Pension - cashout?

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BanquetBeer
Posts: 137
Joined: Thu Jul 13, 2017 5:57 pm

Pension - cashout?

Post by BanquetBeer » Sun Sep 17, 2017 11:59 am

Not sure if this is the right forum for the question - I guess new rules have allowed cashout of pension so I am seeking advice on best path forward.

I have 2 pensions, one I can cash out any time (A) and planned to wait for a downturn. Another I just got an offer (B). Plan would be roll over to 401k account and just invest for long term.

Planned SWR is ~3.5%
Planned retirement date is 2032-33

A)
341.30/mo in 2052
$25,782 lump sum

B)
$130.85/mo in 2052
$4,487 Lump Sum

The part adding confusion is:
(A)
A monthly payment may be eligible for inflation adjustments; a lump sum is not eligible.
What This Means to You:
If you take benefits under this formula as monthly payments and you satisfy the traditional 80-point eligibility rules, you will be eligible for any future inflation adjustments. Lump sums are not eligible. Remember—the company has no obligation to make inflation adjustments and there is no guarantee

(B)
While [company] is not required to adjust pension payments for inflation, the company has approved inflation adjustments from time-to-time for retirees who have retired with eligibility for an immediate pension under the (B) (and their surviving beneficiaries who are getting payments).
What This Means to You:
From time to time, [company] has adjusted pension annuity payments to partially offset the impact of inflation on retirees. Remember—the company has no obligation to make inflation adjustments and there is no guarantee that these adjustments will be made in the future.

Its a big company and generally pretty generous towards employees. Funding seems fine. Main thought is should I cash out for simplicity or is it worth holding onto this long term? Finance wise, plan on ~$4 mil (2017 dollars) at 2033 so small NPV maybe isnt worth the hassle of updates addresses and remembering to file. Etc.

Advice? Plan on cashing out A during next market crash. Should I cash out B during the ~6 month offer window?

chevca
Posts: 425
Joined: Wed Jul 26, 2017 11:22 am

Re: Pension - cashout?

Post by chevca » Sun Sep 17, 2017 12:08 pm

It sounds like you have a high $$ portfolio already and these amounts are peanuts to you... as would be the hundred or few hundred a month future payments. I'd cash out, invest per AA, and move on with life.

Why cash out during a market crash?? I.E. if you're going to time the market, why not cash out now, keep it in something cash like, and invest later?

Valuethinker
Posts: 33143
Joined: Fri May 11, 2007 11:07 am

Re: Pension - cashout?

Post by Valuethinker » Sun Sep 17, 2017 12:19 pm

BanquetBeer wrote:
Sun Sep 17, 2017 11:59 am
Not sure if this is the right forum for the question - I guess new rules have allowed cashout of pension so I am seeking advice on best path forward.

I have 2 pensions, one I can cash out any time (A) and planned to wait for a downturn. Another I just got an offer (B). Plan would be roll over to 401k account and just invest for long term.

Planned SWR is ~3.5%
Planned retirement date is 2032-33

A)
341.30/mo in 2052
$25,782 lump sum

B)
$130.85/mo in 2052
$4,487 Lump Sum

The part adding confusion is:
(A)
A monthly payment may be eligible for inflation adjustments; a lump sum is not eligible.
What This Means to You:
If you take benefits under this formula as monthly payments and you satisfy the traditional 80-point eligibility rules, you will be eligible for any future inflation adjustments. Lump sums are not eligible. Remember—the company has no obligation to make inflation adjustments and there is no guarantee

(B)
While [company] is not required to adjust pension payments for inflation, the company has approved inflation adjustments from time-to-time for retirees who have retired with eligibility for an immediate pension under the (B) (and their surviving beneficiaries who are getting payments).
What This Means to You:
From time to time, [company] has adjusted pension annuity payments to partially offset the impact of inflation on retirees. Remember—the company has no obligation to make inflation adjustments and there is no guarantee that these adjustments will be made in the future.

Its a big company and generally pretty generous towards employees. Funding seems fine. Main thought is should I cash out for simplicity or is it worth holding onto this long term? Finance wise, plan on ~$4 mil (2017 dollars) at 2033 so small NPV maybe isnt worth the hassle of updates addresses and remembering to file. Etc.

Advice? Plan on cashing out A during next market crash. Should I cash out B during the ~6 month offer window?
If your forecasts are at all realistic then I would take the cash for B right now.

A it is not immediately clear, it forms insurance whilst you do not take it as a lump sum. 2052 is a long way away and much can happen.

cherijoh
Posts: 4046
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Pension - cashout?

Post by cherijoh » Sun Sep 17, 2017 1:36 pm

BanquetBeer wrote:
Sun Sep 17, 2017 11:59 am
Not sure if this is the right forum for the question - I guess new rules have allowed cashout of pension so I am seeking advice on best path forward.

I have 2 pensions, one I can cash out any time (A) and planned to wait for a downturn. Another I just got an offer (B). Plan would be roll over to 401k account and just invest for long term.

Planned SWR is ~3.5%
Planned retirement date is 2032-33

A)
341.30/mo in 2052
$25,782 lump sum

B)
$130.85/mo in 2052
$4,487 Lump Sum

The part adding confusion is:
(A)
A monthly payment may be eligible for inflation adjustments; a lump sum is not eligible.
What This Means to You:
If you take benefits under this formula as monthly payments and you satisfy the traditional 80-point eligibility rules, you will be eligible for any future inflation adjustments. Lump sums are not eligible. Remember—the company has no obligation to make inflation adjustments and there is no guarantee

(B)
While [company] is not required to adjust pension payments for inflation, the company has approved inflation adjustments from time-to-time for retirees who have retired with eligibility for an immediate pension under the (B) (and their surviving beneficiaries who are getting payments).
What This Means to You:
From time to time, [company] has adjusted pension annuity payments to partially offset the impact of inflation on retirees. Remember—the company has no obligation to make inflation adjustments and there is no guarantee that these adjustments will be made in the future.

Its a big company and generally pretty generous towards employees. Funding seems fine. Main thought is should I cash out for simplicity or is it worth holding onto this long term? Finance wise, plan on ~$4 mil (2017 dollars) at 2033 so small NPV maybe isnt worth the hassle of updates addresses and remembering to file. Etc.

Advice? Plan on cashing out A during next market crash. Should I cash out B during the ~6 month offer window?
It isn't clear to me from your post - are both these pensions for your current employer? or is one for a former employer? Are they both still accruing benefits or are either of the pensions frozen? A frozen pension favors taking the lump sum now and rolling it into an IRA.

What type of pensions are they - a traditional defined benefit (e.g., 1.5% x years of service x average salary for final 3 or 5 years) or a cash balance pension (e.g., 3% of salary contributed each year with earnings tied to some index like the 10-yr treasury bond index)?

Can you take reduced benefits early or do you have to wait until 2052 to draw any benefits? If you can take them early, how much of a hit would you take in terms of benefit amount? If you retire 20 years before you can start taking your pension then you need to worry about inflation during the period between retirement and when you start drawing the pension. (When you separate from a company with a pension, the amount of monthly payment would get frozen for a traditional DB pension or you would stop accruing new contributions for a cash balance pension). A big time gap between retirement and starting a pension would again favor taking a lump sum.

Will you meet the 80-point eligibility rules when you retire? Getting inflation adjustments would definitely favor keeping the pension instead of taking the lump sum - but only if you think realistically that you'll ever see them.

If 65 is the standard retirement age and you hit it in 2052 but retire in 2032, my guess is that you are looking to retire at ~45. If your eligibility rule is the standard "age + years of service", that suggests to me that you'll be gone well before you reach the magic "80" number and therefore would not be eligible to receive any inflation adjustments.

User avatar
celia
Posts: 7086
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Pension - cashout?

Post by celia » Sun Sep 17, 2017 1:51 pm

BanquetBeer wrote:
Sun Sep 17, 2017 11:59 am
Planned SWR is ~3.5%
Planned retirement date is 2032-33

A)
341.30/mo in 2052
$25,782 lump sum

B)
$130.85/mo in 2052
$4,487 Lump Sum
Is there a typo in here? You plan to stop working in 15 years, but the amounts quoted are for 35 years from now. :confused

BanquetBeer
Posts: 137
Joined: Thu Jul 13, 2017 5:57 pm

Re: Pension - cashout?

Post by BanquetBeer » Sun Sep 17, 2017 2:10 pm

Both from the same former employer, I switched to different formulas. B) is typical 80 point plan A) is alternative plan. Not really sure about formulas or inflation options, I believe taking early has large penalties for 80 point. It was never a large enough amount to really research the details. I think they were both based on some variable % of earned income each year - think the 80 point one the % accrue and the benefit is based on final compensation. With the alternative I think it was maybe defined contribution.

As for A) it does gain lump sum value and I dont really have any bonds. I can cash out any time. Dont know if I can roll over into their 401k and dont want to IRA->roth either lump conversion or ~60%/40% during 2 years of backdoor conversion since Im in the 33%/AMT bracket

I keep very low expenses and have a good income so plan to call it quits early. Been debating if I should go out to Fudruckers for lunch or just eat leftovers at home.. but really leaning towards going out (would be easier decision if the local chain wasnt mediocre)

cherijoh
Posts: 4046
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Pension - cashout?

Post by cherijoh » Sun Sep 17, 2017 3:56 pm

BanquetBeer wrote:
Sun Sep 17, 2017 2:10 pm
Both from the same former employer, I switched to different formulas. B) is typical 80 point plan A) is alternative plan. Not really sure about formulas or inflation options, I believe taking early has large penalties for 80 point. It was never a large enough amount to really research the details. I think they were both based on some variable % of earned income each year - think the 80 point one the % accrue and the benefit is based on final compensation. With the alternative I think it was maybe defined contribution.

As for A) it does gain lump sum value and I dont really have any bonds. I can cash out any time. Dont know if I can roll over into their 401k and dont want to IRA->roth either lump conversion or ~60%/40% during 2 years of backdoor conversion since Im in the 33%/AMT bracket

I keep very low expenses and have a good income so plan to call it quits early. Been debating if I should go out to Fudruckers for lunch or just eat leftovers at home.. but really leaning towards going out (would be easier decision if the local chain wasnt mediocre)
If they are both from your former employer then neither should be growing on an inflation adjusted basis.

A DB plan based on years of service and compensation would be completely frozen as far as your monthly benefit goes since you will never have more years of service or a higher salary (unless you go back to work there). I would expect the lump sum value to grow the closer you get to retirement although there is also an interest rate component to the calculation for the amount of the lump sum. If interest rates spike up, I think the lump sum value for your pension can fall since it would take less money to get the income stream promised you at retirement. So I would be leery of using the prospective value of your lump sum as a bond substitute as you propose to do.

The question you should be asking yourself is - could you do better if you took the lump sum and invested it? If you think the answer is yes then you should take the lump sum sooner rather than later.

Cash balance plans usually have two ways to increase their value - the contribution that is added monthly, quarterly or annually while you are working there and the earnings that accrue to the account - the latter continues for as long as the money is in the account. But this is usually a pretty conservative "bond-like" appreciation. So again you might be able to do better taking the lump sum and growing it in an IRA. A cash balance type pension could be viewed as a bond substitute since it isn't subject to the same quirky lump sum calculations of a DB pension.

I see you said you wanted to avoid having an IRA, but in the long run I think that is the way to go. I'd bite the bullet and convert it to a Roth IRA if you can pay the taxes from another source of funds. Don't be pennywise but pound-foolish when it comes to paying taxes. Inflation is likely eating up the value of your pensions. Do you want to let that happen just to avoid paying some taxes?

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