep in mind about pensions/annuities is that they're supposed to pay out as long as you live. Cruncher's numbers only go out to the median life expectancy; there's a 50% chance you'll live longer, get more payments, and need an even better investment return to match the pension.
Essentially, pensions and annuities are a bet about how long you'll live between you and whoever is paying the pension or annuity. I'd love to talk to someone who made the bet and lost, to see how they feel about it, but my Ouija board doesn't seem to be working.
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Re: Pension buyout offer - Accept or reject
Great points. Boeing has underfunded their pension, people are now living longer and they want out of that bet.ourbrooks wrote:Another way to look at it is what it would cost to buy an equivalent annuity on the open market. When I plugged in $57,000 at immediateannuities.com, I got $314 per month.
Assuming something like current interest rates, you'd have to more than double your money between ages 53 and 65 to be able to get the same monthly amount from the annuity as you would from the pension.
Something to keep in mind about pensions/annuities is that they're supposed to pay out as long as you live. Cruncher's numbers only go out to the median life expectancy; there's a 50% chance you'll live longer, get more payments, and need an even better investment return to match the pension.
Essentially, pensions and annuities are a bet about how long you'll live between you and whoever is paying the pension or annuity. I'd love to talk to someone who made the bet and lost, to see how they feel about it, but my Ouija board doesn't seem to be working.
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Re: Pension buyout offer - Accept or reject
Many posters are saying that the offer is ridiculously low without providing any evidence to support it.
One poster kindly provided some analysis to put actual numbers behind it.
However, there are many considerations that remain:
- what if there is a period of high inflation, either between now and 2026 (before pension starts), or after 2026, or any time over the two periods,
- is it possible to make a counter-offer to the company? And if so, what counteroffer would you make?
The argument that the company is bound to make a low-ball offer makes sense, as from a strategic point of view, they are not going to make a high-ball offer.
One poster kindly provided some analysis to put actual numbers behind it.
However, there are many considerations that remain:
- what if there is a period of high inflation, either between now and 2026 (before pension starts), or after 2026, or any time over the two periods,
- is it possible to make a counter-offer to the company? And if so, what counteroffer would you make?
The argument that the company is bound to make a low-ball offer makes sense, as from a strategic point of view, they are not going to make a high-ball offer.
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Re: Pension buyout offer - Accept or reject
If I go to Vanguard Annuity Access and make the appropriate entries, I get quotes from two insurance companies for a life annuity, for a couple, both born in 1949, that will pay $750/month starting in 2026. If I've got the information right, one company wants $65,280, the other wants $67,800. This suggests that your pension is "worth" about $66,000 and a lump-sum offer of $57,000 is about 14% low. I don't know if that's "ridiculously" low. Much depends on how confident you are about the soundness of the pension plan (and how the Pension Benefits Guaranty Corp. works).woodyguthrie wrote:I worked the first 15 years of my career for a large airplane manufacturer and qualified for their pension plan. No longer with the company.
Company is now trying to reduce their pension liability and has offered a buyout of $57000. If I decline, I will begin receiving the pension of $750/month at age 65. I am now 53, married and in excellent health with no debt, $1.5M savings + $500K home equity.
Should I consider taking the buyout? Offhand to me, it seems ridiculously low.
I have no need for the money at this time and would invest 100%, certain to never touch it.
If you are uneasy about the soundness of the Boeing pension it could make sense to take the lump sum and buy your own annuity with it; this would give you some opportunity to tailor the annuity terms and conditions. But a 14% cut seems like a lot.
Annuitant's state of residence: PA
Product type: Deferred Income Annuity
Death benefit: Prior to commencement date the death benefit would be return of premium, after commencement date the death benefit is determined by the annuity type selected at the time of purchase.
Income timeframe: Begin receiving payments in 13 months or more.
Annuitant elected to begin receiving payments on (commencement date): 11/1/2026
Annuitant requested monthly income of: $750.00
Source of funds: Non-Qualified (after-tax) assets
Annuity type: Joint & Survivor (spouse) Life Only Annuity
Annuitant's birth date: 1/1/1949
Annuitant's gender: M
Joint annuitant's birth date: 1/1/1949
Joint annuitant's gender: F
Survivor benefit percent: 100%
Annuitant's spouse is the sole beneficiary: Yes
Estimated deposit date: 12/19/2014
Annuitant elected not to be contacted by the service center.
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Re: Pension buyout offer - Accept or reject
Watty and Tradingplaces:
Yes, higher inflation than we have had for the past 20 years is the main risk to keeping the pension. Impossible to predict but I don't see any reason to think we will see runaway inflation any time soon.
Well stated. It seems obvious now that you point it out.
Yes, higher inflation than we have had for the past 20 years is the main risk to keeping the pension. Impossible to predict but I don't see any reason to think we will see runaway inflation any time soon.
The argument that the company is bound to make a low-ball offer makes sense, as from a strategic point of view, they are not going to make a high-ball offer.
Well stated. It seems obvious now that you point it out.
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Re: Pension buyout offer - Accept or reject
I think there are some misconceptions regarding pension buyout offers:woodyguthrie wrote:Watty and Tradingplaces:
Yes, higher inflation than we have had for the past 20 years is the main risk to keeping the pension. Impossible to predict but I don't see any reason to think we will see runaway inflation any time soon.
The argument that the company is bound to make a low-ball offer makes sense, as from a strategic point of view, they are not going to make a high-ball offer.
Well stated. It seems obvious now that you point it out.
-- There are issues which make this something other than a zero sum game. Many companies have an incentive to get your pension liability off their books in a way that is completely fair to you and completely neutral from an NPV standpoint. It often makes sense even if it's done on a slightly negative NPV basis from the company's standpoint. The reason is that pension assets (and to a much lesser extent liabilities) are volatile. If funded status decreases, the unfunded liability is treated by analysts and rating agencies as unsecured debt, and that results in a higher cost of capital for the company. Analysts and credit rating agencies also hate uncertainty. If a pension plan is large enough to be material to third parties, it is to the company's benefit to remove that uncertainty. Pension plans are also a distraction to management. If you're interested, you can Google "pension de-risking" for a lot of stories about the benefits of eliminating the uncertainty associated with pensions. You'll see articles about companies going to LDI portfolios, and you'll see commentary about why buy-outs are beneficial.
-- The process of pension buyouts is highly regulated by the federal government. The company isn't free to set the terms. There is a formula used to set the price, and all inputs come from the government. I believe the life-expectancy tables are the same ones the IRS uses, and the interest rate is set by the government as well. The DOL has to approve of all of the terms. As you would expect, the government wants to make sure lump-sum buyouts are fair to the employees. There is almost no opportunity for companies to "game" the process. I say 'almost' because generally speaking, all employees have to be treated the same, but there is some limited leeway for the company to offer packages to some groups of employees but not others. GM was able to do that. There's a high standard that has to be met before the government will sign off on that those types of arrangements though.
-- The value of the PBGC guarantee depends on whether the pension plan is a single employer plan or a multi-employer plan. Single employer plans are safe. Multi-employer plans are not. The PBGC itself says its fund for those plans will be insolvent within 10 years or so.
-- There's more of an opportunity for employees to benefit than there is for the company. The employer has to offer the same terms to everyone. The employees know their own health and their family's history of longevity. If the employee is likely to live longer than the IRS tables say they will, it's more beneficial to take the annuity. If they're in crappy health or if their parents died young, the employee should take the buyout.
Re: Pension buyout offer - Accept or reject
Yes. It's like a savings account. $57,000 deposited in a savings account paying 5.3286% interest grows to $103,552 in 11-1/2 years. This is just enough to fund the $158,250 of monthly withdrawals (211 months X $750) if the account continues to pay 5.3286% annual interest (0.4336% per month). After 211 months the account balance will be $0.lululu in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2264679#p2264679]this post[/url] wrote:... does [my calculation] take into account that the OP will have the lump sum still earning interest (and decreasing, of course) after he is 65?
Yes.Hub in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2264985#p2264985]this post[/url] wrote:Did I do the spreadsheet correctly and am I understanding the results correctly?
[ Being picky here. ] I could be wrong, but I believe "life expectancy" is calculated as the mean age and generally exceeds the median age at which people will die. As a simplified example assume for a group of five people that two will die at age 70 and one each at ages 75, 80, and 90. The median average age of death would be 75 (two die earlier and two die later), but the "life expectancy" of the group would be the mean average of 77.ourbrooks in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2265096#p2265096]this post[/url] wrote:Cruncher's numbers only go out to the median life expectancy
Code: Select all
77 = (70 + 70 + 75 + 80 + 90) / 5
Nisi, the original poster says he is age 53. He was therefore born in 1960 or 1961.nisiprius in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2265165#p2265165]this post[/url] wrote:... I get quotes from two insurance companies for a life annuity, for a couple, both born in 1949 ...
This feature may also make the quotes not comparable to the original posters situation.nisiprius, listing the annuity quote assumptions, wrote:Death benefit: Prior to commencement date the death benefit would be return of premium ...
Re: Pension buyout offer - Accept or reject
In cases where the pension is a large part of a retirement portfolio, longevity is suspect, and there is a legacy intent, the actuarial present value can certainly play a role in determining an annuity's value to the annuitant. Theoretically it always matters, but since we don't know when we will die, it matters more for assessing funding/costs incurred to the pension sponsor for the overall population of annuitiants. In this particular case I'm not certain we're using a long enough term in considering the pension value if there is 100% joint survivorship, or really even a single annuitant. The SSA tables consider the entire population (not just the healthy ones, as the OP claims to be). We've discussed this in other threads, but anticipated revisions to mortality tables will use about age 86 for males, and 88 for females. And with survivorship the term could easily be 25 to 30 years (beyond age 65) in this case.johnubc wrote:Should one factor in the risk of never being able to claim the pension - death before eligibility. Then there is no payout.
As in other similar cases, we'd be looking at about a 6% required rate of return to equal the annuity. The marginal upside potential of a balanced portfolio along with the inherent risks would seem to make the annuity a better choice in this case. If necessary more risk can be taken in other parts of the retirement portfolio. With the direction the look-back rates are going, there may be better opportunities next year if the plan sponsor offers lump sums in the future. I wouldn't be in any hurry to take this lump sum offer.
Re: Pension buyout offer - Accept or reject
If it's well insured, then based on #cruncher's post, I'd be very happy to buy this pension for $57,000. I'd then reduce my CD's, nominal bonds, or cash by $57,000.
Yes there is inflation risk, but the pension value would increase in the event of deflation or disinflation, either of which might harm the portfolio. We can protect against long term inflation with stocks, I bonds, and TIPS.
The pension provides some protection from longevity risk, in case of living longer than expected. This can be expensive if bought with an SPIA when not very old.
Yes there is inflation risk, but the pension value would increase in the event of deflation or disinflation, either of which might harm the portfolio. We can protect against long term inflation with stocks, I bonds, and TIPS.
The pension provides some protection from longevity risk, in case of living longer than expected. This can be expensive if bought with an SPIA when not very old.
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Re: Pension buyout offer - Accept or reject
#Cruncher wrote:Nisi, the original poster says he is age 53. He was therefore born in 1960 or 1961....nisiprius in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2265165#p2265165]this post[/url] wrote:... I get quotes from two insurance companies for a life annuity, for a couple, both born in 1949 ...
Major screw-up, thank you.
The two quotations I am seeing now are both around $95,000. So the company is only offering 60% of the amount needed to buy the same annuity from an insurance company, i.e. the lump sum appears to be only 60% of what the pension is "worth."
Agreed, but it isn't a selectable feature. We can guesstimate its effect. The chance of a 53-year-old surviving within the next 12 years is... http://www.ssa.gov/oact/STATS/table4c6.html ... 80,729/91,267 = 88%, so the chance of dying and collecting return of premium is 12%, so without that benefit the premium could be (pause for thought, n, n-1...) 6/7 as large = $81,400. So the company's lump sum offer is perhaps 70% of what the pension is "worth."#Cruncher wrote:This feature may also make the quotes not comparable to the original posters situation.nisiprius, listing the annuity quote assumptions, wrote:Death benefit: Prior to commencement date the death benefit would be return of premium ...
Then again I choose to get a quote for joint-and-survivor with 100% to survivor, which is probably better than the pension?
Unless I screwed up again the message is clear. If you think the pension is secure, the lump sum is worth quite noticeably less than the pension, in the ballpark of 1/3 or 1/4 less.
Annuitant's state of residence: PA
Product type: Deferred Income Annuity
Death benefit: Prior to commencement date the death benefit would be return of premium, after commencement date the death benefit is determined by the annuity type selected at the time of purchase.
Income timeframe: Begin receiving payments in 13 months or more.
Annuitant elected to begin receiving payments on (commencement date): 11/1/2026
Annuitant requested monthly income of: $750.00
Source of funds: Qualified (pre-tax) assets
Annuity type: Joint & Survivor (spouse) Life Only Annuity
Annuitant's birth date: 10/1/1960
Annuitant's gender: M
Joint annuitant's birth date: 10/1/1960
Joint annuitant's gender: F
Survivor benefit percent: 100%
Annuitant's spouse is the sole beneficiary: Yes
Estimated deposit date: 12/20/2014
Annuitant elected not to be contacted by the service center.
Last edited by nisiprius on Thu Nov 20, 2014 8:13 pm, edited 1 time in total.
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Re: Pension buyout offer - Accept or reject
Wow, I just started posting here and did not expect such a complete and thorough discussion. Bogleheads really have some expertise.
I plan to keep the pension and decline the buyout. Thanks all.
I plan to keep the pension and decline the buyout. Thanks all.
Re: Pension buyout offer - Accept or reject
I always thought that at the "moment of decision" all options were equal. Buyout or Annuity.
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Re: Pension buyout offer - Accept or reject
Another way to think about it:
Your company can buy you an annuity and get rid of their pension obligation to you. In other words, they can pay Prudential or some other insurance company a lump sum and be rid of their obligation to you. You do not get a choice in the matter.
If that is the case, why would they offer you a choice of a lump sum unless it is less than it would cost to buy that annuity?
I went through all of this with a lump sum offer for a much larger amount a few years ago. My lump sum ($800,000) was 50% short of the amount ($1,200,000) it would have taken to buy my pension as an annuity on the open market. There is a mandated formula involving current/recent interest rates that companies must use to calculate a minimum buyout offer. That offer may or may not be a good deal, and it is not the amount it takes to buy the pension obligation.
You should take a very careful look at the PBGC website. Promised benefits before age 65 are very vulnerable.
L.
Your company can buy you an annuity and get rid of their pension obligation to you. In other words, they can pay Prudential or some other insurance company a lump sum and be rid of their obligation to you. You do not get a choice in the matter.
If that is the case, why would they offer you a choice of a lump sum unless it is less than it would cost to buy that annuity?
I went through all of this with a lump sum offer for a much larger amount a few years ago. My lump sum ($800,000) was 50% short of the amount ($1,200,000) it would have taken to buy my pension as an annuity on the open market. There is a mandated formula involving current/recent interest rates that companies must use to calculate a minimum buyout offer. That offer may or may not be a good deal, and it is not the amount it takes to buy the pension obligation.
You should take a very careful look at the PBGC website. Promised benefits before age 65 are very vulnerable.
L.
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Re: Pension buyout offer - Accept or reject
Yeswoodyguthrie wrote:Wow, I just started posting here and did not expect such a complete and thorough discussion. Bogleheads really have some expertise.
I plan to keep the pension and decline the buyout. Thanks all.
- the return is guaranteed. Like buying a zero coupon US Treasury paying 5.3% (current rates are more like 2.5%)
- the survivor benefit is very valuable
- you do bear full inflation risk, however if you can delay taking SS because of this, you can claw that back (because SS will start from a bigger base, and is fully inflation indexed)
- it is diversifying against a bond/ equity portfolio. In essence, you can hold more risky assets should you wish (or move to safe assets more slowly)
- it is well oriented towards the best features of behavioural finance - it is forced deferred gratification
- I am no expert on US bankruptcy law, but AFAIK if you ever fell into severe financial distress (uncovered medical bills etc.) this is protected from bankruptcy proceedings?
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Re: Pension buyout offer - Accept or reject
in the case of Boeing as plan sponsor, I have fewer worries than with many employers. The balance sheet is in good shape AFAIK, it is in a duopoly with Airbus for the world's airliners, and airliner demand does not seem to be slowing (and even if it does, the demand will be for more new fuel efficient planes like the Dreamliner). Building a long haul airliner that is safe and efficient is not a trivial business, and that's why so many competitors have fallen by the wayside- there is a lot of 'embodied knowledge' in the Boeing share price. The very problems of the Dreamliner tell you how difficult this business of building new generations of planes *is*. One could also mention a degree of political protection (hard to imagine a world where the US accepts that it is not a leading producer of civilian and military aircraft).Leeraar wrote: You should take a very careful look at the PBGC website. Promised benefits before age 65 are very vulnerable.
L.
However generally Leeraar's point is a good one. Buyouts are usually a bad idea BUT the risk of the plan sponsor and what can happen to benefits has to be considered.
Re: Pension buyout offer - Accept or reject
Interesting thread. I'm curious as to whether the OP was offered a third option; starting her/his pension payout before age 65.
OP and I are about the same age, worked for the same employer, although I for only about half as long.
Mid September I received a pension buyout offer from megacorp. The three options were 1) do nothing (ie stay with the original pension payout starting at 65), 2) lump sum payout or 3) early pension payout starting at 55.
Crunching the numbers we determined that the lump sum offered was about a 30% haircut as compared to a SPIA I could buy today, a non-starter for me. The early pension payout starting at 55 however looked very attractive in that it represented a 8.5% return on the lump sum. We completed the paperwork well before the filing deadline. Then we waited for the deadline to pass and to receive confirmation. The deadline came and went without a word from megacorp.
Seven days after the filing deadline I received a letter from megacorp saying that they had made a mistake in calculating the amount for the early pension payout starting at 55. The "corrected" offer was 30% less.
To my untrained mind, I thought that since I had formally accepted the original offer, it then represented a binding agreement. A subsequent conversation with an attorney specializing in labor law resulted in the decision to just let it go. The legal expenses would most probably exceed the recovered pension.
I, like the OP, have decided to do nothing at this time and just wait to take the pension payout at 65.
The whole experience raises a question in my mind. How "safe" are these buyouts really? Say one takes the lump sum or even an early pension payout. At what point can the offer no longer be retracted? When the check clears? When some statutory period expires? How would you feel say being a year into "retirement", happily drawing your pension only to get a phone call or a letter saying, oops we made a mistake.
OP and I are about the same age, worked for the same employer, although I for only about half as long.
Mid September I received a pension buyout offer from megacorp. The three options were 1) do nothing (ie stay with the original pension payout starting at 65), 2) lump sum payout or 3) early pension payout starting at 55.
Crunching the numbers we determined that the lump sum offered was about a 30% haircut as compared to a SPIA I could buy today, a non-starter for me. The early pension payout starting at 55 however looked very attractive in that it represented a 8.5% return on the lump sum. We completed the paperwork well before the filing deadline. Then we waited for the deadline to pass and to receive confirmation. The deadline came and went without a word from megacorp.
Seven days after the filing deadline I received a letter from megacorp saying that they had made a mistake in calculating the amount for the early pension payout starting at 55. The "corrected" offer was 30% less.
To my untrained mind, I thought that since I had formally accepted the original offer, it then represented a binding agreement. A subsequent conversation with an attorney specializing in labor law resulted in the decision to just let it go. The legal expenses would most probably exceed the recovered pension.
I, like the OP, have decided to do nothing at this time and just wait to take the pension payout at 65.
The whole experience raises a question in my mind. How "safe" are these buyouts really? Say one takes the lump sum or even an early pension payout. At what point can the offer no longer be retracted? When the check clears? When some statutory period expires? How would you feel say being a year into "retirement", happily drawing your pension only to get a phone call or a letter saying, oops we made a mistake.
Re: Pension buyout offer - Accept or reject
I find it concerning that in threads like these, where BH's are trying to help folks decide on whether or not to take a lump sum or an annuity, that inevitably comparisons are made between an "annuity pay-out rate" and expected returns on investing the lump sum in stocks or bonds. In my way of thinking, the 5.3% "return" that #Cruncher calculated is effectively a return on investment + a return of principle. That is very different from the expected yield of a high quality long term-bond, which is just a measure of return on investment. Unlike the bond, when you die, you (or your heirs) don't get the principle back on the annuity.
A fairer comparison, if one even needs to be made, would be to back out the effective discount rate that is being used to calculate the lump sum from the annuity, given an assumed mortality function (and accounting for joint survivorship if applicable). My bet on this one is that it would come out pretty close to the yield for long-term high quality corporate bond.
Why do I think that? Because I completely agree with Louis Winthorpe III post above - I don't believe that in general, offers such as the one presented to the OP are designed with a motive that pits the company's interests against the employee's. Plus the actuarial methods used to calculate lump sum equivalencies are regulated.
I tested that belief on my own company's pension options, and confirmed that all of the options were actuarial equivalents (I did the math myself) and conformed precisely to methods spelled out by the 2006 PPA.
Having said all of that, I don't know why Nisi's quote seemed so much higher. Is the deal the OP is getting a 100% survivorship annuity? Or a 50%? And then there is the complication of the early death benefit. But it seems that in other threads like this one, insurance company quotes usual have been about 10-20% higher, which should be expected given profit motive and accounting for adverse selection factors, neither of which the company offering a lump sum is allowed to account for.
Given how frequently this topic comes up, I think it would be useful to have a "lump sum versus annuity" entry in the Wiki. I searched for one and couldn't find.
MB
A fairer comparison, if one even needs to be made, would be to back out the effective discount rate that is being used to calculate the lump sum from the annuity, given an assumed mortality function (and accounting for joint survivorship if applicable). My bet on this one is that it would come out pretty close to the yield for long-term high quality corporate bond.
Why do I think that? Because I completely agree with Louis Winthorpe III post above - I don't believe that in general, offers such as the one presented to the OP are designed with a motive that pits the company's interests against the employee's. Plus the actuarial methods used to calculate lump sum equivalencies are regulated.
I tested that belief on my own company's pension options, and confirmed that all of the options were actuarial equivalents (I did the math myself) and conformed precisely to methods spelled out by the 2006 PPA.
Having said all of that, I don't know why Nisi's quote seemed so much higher. Is the deal the OP is getting a 100% survivorship annuity? Or a 50%? And then there is the complication of the early death benefit. But it seems that in other threads like this one, insurance company quotes usual have been about 10-20% higher, which should be expected given profit motive and accounting for adverse selection factors, neither of which the company offering a lump sum is allowed to account for.
Given how frequently this topic comes up, I think it would be useful to have a "lump sum versus annuity" entry in the Wiki. I searched for one and couldn't find.
MB
Re: Pension buyout offer - Accept or reject
States have regs on how insurance companies invest their money which means they're all limited to ~3% returns from today's AAA bonds. With their calcs based on this number, they need a heft sum to produce the requested lifetime income number.mindbogle wrote:Having said all of that, I don't know why Nisi's quote seemed so much higher.
Pensions should mostly be 60/40 and can use a larger return factor in their calculations. So in present environment, it's pretty hard for a SPIA to beat a pension or even your own DIY annuity.
Re: Pension buyout offer - Accept or reject
As a followup, I did the math assuming no joint survivorship (because its easier), and I now see that #Cruncher's number is a discount rate, and not a payout ratio as I had erroneously assumed. My apologies on that one. For comparison, the 2006 PPA long-term high quality corporate bond discount rate (segment 3) is currently about 5%, close to what #Cruncher got.mindbogle wrote:I find it concerning that in threads like these, where BH's are trying to help folks decide on whether or not to take a lump sum or an annuity, that inevitably comparisons are made between an "annuity pay-out rate" and expected returns on investing the lump sum in stocks or bonds. In my way of thinking, the 5.3% "return" that #Cruncher calculated is effectively a return on investment + a return of principle. That is very different from the expected yield of a high quality long term-bond, which is just a measure of return on investment. Unlike the bond, when you die, you (or your heirs) don't get the principle back on the annuity.
A fairer comparison, if one even needs to be made, would be to back out the effective discount rate that is being used to calculate the lump sum from the annuity, given an assumed mortality function (and accounting for joint survivorship if applicable). My bet on this one is that it would come out pretty close to the yield for long-term high quality corporate bond.
Why do I think that? Because I completely agree with Louis Winthorpe III post above - I don't believe that in general, offers such as the one presented to the OP are designed with a motive that pits the company's interests against the employee's. Plus the actuarial methods used to calculate lump sum equivalencies are regulated.
I tested that belief on my own company's pension options, and confirmed that all of the options were actuarial equivalents (I did the math myself) and conformed precisely to methods spelled out by the 2006 PPA.
Having said all of that, I don't know why Nisi's quote seemed so much higher. Is the deal the OP is getting a 100% survivorship annuity? Or a 50%? And then there is the complication of the early death benefit. But it seems that in other threads like this one, insurance company quotes usual have been about 10-20% higher, which should be expected given profit motive and accounting for adverse selection factors, neither of which the company offering a lump sum is allowed to account for.
Given how frequently this topic comes up, I think it would be useful to have a "lump sum versus annuity" entry in the Wiki. I searched for one and couldn't find.
MB
MB
Re: Pension buyout offer - Accept or reject
Outstanding information above, additionally If this was a recent offer by the pension provider, Boeing, they might be using current mortality tables knowing new ones are forthcoming soon also. Its business, and I'd suspect bonuses are involved signing up participants to relieve Boeing of its obligation as inexpensively as possible, within the law's guidelines of course. Good Luck! http://www.octoberthree.com/news/articl ... -Actuaries
Re: Pension buyout offer - Accept or reject
I suspect the lookback month Boeing is using is from late 2013, for the current plan year, which would put the long segment rate around 5.5%, and then mortality calculations get applied. So it should be no surprise that over average longevity the IRR is just below the long rate for a pension period that falls largely within that segment. It looks like the rates for this November 2014 are going to be within 20 or 30 basis points of the November 2012 lows, which will result in higher lump sums in 2015, than we've had this year. That's another reason we're now seeing a rash of offers. Although this article is a little old, it illustrates well the impact the rates have on the lump sums http://pensionblog.com/2013/07/18/lump- ... june-2013/ . Going into 2015 we'll be seeing the inverse of what the article describes. Also for reference, here are the current and past rates http://www.pensionsoft.com/references_ppa_segment.htmlmindbogle wrote: For comparison, the 2006 PPA long-term high quality corporate bond discount rate (segment 3) is currently about 5%, close to what #Cruncher got.
Re: Pension buyout offer - Accept or reject
I am convinced that GM sent far more to Prudential on my behalf than they offered me as a lump sum. This was to replace my pension with an annuity.
Part of the difference, I speculate, is that administration was paid "outside" the pension, but those costs are inside the price of the annuity.
I agree that Boeing commercial airliners are a solid business, but Boeing has many other units in aerospace and defense. I have no idea whether those units are able to handle their pension obligations separately from the parent conglomerate.
Anyway, I retired at age 57, and if my pension had gone down in the GM bankruptcy i would have lost nearly half of it. The PBGC amount depends on your age when the plan fails, not your age when you retired. By the way, GM did have sweeteners for executive pensions. Those were not PBGC insured and disappeared in the bankruptcy.
Companies certainly play the game. Last year GM announced that interest rate assumptions would be going down so that future lump sums would be lower. Some people decided to retire and come back as contractors. I do not know what the impact of their reduced employment seniority is, but in terms of fringe benefits I can only imagine it was a good deal for the company. For example, health care coverage for active employees is substantially better than for retirees.
L.
Part of the difference, I speculate, is that administration was paid "outside" the pension, but those costs are inside the price of the annuity.
I agree that Boeing commercial airliners are a solid business, but Boeing has many other units in aerospace and defense. I have no idea whether those units are able to handle their pension obligations separately from the parent conglomerate.
Anyway, I retired at age 57, and if my pension had gone down in the GM bankruptcy i would have lost nearly half of it. The PBGC amount depends on your age when the plan fails, not your age when you retired. By the way, GM did have sweeteners for executive pensions. Those were not PBGC insured and disappeared in the bankruptcy.
Companies certainly play the game. Last year GM announced that interest rate assumptions would be going down so that future lump sums would be lower. Some people decided to retire and come back as contractors. I do not know what the impact of their reduced employment seniority is, but in terms of fringe benefits I can only imagine it was a good deal for the company. For example, health care coverage for active employees is substantially better than for retirees.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: Pension buyout offer - Accept or reject
I agree that you have to look at the true "return/yield" without return of principle....however, at the same time, it is a benefit to have some locking-in of part of your portfolio, so you're not dependent 90% upon your stock and bond portfolio and 10% on some SS. I would assign some (small) additional value to having a small pension, even if not COLAed, in addition to a smallish SS benefit, to stabilize my portfolio. There is a chance that the future could have extended low(er) interest rates than the past has seen, so you are getting some small benefit to locking in against that risk.mindbogle wrote:I find it concerning that in threads like these, where BH's are trying to help folks decide on whether or not to take a lump sum or an annuity, that inevitably comparisons are made between an "annuity pay-out rate" and expected returns on investing the lump sum in stocks or bonds. In my way of thinking, the 5.3% "return" that #Cruncher calculated is effectively a return on investment + a return of principle. That is very different from the expected yield of a high quality long term-bond, which is just a measure of return on investment. Unlike the bond, when you die, you (or your heirs) don't get the principle back on the annuity.
A fairer comparison, if one even needs to be made, would be to back out the effective discount rate that is being used to calculate the lump sum from the annuity, given an assumed mortality function (and accounting for joint survivorship if applicable). My bet on this one is that it would come out pretty close to the yield for long-term high quality corporate bond.
Why do I think that? Because I completely agree with Louis Winthorpe III post above - I don't believe that in general, offers such as the one presented to the OP are designed with a motive that pits the company's interests against the employee's. Plus the actuarial methods used to calculate lump sum equivalencies are regulated.
Re: Pension buyout offer - Accept or reject
Mindbogle already noted the earlier misinterpretation of Cruncher's numbers. The method we've been using to calculate the required rate of return on the lump sum does result in the exhaustion of principle, with a resultant future value of $0, just like the annuity. Of course, since we really don't know when we'll croak, it's important to pick a suitable term such that one doesn't outlive the cash flow stream; we do want somewhat of an apples to apples comparison. Obviously the insurance component of an annuitized pension is absent in the lump sum; however, that insurance can always be purchased at a later date, if necessary.MooreBonds wrote:I agree that you have to look at the true "return/yield" without return of principle....however, at the same time, it is a benefit to have some locking-in of part of your portfolio, so you're not dependent 90% upon your stock and bond portfolio and 10% on some SS. I would assign some (small) additional value to having a small pension, even if not COLAed, in addition to a smallish SS benefit, to stabilize my portfolio.
Although some might assign an added value to having a small pension, others might assign an additional value to liquidity, flexibility, and the inflation hedging potential of a lump sum--to each his own. But I wouldn't assign enough value to not keep this pension, which by my calculations is closer to a 6% return, assuming a more reasonable term length. The plan sponsor can value the average pension across numerous annuitants with different expected life spans, resulting in an average. For me, I would need to value the plan to live until at least age 86 or so, and joint until 90 or so.
Re: Pension buyout offer - Accept or reject
The $57,000 is in the ballpark , for that $750/month life annuity at 65 the lump sum value using the October 2014 rates is roughly $64,600 and using the September 2013 rates it's around $55,400 - I'm convinced the calculations were done correctly - Woody needs to contact his former employer and ask them what month was used and let us know.
He could also ask them for a "relative value" report that compares his options - but given the financial picture that he's painted , I'd say it's a coin flip .
He could also ask them for a "relative value" report that compares his options - but given the financial picture that he's painted , I'd say it's a coin flip .
Re: Pension buyout offer - Accept or reject
Maybe I can weigh in here as I had just gone through the same process except on the opposite side of the table..
As several folks have already stated, the calculations for these benefits are prescribed by the government (as your pension is protected by ERISA) and there is only one lump sum figure that could be offered to you based on a set of standardized actuarial assumptions. There's zero leeway to "modify" the offer presented to you. Generally speaking the annuity you could purchase independently would be significantly more expensive for the following reasons:
1) pension plans pay significant amounts of money for administration (tax, accounting, investment advisors, trustees/custodians, actuaries, transaction/disbursement fees, employees who are dedicated to administer the plan, etc.) -- these costs will have to be absorbed by an insurance company but they usually have greater economies of scale. Hence it's not just your monthly payments that are transferred, but also the costs. If you want to get a sense for the cost of administration, go look up a form 5500 for a large multi-employer plan that's filed on a yearly basis -- those can easily go a couple of thousands of pages long!
2) insurance companies need a margin of safety against a host of actuary assumptions that could turn out unfavorable for them, primarily mortality risk.
3) insurance companies need a profit margin
One other thing to note: generally speaking lump sums are almost always offered to terminated vested employees and not offered to retirees for the simple reason that they do not want adverse selection.
As you had mentioned that you are in great shape, it's likely that you would live longer than the average person and therefore the annuity is more attractive to you. However, you also seem way more advanced in your financial knowledge than the average person, and given that you'll invest the lump sum rather than spending it there's also a decent likelihood that your returns could be better than the AA corporate rate that is used to discount the lump sum that was offered. Furthermore I think there's option value to the fact that lump sums may not always be offered to you (depends on plan docs, some allow anyone to take a lump sum whenever they want) -- if you find yourself in a situation where you need cash after you retire (say, at 68) the lump sum invested in a sensible portfolio would have been the far better route to take because you can no longer elect lump sum at that point (of course you could also argue that you would have plenty of liquidity at that point that this marginal sum wouldn't really matter).
In any case, I do want to highlight that the decision is usually more clear cut for people at the extremes -- if you know how to invest and can be sensible with money, lump sums are generally a good decision; if someone has no idea what an annuity is or how to think about the risks involved in investing themselves, then lump sums are generally a bad decision. The harder decisions are for those who are in the middle. Best of luck!
As several folks have already stated, the calculations for these benefits are prescribed by the government (as your pension is protected by ERISA) and there is only one lump sum figure that could be offered to you based on a set of standardized actuarial assumptions. There's zero leeway to "modify" the offer presented to you. Generally speaking the annuity you could purchase independently would be significantly more expensive for the following reasons:
1) pension plans pay significant amounts of money for administration (tax, accounting, investment advisors, trustees/custodians, actuaries, transaction/disbursement fees, employees who are dedicated to administer the plan, etc.) -- these costs will have to be absorbed by an insurance company but they usually have greater economies of scale. Hence it's not just your monthly payments that are transferred, but also the costs. If you want to get a sense for the cost of administration, go look up a form 5500 for a large multi-employer plan that's filed on a yearly basis -- those can easily go a couple of thousands of pages long!
2) insurance companies need a margin of safety against a host of actuary assumptions that could turn out unfavorable for them, primarily mortality risk.
3) insurance companies need a profit margin
One other thing to note: generally speaking lump sums are almost always offered to terminated vested employees and not offered to retirees for the simple reason that they do not want adverse selection.
As you had mentioned that you are in great shape, it's likely that you would live longer than the average person and therefore the annuity is more attractive to you. However, you also seem way more advanced in your financial knowledge than the average person, and given that you'll invest the lump sum rather than spending it there's also a decent likelihood that your returns could be better than the AA corporate rate that is used to discount the lump sum that was offered. Furthermore I think there's option value to the fact that lump sums may not always be offered to you (depends on plan docs, some allow anyone to take a lump sum whenever they want) -- if you find yourself in a situation where you need cash after you retire (say, at 68) the lump sum invested in a sensible portfolio would have been the far better route to take because you can no longer elect lump sum at that point (of course you could also argue that you would have plenty of liquidity at that point that this marginal sum wouldn't really matter).
In any case, I do want to highlight that the decision is usually more clear cut for people at the extremes -- if you know how to invest and can be sensible with money, lump sums are generally a good decision; if someone has no idea what an annuity is or how to think about the risks involved in investing themselves, then lump sums are generally a bad decision. The harder decisions are for those who are in the middle. Best of luck!