Take union pension now & invest, or wait for higher payout?

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Topic Author
Endpin
Posts: 6
Joined: Sat Jan 24, 2015 7:34 am

Take union pension now & invest, or wait for higher payout?

Post by Endpin »

Greetings Bogleheads,
This is my first post, and I'd like to start by thanking everyone who participates in the forum. I've already learned a lot just by reading the Wikis, FAQs and through general lurking. You folks are awesome.

My question involves a union pension that my wife could take now in monthly installments (and invest the money because we don't need it now), or wait 7 years for a higher monthly payout.

Here is our financial situation, with the emphasis on our retirement funds.

Current status: Married couple, two kids in college. We're living/working in Germany, but we're US citizens.
He: 56
She: 57
He works for a German company, and will have a solid corporate pension at age 66 which, when combined with the German and US social security, will provide about 80% of his current income. He also makes money in the US, and contributes regularly to Roth IRAs. We will probably move back to the US in 10 years. She has royalty income, which is variable.

Current Retirement Assets:
German company pension
German equivalent of a 401K (tax-advantaged monthly contributions)
Pension + 401K + Social Security should provide about 80% of pre-retirement income at age 66.
******************************************************
IRAs (in the US / all Roth IRAs) almost $300,000
His
T. Rowe Price Symbol Value Expense
Roth: Emerging Markets Stock PRMSX $7,847.- 1.25%
Roth: Equity Index 500 PREIX $44,298.- 0.28%
Roth: European Stock PRESX $8,346.- 0.96%
Roth: Retirement 2030 TRRCX $1,528.- 0.73%
Roth: Pers Strat Growth TRSGX $4,723 0.90%
Roth: US Bond Enh Index PBDIX $64,757.- 0.30%

Roth: Gabelli Small Cap Growth
CL AAA GABSX $26,631.- 1.39%

Equity/Bond mix equals about 57/43
Desired mix: 54/46

Hers
T. Rowe Price
Roth: Spectrum Growth PRSGX $46,113.- 0.80%
Roth: Retirement 2020 TRRBX $33,176.- 0.67%
Roth: US Bond Enh Index PBDIX $59,712.- 0.30%
Roth: Pers Strat Growth TRSGX $4,723.- 0.90%

Equity/Bond mix equals about 46/54
Desired mix: 43/57
**********************************
Own house. Current value, ca $300,000. Paid off in 10 years

**********************************
Retirement contributions
He:
Contributes $6,500 per year into T. Rowe Price Roth IRA.
Contributes about $7,000 per year into a company "401K"—similar plan. (The plan is not called "401K" here in Germany, but it is a tax-advantaged plan that he pays into a pension account every month).

***********************************

Question: She has a union pension in the US that was funded years ago. She can't ever take a lump sum distribution, but she could start taking monthly distributions now at a lower rate (at her current age 57), or wait until age 65 for a higher monthly payout.


Would it make sense to take monthly distributions from her pension now, and invest that money in a Roth IRA until she is 65 (or longer)?

By my calculations, if she took the pension now ($369 / month) and invested in a Roth IRA at a modest return, she would have about $40,000 by the time she was 65. Or she could wait until she is 65 and take the $837 amount every month. So, is it better to have an extra $40,000 in a Roth IRA at age 65, and get $369 from that point on for life — or — not have the extra $40,00 in a Roth, but receive $837 beginning at age 65 for life? This is not money that we need now for living expenses. This is money that will be needed/used later for retirement living.

The options for payout look like this:

Pension Effective Date / Amount of monthly pension
03/01/2015 $369.00 / month
12/01/2016 $446.40 / month
12/01/2017 $495.00 / month
12/01/2018 $547.20 / month
12/01/2019 $604.80 / month
12/01/2020 $675.00 / month
12/01/2021 $748.80 / month
12/01/2022 $837.00 / month

After 12/01/2022, the pension amount would not increase, and is not inflation adjusted.
ubermax
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Joined: Tue Feb 11, 2014 1:19 pm

Re: Take union pension now & invest, or wait for higher payo

Post by ubermax »

Too wordy , lost interest quickly .
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TomatoTomahto
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Re: Take union pension now & invest, or wait for higher payo

Post by TomatoTomahto »

Endpin, welcome to the forum. I guess Ubermax felt that you weren't careful enough finding the sweet spot between too little information and too much; others will disagree. That's what makes horse races.

I am not sufficiently advanced in the finer points of these kinds of decisions to put forward an informed opinion, but I wanted you to know that you are welcomed here and to suggest that you not take the very first comment on a post of yours to heart.
I get the FI part but not the RE part of FIRE.
jmg229
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Joined: Mon Jan 31, 2011 12:21 pm

Re: Take union pension now & invest, or wait for higher payo

Post by jmg229 »

There are others who are better that this kind of analysis than I am, but here's a stab at it. You say you you can save up $40,000 from taking the lower payment early. How much could you get from an annuity at age 65 for $40k? Probably not $468 a month (the difference in what you will be making monthly from that point forward). Meaning that what you have saved up is at that point not worth the increased income stream going forward. Alternatively, you could calculate a break-even point. How long would your life need to live to make more money with the higher amount starting later (with less compounding)? My guess is that waiting makes sense if you have no pressing need for the money.
tibbitts
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Joined: Tue Feb 27, 2007 5:50 pm

Re: Take union pension now & invest, or wait for higher payo

Post by tibbitts »

I'd wait for the higher payout, at least if the pension is solid and you don't end up dealing with the pbgc.
Topic Author
Endpin
Posts: 6
Joined: Sat Jan 24, 2015 7:34 am

Re: Take union pension now & invest, or wait for higher payo

Post by Endpin »

jmg229: Thanks for your take on my situation. I think you might be right: A $40,000 lump sum in a Roth IRA might not be worth losing $468 a month from age 65 onward. I'm also not equipped to figure out the actuarial parts of the equation, which is why I'm posting the question. I assume we'll live a "normal" length of time after age 65, but one never knows.

Ubermax (we would say Übermax here in Germany): Sorry that you lost interest quickly. I guess I overcompensated after reading the "How To Post" sticky, where it says to be sure and give as much complete background information on one's financial situation as possible. If you're still reading this thread, the short simple question is the one that jmg299 and TomatoTomahto seemed to glean from my wordy post:

Short, simple version:


Question: My wife is vested in a pension fund. She can't ever take a lump sum distribution, but she could start taking monthly distributions now at a lower rate (at her current age 57), or wait until age 65 for a higher monthly payout.

Would it make sense to take monthly distributions from her pension now, and invest that money in a Roth IRA until she is 65 (or longer)?
She would get:
03/01/2015 $369.00 / month
if she took the pension now.

If she waited until 12/01/2022, she would get $837.00 / month.

Thanks, TomatoTomahto for your kind welcome. Your name says it all.
Topic Author
Endpin
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Joined: Sat Jan 24, 2015 7:34 am

Re: Take union pension now & invest, or wait for higher payo

Post by Endpin »

tibbitts wrote:I'd wait for the higher payout, at least if the pension is solid and you don't end up dealing with the pbgc.
Thanks, tibbitts — The pension fund has been sending out a "Notice of Critical Status" for the last few years. The fund cut its payouts a few years ago in order to meet certain regulatory standards. This looks ominous, and the main contributors to this fund are in an ailing industry. That said, you're probably right that the higher payout is more desirable.
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: Take union pension now & invest, or wait for higher payo

Post by JW-Retired »

Endpin wrote:
Short, simple version:


Question: My wife is vested in a pension fund. She can't ever take a lump sum distribution, but she could start taking monthly distributions now at a lower rate (at her current age 57), or wait until age 65 for a higher monthly payout.

Would it make sense to take monthly distributions from her pension now, and invest that money in a Roth IRA until she is 65 (or longer)?
She would get:
03/01/2015 $369.00 / month
if she took the pension now.

If she waited until 12/01/2022, she would get $837.00 / month.
I assume that pension payment will be taxable income. So, to be fair, you need to assume you take the taxes out of the $369/month and invest the balance.

But the pension now looks like an extremely bad deal anyway. If you get a quote for a SPIA (single premium immediate annuity) here.......... https://www.immediateannuities.com/
it says your estimated $40000 will only buy an age 65 female a single life annuity of $205/month.
JW
Last edited by JW-Retired on Sun Feb 08, 2015 12:05 pm, edited 1 time in total.
Retired at Last
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TomatoTomahto
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Re: Take union pension now & invest, or wait for higher payo

Post by TomatoTomahto »

Endpin, I've been involved in two of these decisions myself, from two separate companies, and my impression is that companies (and probably unions also) take advantage of people's impatience and distrust of the future, the smell of money, and life situations.

Some people take SS earlier than optimal, because they are not sure that it will be there later.

When you're negotiating the sales price of something, as the buyer, it sometimes will close a deal if you pull the bills out of your pocket and let the seller see and smell them.

And, the one that got me to make a financially suboptimal choice, my life situation is that while my wife and I share our assets willingly, I pay for some expenses associated with 2 children from my first marriage only from my funds. This made me decide to take some income earlier rather than later. I am not alone in having a life which can sometimes overvalue money today rather than in the future.

My approach, absent my situation, would be to prefer choices that are the opposite of what human nature pushes: in order of preference, a deferred annuity, an annuity now, a deferred lump sum, and finally a lump sum now.

Punch line: you do not need the money now, so ordinarily I'd go for the annuity at 65. That was my theory until I saw that they'd cut payouts in the past. Since that's the case, I know that I would take what I can get. Bird in hand and all that.
I get the FI part but not the RE part of FIRE.
basspond
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Re: Take union pension now & invest, or wait for higher payo

Post by basspond »

My rule of thumb is if your/pension annuities (including SS) are going to make up more than half of your income in retirement take the annuity at the highest rate possible. Also get all the information on the pension. Does it have survivorship or guaranteed payment options?
heyyou
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Re: Take union pension now & invest, or wait for higher payo

Post by heyyou »

If my pension fails in the future, I have the impression that my benefit will be recalculated to include somewhat of an early retirement penalty, further reducing my shrunken benefit.

Can you construct a speadsheet to compare (A) payout after lower US taxes now on lower payout with (B) higher taxes later on higher pension income by waiting until repatriation to start the pension?

I would prefer delaying the start of the pension just to let the assets compound. So far, delayed gratification has worked for me, better than trying to out maneuver the status quo.
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#Cruncher
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Re: Take union pension now ... or wait for higher payout

Post by #Cruncher »

Endpin in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2367418#p2367418]this post[/url] wrote:Would it make sense to take monthly distributions from her pension now...? She would get:
03/01/2015 $369.00 / month if she took the pension now.
If she waited until 12/01/2022, she would get $837.00 / month.
No, waiting to take the larger pension is clearly the better choice unless your wife is in poor health. If she is age 65 on 12/1/2022, then she is age 57.25 on 3/1/2015. Assuming a life expectancy of 86 (what SSA Life Expectancy Calculator shows for a female born 12/1/1957), then the breakeven discount rate of the two options is about 10% per year. I.e., discounting the cash flows at that rate produces the same present value.

Code: Select all

  10.033%     breakeven annual rate
   0.799934%  equivalent monthly rate     =(1 + 10.033%) ^ (1 / 12) - 1
  $43,176     present value of $369/mo    =PV(0.799934%, 345, -369,      0, 0)
  $90,583     value of $837/mo at age 65  =PV(0.799934%, 252, -837,      0, 0)
  $43,176     present value of $90,583    =PV(0.799934%,  93,    0, -90583, 0)
(Last three formulas use Excel PV function.) Since 10% is an exceptionally good return in today's financial environment, it makes sense to wait and take the higher expected payout: $211,000 = $837 X 252 months at age 65 instead of only $127,000 = $369 X 345 months now.
Assumptions:

Code: Select all

  $369     monthly payment now
  $837     monthly payment starting at age 65
    57.25  age now
    65.00  age to begin larger pension
    86.00  life expectancy
    93     months from now to age 65
   252     months from age 65 to LE
   345     months from now to LE
vested1
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Re: Take union pension now & invest, or wait for higher payo

Post by vested1 »

You may also want to look at taking the pension later as part of a larger strategy. This would entail looking at when your wife wishes to retire. For arguments sake lets say age 63. She is 57 now so that would make her 62 in the year 2021. If she took the pension at 12/01/2021 that $748 extra a month would make it easier to delay filing for US SS, adding delayed credits for every month during the delay. Her pension isn't protected by COLA so it makes sense to delay for a larger sum to allow for more flexibility later on when the income will be needed.

You may already have considered this, but forecasting expenses in retirement and looking at all sources of income can help you make a more informed decision.
Topic Author
Endpin
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Joined: Sat Jan 24, 2015 7:34 am

Re: Take union pension now & invest, or wait for higher payo

Post by Endpin »

Thanks to all for the valuable info. My gut feeling mirrors what you all seem to be saying:
$837.00 / month from 12/01/2022
beats
$369.00 / month starting now, even if invest all of the money now for the next 7+ years.

As I mentioned in my first "wordy" post, we don't need the money now. In retirement, this pension will certainly help, but it won't be the core of our retirement income.

The only gamble will be to wait until 12/01/2022 and hope that the pension fund is still fully funded.

Basspond: The pension does have survivorship options. There is an option for a 50% or 75% survivor benefit. If she takes a smaller amount, she can opt into the survivor benefit. I wouldn't need the survivor benefit. It would be better for her to have the highest amount.

JW: My tax situation is rather complicated, being in a foreign country and all. But you're right, that the money will be taxable.

heyyou: You're right that my US tax rate is low now because I am claiming foreign tax credits when I file in the US. It's beyond my ability to calculate the tax on the smaller amount now vs. the larger amount in 8-10 years—but I see your point.

Thanks, #cruncher for crunching the numbers. Here we have it in black and white (or black and bluish on my computer screen). This is what I was looking for.

vested1: I'll monitor the pension every year when I get the statements. It's hard to say what can happen in 5 - 8 years, but using a slightly earlier start date with the goal of delaying US SS might also be a good tactic. Thanks.
FredL
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Re: Take union pension now & invest, or wait for higher payo

Post by FredL »

I am not an expert. If I were you, I would wait for higher pension. I treat pension as an insurance, not just calculating the money. Investment can go south unless you buy treasury which the interest is almost nothing. If you need large sum of money, you may take it now and invest it, than you may have a large sum of money in the future.
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