Pension [versus] Lump Sum

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
User avatar
Topic Author
victorb
Posts: 213
Joined: Wed Mar 20, 2013 11:29 pm

Pension [versus] Lump Sum

Post by victorb »

I can obtain a lump sum distribution from our Pension. It amounts to about $195k and if I take it monthly, it will be about:
$1100 single life
$990 50% joint & survivor
$900 100% joint & survivor
Any comments on lump sum vs the other 3 options
User avatar
LadyGeek
Site Admin
Posts: 95696
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Pension [versus] Lump Sum

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (pension vs. lump sum). I also retitled the thread.

Until the experts come along, take a look at this wiki page: Lump sum vs pension
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 10:55 pm

Re: Pension [versus] Lump Sum

Post by lack_ey »

You're missing a lot of relevant information. I don't mean this as an admonishment (especially since I am not one of these experts that will come along and save the day), but it is probably instructive to consider the aspects that would inform your decision and why they are relevant.

I think the most obvious factor would be age and life expectancy. The younger you are, the more valuable the lifelong income stream relative to the lump sum. If the spouse has a significantly longer life expectancy, the joint option is more valuable.

Who is backing the pension? Do you know anything about whether or not it might be underfunded or in good shape? What's the likelihood of trouble down the line? In other words, how risky is this pension benefit?

What kind of other financial assets do you have, and what are your expenses going to look like? Social Security? What else? Does leaving behind money when you pass mean anything to you, or do you want to spend it all? Do you manage your own investments? How do you feel about risk and uncertain situations such as stock market losses, high inflation, unexpected expenses, and so on? These considerations can help determine whether a guaranteed income stream or a wad of cash is more valuable for your particular financial situation. With the lump sum, you have more immediate liquidity, but if you're sitting on millions in liquid investments anyway, you probably have enough already, for example. A more conservative investor may prefer the income stream, as would one afraid of running out of money in the long term. If inflation is higher than people expect, a non-inflation-indexed income stream becomes significantly less valuable as time goes on. There are a lot of unknowns and factors here.

Ultimately, your option here is not that much different from somebody shopping for an immediate single premium annuity. They might be looking to see if paying an insurance company (actually, the prudent would probably try multiple insurance companies for risk hedging in case of default) $195K to receive the lifetime monthly checks would be worth it. In fact, it's possible—though maybe not that probable, considering the options are usually ballpark fair—that the best option may be to take the lump sum and turn around to buy a SPIA to receive a larger check than the one your pension would have offered. So would you in fact use $195K of your own money to buy a SPIA with one of the three terms specified? That's what you need to figure out.
User avatar
BL
Posts: 9874
Joined: Sun Mar 01, 2009 1:28 pm

Re: Pension [versus] Lump Sum

Post by BL »

I would go to https://www.immediateannuities.com/
and see what monthly payout 195k would buy and compare to the single pension payout to see if it is roughly equivalent. If it happens to be COLA adjusted, it is worth a lot extra.

A guaranteed pension, with or without annual increases, is worth a lot as you will never lose it due to stock market problems, bad management by you, your spouse, or some bad judgement or scam. It is valuable to have that longevity insurance.
cricket49
Posts: 281
Joined: Sun Apr 05, 2015 4:14 pm

Re: Pension [versus] Lump Sum

Post by cricket49 »

I just went through the same situation.

From my research I found out you will receive more money if you take monthly distributions and if you live long. Also, if I choose
a monthly pension, I would elect joint survivor so my spouse would also be taken care of.

I researched the old company that provided the pension and found out from other employees that the company was not doing
well financially. This made my decision easier and I took the lump sum distribution and rolled it over into an IRA so I did not have to claim it
as income or a penalty.

No pension is guaranteed anymore. The company that offered the pension could sell or go out of business or file bankruptcy. Most pension plans
are guaranteed by the Benefits Guaranty Corporation (US Government Agency) however you might not receive the full 100%. See the link.

http://www.pbgc.gov/wr/benefits/guarant ... efits.html

Also, some companies offer lump sum distributions and if a certain percent of people elect the monthly pension benefit, the company can sell
your pension into an annuity where you will receive a monthly benefit from an insurance company. I have no idea what rules or restrictions are
involved if this happens, but I read where two major companies did this and the retirees were not happy with this option. If this happens you
have to make sure the insurance company is still around to payout in 10, 20, 30 years etc.

The recession has taken it's toll on many large companies and most of them that offered pensions want the financial liability off their books.

Get online and do your research, talk to current employees of the company, talk to ex employees to see what they are going to do.

Your decision might be different than mine.

Good luck!
Expect the best. Prepare for the worst.
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: Pension [versus] Lump Sum

Post by JW-Retired »

Put your own and your wife's ages in here and see what is shown to be best. i.e., what $195k will buy you on the J&S annuities market.
https://www.immediateannuities.com/
JW
Retired at Last
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Pension [versus] Lump Sum

Post by Watty »

You also need to consider if the pension is covered by the PBGC or not.

Your Social security plans also comes into play. One strategy could be to take the lump sum, then use that to fund your retirement so that you could delay starting social security a later to get a larger Social security check. Doing this is in essence buying a government guaranteed inflation adjusted annuity with favorable survivor rules.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: Pension [versus] Lump Sum

Post by Leeraar »

The Wiki on this topic is quite good: Lump sum vs pension

It will give you a framework to make a decision. Then, come back here with any further questions.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
fishboat
Posts: 508
Joined: Tue Oct 14, 2014 12:15 pm

Re: Pension [versus] Lump Sum

Post by fishboat »

When I went through this decision I used the following thought process with respect to a single-life annuity for 32 years:

Q1: Is the company pension fair?
A1: I used the immediateannuities website and my lump sum amount to determine what I could get in a SL annuity. This exercise indicated taking the company pension gave me $600-$700 more per month then the annuity on the website. Conclusion..the company pension was more than fair.

Q2: If I took the lump sum and invested it, what average annual return would I need to support a withdrawal rate matching the company pension monthly amount, such that at the end of 32 years there would be zero balance? I used the annuity calculator on bankrate.com for this.
A2: If memory serves...I need an average annual return of about 7.5% to 8%.

I'm investing the risk profile of taking the company pension-annuity...but so far, the company pension is looking pretty good.

A couple good recent references:

viewtopic.php?f=2&t=150253

viewtopic.php?f=1&t=154333
Post Reply