Lump Sum Pension Offer
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Lump Sum Pension Offer
I just received notice that I am eligible for a lump sum pension payment in the mail today from a former employer. Good news for me because I didn't even know I was eligible for a pension (common thought was needed to be there 6 years. I was there 4).
Anyway when I look at the numbers it doesn't seem to make sense to me to take it. I am projected to receive $1,238 a month for a single life at retirement age. The are currently offering me just over $14k. To me the offer just doesn't seem to add up but I know it is governed by law. Am I missing anything?
I am currently 33. Married with 1 dependent. 28% bracket but if I did take it I would roll in to my 401k.
Any additional thoughts or considerations are appreciated.
Anyway when I look at the numbers it doesn't seem to make sense to me to take it. I am projected to receive $1,238 a month for a single life at retirement age. The are currently offering me just over $14k. To me the offer just doesn't seem to add up but I know it is governed by law. Am I missing anything?
I am currently 33. Married with 1 dependent. 28% bracket but if I did take it I would roll in to my 401k.
Any additional thoughts or considerations are appreciated.
- whaleknives
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Re: Lump Sum Pension Offer
Immediate Annuities was not as helpful as I hoped, but for $30,000 (minimum lump sum) for a 40 year old (minimum age), the Single Life Only (No Death Benefit) monthly payment in New York at age 65 was only $464, so $1238 monthly looks very good. Perhaps you can find another Single Payment Immediate Annuity (SPIA) site that comes closer to your criteria.
"I'm an indexer. I own the market. And I'm happy." (John Bogle, "BusinessWeek", 8/17/07) ☕ Maritime signal flag W - Whiskey: "I require medical assistance."
Re: Lump Sum Pension Offer
Before deciding to keep the defined benefit you should consider what happens if the company pension plan fails. According to the wiki on Lump Sum vs Pension, your PBGC benefit may be very limited if you're under 65 on the date the plan fails. https://www.bogleheads.org/wiki/Lump_sum_vs_pension
Also, given that it'll be 30 years or so until you're eligible to receive pension payments and it's hard to predict what your health will be then, it may be prudent to opt for the spousal benefit option.
Also, given that it'll be 30 years or so until you're eligible to receive pension payments and it's hard to predict what your health will be then, it may be prudent to opt for the spousal benefit option.
Re: Lump Sum Pension Offer
It sounds too good to be true that you are eligible for a more than 1000$ a month pension after 4 years of employment. Was it a very high paid job?
I helped someone fill out their pension paperwork, admittedly for a lowish paid job, and it was about 400$/month at age 65 after 30 plus years of work at Kmart.
14,000 now vs 1238$ per month in 32 years ? If you got 14,000 after tax and it doubles every 7 years (a big if) it could grow to over 200,000 in 32 years. But a safe withdrawal rate of 4% is only $746/month. But that is ignoring tax effects.
Are you sure this is not an offer to sell you an annuity? I would read the fine print again.
How secure is the comapny that the pension fund will still be around in 32 years?
A bird in the hand is worth 2 in the bush...............
Lafder
I helped someone fill out their pension paperwork, admittedly for a lowish paid job, and it was about 400$/month at age 65 after 30 plus years of work at Kmart.
14,000 now vs 1238$ per month in 32 years ? If you got 14,000 after tax and it doubles every 7 years (a big if) it could grow to over 200,000 in 32 years. But a safe withdrawal rate of 4% is only $746/month. But that is ignoring tax effects.
Are you sure this is not an offer to sell you an annuity? I would read the fine print again.
How secure is the comapny that the pension fund will still be around in 32 years?
A bird in the hand is worth 2 in the bush...............
Lafder
Re: Lump Sum Pension Offer
You are right that the numbers don't make sense. I would be willing to bet the OP meant a pension of $1238 per year.Lafder wrote:It sounds too good to be true that you are eligible for a more than 1000$ a month pension after 4 years of employment. Was it a very high paid job?
I helped someone fill out their pension paperwork, admittedly for a lowish paid job, and it was about 400$/month at age 65 after 30 plus years of work at Kmart.
14,000 now vs 1238$ per month in 32 years ?
Andy
Re: Lump Sum Pension Offer
Assuming the $1200 per month is correct, keep the pension. $14k is a pittance!
You can go to Fidelity and price out the same fixed income deferred annuity and see what it would cost for you to buy the product in today's dollars. I actually had a similar situation to you a little while ago and had to go through this exercise. viewtopic.php?t=162970
As for the insurance portion, find out if PBGC insures the pension in the event your company goes bankrupt. If so, they generally will insure pensions up to 4K per month (so you would be covered).
You can go to Fidelity and price out the same fixed income deferred annuity and see what it would cost for you to buy the product in today's dollars. I actually had a similar situation to you a little while ago and had to go through this exercise. viewtopic.php?t=162970
As for the insurance portion, find out if PBGC insures the pension in the event your company goes bankrupt. If so, they generally will insure pensions up to 4K per month (so you would be covered).
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Re: Lump Sum Pension Offer
I really thought it was per year as well but then I log on to the site they sent and see this...Wagnerjb wrote:You are right that the numbers don't make sense. I would be willing to bet the OP meant a pension of $1238 per year.Lafder wrote:It sounds too good to be true that you are eligible for a more than 1000$ a month pension after 4 years of employment. Was it a very high paid job?
I helped someone fill out their pension paperwork, admittedly for a lowish paid job, and it was about 400$/month at age 65 after 30 plus years of work at Kmart.
14,000 now vs 1238$ per month in 32 years ?
- FrugalInvestor
- Posts: 6213
- Joined: Thu Nov 06, 2008 11:20 pm
Re: Lump Sum Pension Offer
The lump sum payout is $94,949, not $14,000.
Are the payout numbers on the statement in today's dollars or 2053 to 2063 dollars?
Are the payout numbers on the statement in today's dollars or 2053 to 2063 dollars?
Have a plan, stay the course and simplify. Then ignore the noise!
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Re: Lump Sum Pension Offer
Those are my benefits if I take them at retirement (2048). The $14K is if I opt for the lump sum todayFrugalInvestor wrote:The lump sum payout is $94,949, not $14,000.
Are the payout numbers on the statement in today's dollars or 2053 to 2063 dollars?
Re: Lump Sum Pension Offer
It still sounds too good to be true for 4 years of employment !
But, sometimes there are indeed amazing benefits packages!
lafder
But, sometimes there are indeed amazing benefits packages!
lafder
Re: Lump Sum Pension Offer
The $94k lump sum @ 65 doesn't make sense. A $94k age 65 lump sum converted to a current lump sum of $14k does appear reasonable.
$1,238 x 12 = $14,856 annual benefit
Assume a 1.5% annual benefit factor so $14,856 / (4 x 1.5%) = 247,600 final average salary.
You must be a doc or an attorney or its wrong.
$1,238 x 12 = $14,856 annual benefit
Assume a 1.5% annual benefit factor so $14,856 / (4 x 1.5%) = 247,600 final average salary.
You must be a doc or an attorney or its wrong.
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Re: Lump Sum Pension Offer
I agree which is why my gut tells me something is off but can't piece it.Lafder wrote:It still sounds too good to be true for 4 years of employment !
But, sometimes there are indeed amazing benefits packages!
lafder
Former auditor at one of the Big 4 firms in NYC certainly didn't have a salary anywhere near thatKSActuary wrote:The $94k lump sum @ 65 doesn't make sense. A $94k age 65 lump sum converted to a current lump sum of $14k does appear reasonable.
$1,238 x 12 = $14,856 annual benefit
Assume a 1.5% annual benefit factor so $14,856 / (4 x 1.5%) = 247,600 final average salary.
You must be a doc or an attorney or its wrong.
Appreciate everyone's thoughts though
Re: Lump Sum Pension Offer
Hi,
14k isn't a huge amount now.
95k likely won't be a huge amount in 2048. As in make or break retirement
14k invested today earning 6.2% will get you 95k in 32 years. That's nothing to sneeze at, but also sounds do-able on your own as a disciplined Boglehead with an IPS.
I'd take the lump sum now to get it under my control, invest it 70-80% in stocks, and don't look for 20 years.
Don't forget that 1200/month in 2048 might only have the buying power of 400-600 per month. Maybe even less if inflation roared back for a few years. And 32 years is a lot of years.
14k isn't a huge amount now.
95k likely won't be a huge amount in 2048. As in make or break retirement
14k invested today earning 6.2% will get you 95k in 32 years. That's nothing to sneeze at, but also sounds do-able on your own as a disciplined Boglehead with an IPS.
I'd take the lump sum now to get it under my control, invest it 70-80% in stocks, and don't look for 20 years.
Don't forget that 1200/month in 2048 might only have the buying power of 400-600 per month. Maybe even less if inflation roared back for a few years. And 32 years is a lot of years.
"So, what would have been so terrible if I had a small fortune?"
Re: Lump Sum Pension Offer
Hi,
14k isn't a huge amount now.
95k likely won't be a huge amount in 2048. As in make or break retirement
14k invested today earning 6.2% will get you 95k in 32 years. That's nothing to sneeze at, but also sounds do-able on your own as a disciplined Boglehead with an IPS.
I'd take the lump sum now to get it under my control, invest it 70-80% in stocks, and don't look for 20 years.
Don't forget that 1200/month in 2048 might only have the buying power of 400-600 per month. Maybe even less if inflation roared back for a few years. And 32 years is a lot of years.
14k isn't a huge amount now.
95k likely won't be a huge amount in 2048. As in make or break retirement
14k invested today earning 6.2% will get you 95k in 32 years. That's nothing to sneeze at, but also sounds do-able on your own as a disciplined Boglehead with an IPS.
I'd take the lump sum now to get it under my control, invest it 70-80% in stocks, and don't look for 20 years.
Don't forget that 1200/month in 2048 might only have the buying power of 400-600 per month. Maybe even less if inflation roared back for a few years. And 32 years is a lot of years.
"So, what would have been so terrible if I had a small fortune?"
- VirtualCuriosity
- Posts: 58
- Joined: Wed May 04, 2016 2:59 am
Re: Lump Sum Pension Offer
[/quote]I agree which is why my gut tells me something is off but can't piece it.[quote]
Maybe I am crazy, but I can piece it. If this is accurate for only 4 years of service, personally, I would be fearing that fund health in the future. Me??? I would take the 14k and roll it into my own investments. A bird in the hand 32 years earlier and the bush may be not even be there in the future. Besides, it was a surprise anyway and not figured into your plans it sounds like. A surprise 14k boost to a portfolio doesn't sound bad.
Maybe I am crazy, but I can piece it. If this is accurate for only 4 years of service, personally, I would be fearing that fund health in the future. Me??? I would take the 14k and roll it into my own investments. A bird in the hand 32 years earlier and the bush may be not even be there in the future. Besides, it was a surprise anyway and not figured into your plans it sounds like. A surprise 14k boost to a portfolio doesn't sound bad.
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Re: Lump Sum Pension Offer
Well I am pretty sure Generator515 and I have the same former employer, if not I have a similar predicament. Couple of points. I am about 90% sure pension eligibility was 5 years. Anything under a 25k lump some could be paid out at anytime.
I haven't been able to log into the website, but my packet showed 23k lump today vs 110ish a year at if I start September 1, 2016. Seems really weird I could start pension today. The packet states lump sum is 89.30% of 50% joint survivor option.
I am waiting for website access, as it think it will help clarify the numbers compared to your screenshot. My gut tells me there is no free lunch and I am leaning towards the money today.
I am personally not worried about their pension for 3 reasons:
1) most of the participants understand pension liability given it's a big4. If a big4, can't keep their own pension viable, what hope does a normal entity have.
2) assuming it's the same pension as the partners, to my understanding the partners have the most to lose from it going under as it a large part of their NW. As a few partners said to me: the firm really rewards longevity as a partner, not how much cash you bring in. Some bitterness from Advisory vs Audit worlds.
3) my amount is so small, it should be covered by the PGGC
Similar stats: 35yr, married, 1 dependent, 28% tax. 6 years at the firm.
They really could have done a better job at explaining all the options.
I haven't been able to log into the website, but my packet showed 23k lump today vs 110ish a year at if I start September 1, 2016. Seems really weird I could start pension today. The packet states lump sum is 89.30% of 50% joint survivor option.
I am waiting for website access, as it think it will help clarify the numbers compared to your screenshot. My gut tells me there is no free lunch and I am leaning towards the money today.
I am personally not worried about their pension for 3 reasons:
1) most of the participants understand pension liability given it's a big4. If a big4, can't keep their own pension viable, what hope does a normal entity have.
2) assuming it's the same pension as the partners, to my understanding the partners have the most to lose from it going under as it a large part of their NW. As a few partners said to me: the firm really rewards longevity as a partner, not how much cash you bring in. Some bitterness from Advisory vs Audit worlds.
3) my amount is so small, it should be covered by the PGGC
Similar stats: 35yr, married, 1 dependent, 28% tax. 6 years at the firm.
They really could have done a better job at explaining all the options.
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- Joined: Thu May 26, 2016 3:03 pm
Re: Lump Sum Pension Offer
The proper way to analyze this is by a pension or life actuary who knows how to discount the dollars by interest & mortality to get Present Value.
I am not an actuary. Nor am i doing this the proper way. However, lets say you:
retire at 65
live to a statistical average of 82 years age
and interest rate is 5% annually or .41667 monthly
You will receive 82 - 65 x 12 = 204 payments
Plug the formula into excel for present value =pv(0.41667, 204, 1238) and you get $170K value when you are 65.
Pull that back another 32 years (from age 65 to 33) and you get $170K / 1.05^32 = $36K (notice i only pull back by interest here and not interest+mortality, so the real # is lower)
Does this mean they are cheating you? No, substitute a 7.5% and you get a present value of $14k.
Assuming my math is at least somewhat reasonable (i'm here to learn, pointers welcomed), the question you should ask is if you can beat a 7.5% rate of return.
I am not an actuary. Nor am i doing this the proper way. However, lets say you:
retire at 65
live to a statistical average of 82 years age
and interest rate is 5% annually or .41667 monthly
You will receive 82 - 65 x 12 = 204 payments
Plug the formula into excel for present value =pv(0.41667, 204, 1238) and you get $170K value when you are 65.
Pull that back another 32 years (from age 65 to 33) and you get $170K / 1.05^32 = $36K (notice i only pull back by interest here and not interest+mortality, so the real # is lower)
Does this mean they are cheating you? No, substitute a 7.5% and you get a present value of $14k.
Assuming my math is at least somewhat reasonable (i'm here to learn, pointers welcomed), the question you should ask is if you can beat a 7.5% rate of return.
Re: Lump Sum Pension Offer
Shouldn't be using a single life pay rate when comparing to a lump sum option; however, any reasonable 100% joint life pay rate would still prove this to be a very rich pension. Normally with small pensions and long time horizons one can make an argument to just take the lump and be done with it--hard to do that in this instance. I'd want to make certain this is an ERISA pension with PBGC insurance, and even then there's no guarantee things can't change. If it's a Multiemployer plan, I'd take the lump sum and run.
Re: Lump Sum Pension Offer
I think the official formulas for calculating pension benefits still assume very high internal interest rates (like 5-7%) - probably a big part of the reason so many pensions are trying to buy people out.
My wife just got a pension buyout at age 39 for a small one she also forgot she had. 12.5k buyout in 2015 dollars vs a $230/mo benefit to start in 2041.
Its going to be very hard to beat that return in the market so it all comes dont to how confident are you that the pension will not go belly up. In our case we erred to the side of caution and took the buyout and rolled it over to her IRA.....
My wife just got a pension buyout at age 39 for a small one she also forgot she had. 12.5k buyout in 2015 dollars vs a $230/mo benefit to start in 2041.
Its going to be very hard to beat that return in the market so it all comes dont to how confident are you that the pension will not go belly up. In our case we erred to the side of caution and took the buyout and rolled it over to her IRA.....
- Don Christy
- Posts: 391
- Joined: Sun Oct 11, 2009 10:33 pm
Re: Lump Sum Pension Offer
A couple of things to keep in mind...
Many plan sponsors are offering these lump sum windows right now due to an upcoming requirement to use new mortality tables to value their benefit obligations. The new tables have both a longer life expectancy, as well as an assumption of future improvements in life expectancy. This will likely be required in next 1-2 years, so sponsors are moving now to get vested terminated participants out of their plans.
With the new mortality tables, your benefit will be worth more... Of course they may not offer another window in the future so you may have to wait until retirement age if you don't take the lump sum during the window.
Additionally, the premiums plan sponsors pay to the Pension Benefit Guarantee Corporation (PBGC) are rapidly increasing. Especially for underfunded pensions, this is a large expense. And a portion of the expense is a "per head" fee, so sponsors are particularly interested in getting small beneficiaries out of the plan as the expense load is high relative to the benefit.
Finally, I think many sponsors use a higher interest rate to calculate the lump sum value (higher rate creates a lower present value) than the rate used to fund or account for the liability, so there can be some rate arbitrage that is beneficial to the sponsor.
Most likely, the first item above is the only one that really impacts your decision. The other items are more about plan sponsor motivation.
Many plan sponsors are offering these lump sum windows right now due to an upcoming requirement to use new mortality tables to value their benefit obligations. The new tables have both a longer life expectancy, as well as an assumption of future improvements in life expectancy. This will likely be required in next 1-2 years, so sponsors are moving now to get vested terminated participants out of their plans.
With the new mortality tables, your benefit will be worth more... Of course they may not offer another window in the future so you may have to wait until retirement age if you don't take the lump sum during the window.
Additionally, the premiums plan sponsors pay to the Pension Benefit Guarantee Corporation (PBGC) are rapidly increasing. Especially for underfunded pensions, this is a large expense. And a portion of the expense is a "per head" fee, so sponsors are particularly interested in getting small beneficiaries out of the plan as the expense load is high relative to the benefit.
Finally, I think many sponsors use a higher interest rate to calculate the lump sum value (higher rate creates a lower present value) than the rate used to fund or account for the liability, so there can be some rate arbitrage that is beneficial to the sponsor.
Most likely, the first item above is the only one that really impacts your decision. The other items are more about plan sponsor motivation.
“Speak only if it improves upon the silence." Mahatma Gandhi
- Don Christy
- Posts: 391
- Joined: Sun Oct 11, 2009 10:33 pm
Re: Lump Sum Pension Offer
If I'm doing the math correctly, they're using about a 6% discount rate to get from $94k in 32 years to $14k today. Seems like a big discount rate. If it were me and I didn't need the cash, and the plan is an ERISA plan with PBGC coverage, I would not take the offer.
6% guaranteed is worth waiting for IMO.
At that time you can then decide whether you want the lump or one of the annuity options.
FWIW, my experience is that 50-60% of folks eligible take the offer, and 99% who take the offer take the lump sum form of payment.
6% guaranteed is worth waiting for IMO.
At that time you can then decide whether you want the lump or one of the annuity options.
FWIW, my experience is that 50-60% of folks eligible take the offer, and 99% who take the offer take the lump sum form of payment.
“Speak only if it improves upon the silence." Mahatma Gandhi
Re: Lump Sum Pension Offer
Taking $14,000 now that compounds monthly for 32 years, then withdrawing $1,238/mo while the remaining balance continues to compound until it goes to zero in another 30 years (i.e., at age 95), requires a 7.85% annual return.
If inflation stays low, that's a great "guaranteed" (subject to all the company and PBGC qualifiers mentioned above) return. If inflation runs high for enough years, the lump sum might be better. I might flip a coin, hoping the coin flip says "take the pension".
You might check that Summary Plan Description to see if you can reproduce the $1,238/mo with your own calculations. As the web site says, "actual benefits payable to your may vary."
If inflation stays low, that's a great "guaranteed" (subject to all the company and PBGC qualifiers mentioned above) return. If inflation runs high for enough years, the lump sum might be better. I might flip a coin, hoping the coin flip says "take the pension".
You might check that Summary Plan Description to see if you can reproduce the $1,238/mo with your own calculations. As the web site says, "actual benefits payable to your may vary."