Pension Now (Age 36) or Later (Age 65)?

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postitgoat
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Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

My old employer is offering me a pension buy out and I am wondering if I should take it. To make things simple, I've used their online calculator and are looking at the lump sum amounts. If I take it now at age 36 it is $25k or if I wait until age 65 it is $130k. Simple math suggest this is about 6% rate. Don't need the money now, thinking about putting it an total bond fund or the like via roll over to a 401k avoid tax consequences.

Quick Facts
  • Me: 36
  • Spouse: 33
  • Children: 1 + 1 planned
  • NW: 1.1m, mostly tax advantage accounts
  • Debt: 0
  • Real estate: 0 - rent stabilized (controlled) in VHCOL area
  • Lump sum age 36: 25k
  • Lump sum age 65: 130k in 2046, in 2046 dollars
  • No COLA on the pension monthly payments
Pros for early lump sum:
  • Hedges against early death
  • Lump sum goes down if interest rates go up? - I don't understand this one
Cons for early lump sum:
  • Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
My initial thoughts:
  • Do pensions really have an low risk rate compared to a (90% total us bond and 10% total int bond fund)? My guess is no, they have access to most of the same investments we do. I suspect their institutional access does provide them access to other instruments, but I suspect they are correlated to the general market trends anyway.
  • 30 year backtest of the US total Bond Market on portfoliovisualizer.com suggest a 6% rate. Obviously fund expenses will eat the return, but I'll call it equal to "low risk" rate I stated under Cons
Did I oversimplify? What would you do?
Edited: Lumps sum payment in 2046 for clarity
Last edited by postitgoat on Wed Oct 04, 2017 10:34 pm, edited 1 time in total.
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dm200
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by dm200 »

I would lean towards the defined benefit pension at age 65.

1. Diversification
2. Asset Protection
3. Risk of making bad choices
soupcxan
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by soupcxan »

postitgoat wrote: Tue Oct 03, 2017 2:54 pm Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
Arthur Andersen used to be a Big Five accounting firm with a pension plan as well.
Grt2bOutdoors
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Grt2bOutdoors »

soupcxan wrote: Tue Oct 03, 2017 3:04 pm
postitgoat wrote: Tue Oct 03, 2017 2:54 pm Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
Arthur Andersen used to be a Big Five accounting firm with a pension plan as well.
The failure of Arthur Andersen had zero to do with the management of their pension plan. What is your point?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Grt2bOutdoors »

dm200 wrote: Tue Oct 03, 2017 3:00 pm I would lean towards the defined benefit pension at age 65.

1. Diversification
2. Asset Protection
3. Risk of making bad choices
+1. Another vote for keeping the pension.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
soupcxan
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by soupcxan »

[deleted]
Last edited by soupcxan on Sun Dec 10, 2017 3:30 pm, edited 1 time in total.
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Watty
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Watty »

postitgoat wrote: Tue Oct 03, 2017 2:54 pm If I take it now at age 36 it is $25k or if I wait until age 65 it is $130k. Simple math suggest this is about 6% rate.
You need to also factor in inflation. The math gets funky but 30 years of even 3% inflation gets pretty ugly.

You also need to consider that the ability to take a lump sum is often eliminated so can't count on that when you are 65. You might be forced to take the pension at 65 and only get a couple of hundred dollars a month in inflated dollars if you have to take pension. A pension or annuity typically breaks even about 20 years or so into it so your are looking about 50 years into the future if you have to take the pension when you are 65.

I can see where taking it later could work out OK but there are not many ways that it could work out to be fantastic. There are lots of ways where waiting until you are 65 could work out very badly.

I would tend to favor taking the lump sum and rolling it into an IRA because 30 years is a long time.

That said one thing to check on is the details of how the growth of the cash value is calculated. I have a small old discontinued pension that was worth $X when the pension was discontinued. I could not take a lump sum until I left that job. The amount grew each year based on something like the ten year treasury rate or 5%, whichever was greater. Interest rates were much higher then so the 5% guarantee looked really low. The 5% turned out to be great though when interest rates dropped so even after I retired and could take a lump sum I kept the pension since it was earning more than I could get with bonds. Sometimes the details of how the calculations are done can make a compelling case for one of the options.
Last edited by Watty on Tue Oct 03, 2017 3:56 pm, edited 1 time in total.
Maverick3320
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Maverick3320 »

130k in today's dollars (adjusted for inflation)?
Grt2bOutdoors
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Grt2bOutdoors »

soupcxan wrote: Tue Oct 03, 2017 3:24 pm
Grt2bOutdoors wrote: Tue Oct 03, 2017 3:20 pm
soupcxan wrote: Tue Oct 03, 2017 3:04 pm
postitgoat wrote: Tue Oct 03, 2017 2:54 pm Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
Arthur Andersen used to be a Big Five accounting firm with a pension plan as well.
The failure of Arthur Andersen had zero to do with the management of their pension plan. What is your point?
Is this more clear?

A federal appeals court has overturned a $5 million judgment that ordered the insurer of defunct auditor Arthur Andersen LLP to cover the firm's liability to retired employees who lost their pensions when Enron collapsed.
If you're going to post that sentence you ought to post the entire court opinion so the entire community here at Bogleheads can understand the statement above was taken out of context. The statement above does not indicate that the failure of Arthur Andersen was due to their inability to manage or fund their pension plan. Your original statement implied that because they were a Big Five accounting firm with a pension plan, they failed because of the pension plan. I stand by my original statement - failure of Arthur Andersen had zero to do with their pension plan, it was due to censure by the U.S. Government for their inability to expose blatant fraud at Enron and a history of this at a couple of their other audit clients.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Pajamas
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Pajamas »

If I were 36 with 29 years to get to 65, I would take the lump sum now and add it to my portfolio following my asset allocation plan because the promised return is equivalent to a 100% bond fund.

I would also make a note on a 3 x 5 file card to check on my 65th birthday to see if I had made the right decision. If so, that would be a good excuse to open another bottle of champagne and if not, to open another bottle of champagne and toast to the fact that it didn't really matter either way in the long run. :beer
finite_difference
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by finite_difference »

Grt2bOutdoors wrote: Wed Oct 04, 2017 7:40 am
soupcxan wrote: Tue Oct 03, 2017 3:24 pm
Grt2bOutdoors wrote: Tue Oct 03, 2017 3:20 pm
soupcxan wrote: Tue Oct 03, 2017 3:04 pm
postitgoat wrote: Tue Oct 03, 2017 2:54 pm Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
Arthur Andersen used to be a Big Five accounting firm with a pension plan as well.
The failure of Arthur Andersen had zero to do with the management of their pension plan. What is your point?
Is this more clear?

A federal appeals court has overturned a $5 million judgment that ordered the insurer of defunct auditor Arthur Andersen LLP to cover the firm's liability to retired employees who lost their pensions when Enron collapsed.
If you're going to post that sentence you ought to post the entire court opinion so the entire community here at Bogleheads can understand the statement above was taken out of context. The statement above does not indicate that the failure of Arthur Andersen was due to their inability to manage or fund their pension plan. Your original statement implied that because they were a Big Five accounting firm with a pension plan, they failed because of the pension plan. I stand by my original statement - failure of Arthur Andersen had zero to do with their pension plan, it was due to censure by the U.S. Government for their inability to expose blatant fraud at Enron and a history of this at a couple of their other audit clients.
I think what Grt2bOutdoors is saying is that although Arthur Andersen was shuttered, it doesn’t mean Arthur Andersen employees lost their pension plans.

So although companies may go out of business, unless there was fraud/theft related to their pension program, you are probably OK.

A guaranteed 6% rate seems good. That’s a nominal rate though, so in real terms (subtract 2% inflation) will be around 4% — correct? Still not bad for a guaranteed rate.

If you can get the income instead at 65 how much would that be?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
Nowizard
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Nowizard »

I would definitely take the lump sum distribution, particularly since the pension is not subject to a COLA. Depending on your tax status, you can put it in a non-taxable bond fund or create a ladder. You might even investigate the current investment vehicles used by the pension plan and mimic them. Doing so protects against the plan becoming insolvent but essentially continues the pension other than for any immediate tax consequences for taking a lump sum payment.

Tim
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zaboomafoozarg
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by zaboomafoozarg »

How much would your pension pay per year if you didn't do the buyout or lump sum, and instead just received the normal pension payments starting at age 65?

Most pension buyouts I've seen have been a better deal for the company than the recipient.
Last edited by zaboomafoozarg on Wed Oct 04, 2017 8:07 am, edited 2 times in total.
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oldcomputerguy
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by oldcomputerguy »

Watty wrote: Tue Oct 03, 2017 3:46 pm
postitgoat wrote: Tue Oct 03, 2017 2:54 pm If I take it now at age 36 it is $25k or if I wait until age 65 it is $130k. Simple math suggest this is about 6% rate.
You need to also factor in inflation. The math gets funky but 30 years of even 3% inflation gets pretty ugly.
Definitely. $25k translated through 30 years of 3% works out to $60,681.
bigred77
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by bigred77 »

Pajamas wrote: Wed Oct 04, 2017 7:49 am If I were 36 with 29 years to get to 65, I would take the lump sum now and add it to my portfolio following my asset allocation plan because the promised return is equivalent to a 100% bond fund.

I would also make a note on a 3 x 5 file card to check on my 65th birthday to see if I had made the right decision. If so, that would be a good excuse to open another bottle of champagne and if not, to open another bottle of champagne and toast to the fact that it didn't really matter either way in the long run. :beer
This is what I would do too. If you already have $1M+ in investments at 36 this is peanuts to you. It's more likely that you'll completely forget about this in 29 years and they won't have your current address on file than the chance that this would materially affect your retirement plans. Just take the lump sum and roll it into your portfolio.

Also, the 6% rate compared to the return of a total bond fund isn't really appropriate in my opinion. I would compare it to a reasonably conservative estimate of my overall portfolio.
stan1
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by stan1 »

This is a small portion of your portfolio (already less than 2.5% at current values). You can take some risk to get the 6% return or take the payout now and simplify your finances for the next 30 years. This decision is not going to make a difference in your life.
jwhitaker
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by jwhitaker »

Two points: 1)We should turn the question around to see if we are being affected by (what I think is called) the framing affect. Here is what the question would sound like:

"My employer is offering me the ability to invest 25k pre-tax in a 29 year, 0 coupon bond that currently yields 6% to maturity. It has the option to convert to an annuity at maturity, and maturity value is based on annuity prices at that time."

I suppose the reader also needs to convert all their information (true or otherwise) about pension cuts into default rates, etc., also there are government guarantees in place. What would you suggest the reader do in this case? Personally, this framing makes me more positive about the idea :beer

2) There is about a 20% chance you will die by age 65 according to life tables. That accounts for about 0.8% of the 5.8% yield. So it's still a decent yield, but I believe it is possible now to buy long term corporate bonds yielding in the 5% range. Perhaps not from as high of a credit quality as your employer though. Also a pure bond would have a different interest rate sensitivity than a deferred annuity. I think it's most appropriate to compare the 25k with what it would cost to buy the same monthly payment as a deferred annuity and then ask yourself, assuming the pension deal is better than market rate, if you want to buy it.
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Grt2bOutdoors »

jwhitaker wrote: Wed Oct 04, 2017 8:51 am Two points: 1)We should turn the question around to see if we are being affected by (what I think is called) the framing affect. Here is what the question would sound like:

"My employer is offering me the ability to invest 25k pre-tax in a 29 year, 0 coupon bond that currently yields 6% to maturity. It has the option to convert to an annuity at maturity, and maturity value is based on annuity prices at that time."

I suppose the reader also needs to convert all their information (true or otherwise) about pension cuts into default rates, etc., also there are government guarantees in place. What would you suggest the reader do in this case? Personally, this framing makes me more positive about the idea :beer

2) There is about a 20% chance you will die by age 65 according to life tables. That accounts for about 0.8% of the 5.8% yield. So it's still a decent yield, but I believe it is possible now to buy long term corporate bonds yielding in the 5% range. Perhaps not from as high of a credit quality as your employer though. Also a pure bond would have a different interest rate sensitivity than a deferred annuity. I think it's most appropriate to compare the 25k with what it would cost to buy the same monthly payment as a deferred annuity and then ask yourself, assuming the pension deal is better than market rate, if you want to buy it.
+1
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Nate79 »

I would take the payout now. 30 years is a looooooooooong time. There are so many risks to the pension in 30 years I would not depend on the projection to happen. 6% is not guaranteed. The employer is not guaranteed to be in business. Inflation. etc.
rgs92
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by rgs92 »

Wouldn't the PBGC stand behind this pension (fully at this level)?
tesuzuki2002
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by tesuzuki2002 »

You and I are in a VERY similar situation all around with regards to your "Quick Facts". My NW is just under your at around $950K. Have 1 child and that is probably how that will stay for now.

I recently what given a similar offer on a $20K lump sum pension now.

I'd rather see it that I get my investments in 1 place with Vanguard and can put them to my Asset Allocation. You lose some security of the DBP, but you also don't have to ever deal with the pension group with payments or risks of there being issues. I do and figured in the fact that I needed about a 5.7% return to match that of the Pension when I get to age 65 and beyond. I'm confident I'll make that and then some.

Either way I'll be rolling more money into all those account in the coming years. The saving rate I'm currently holding will dwarf what happens to the $20K in another 6 months.

I think it will greatly simplify my life going forward.

cheers!!
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Valuethinker »

postitgoat wrote: Tue Oct 03, 2017 2:54 pm My old employer is offering me a pension buy out and I am wondering if I should take it. To make things simple, I've used their online calculator and are looking at the lump sum amounts. If I take it now at age 36 it is $25k or if I wait until age 65 it is $130k. Simple math suggest this is about 6% rate. Don't need the money now, thinking about putting it an total bond fund or the like via roll over to a 401k avoid tax consequences.

Quick Facts
  • Me: 36
  • Spouse: 33
  • Children: 1 + 1 planned
  • NW: 1.1m, mostly tax advantage accounts
  • Debt: 0
  • Real estate: 0 - rent stabilized (controlled) in VHCOL area
  • Lump sum age 36: 25k
  • Lump sum age 65: 130k
  • No COLA on the pension monthly payments
Pros for early lump sum:
  • Hedges against early death
  • Lump sum goes down if interest rates go up? - I don't understand this one
Cons for early lump sum:
  • Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
My initial thoughts:
  • Do pensions really have an low risk rate compared to a (90% total us bond and 10% total int bond fund)? My guess is no, they have access to most of the same investments we do. I suspect their institutional access does provide them access to other instruments, but I suspect they are correlated to the general market trends anyway.
  • 30 year backtest of the US total Bond Market on portfoliovisualizer.com suggest a 6% rate. Obviously fund expenses will eat the return, but I'll call it equal to "low risk" rate I stated under Cons
Did I oversimplify? What would you do?
6"per cent is a good estimate of what equities might do in the next 30 years.

I would keep the pension especially if it has a survivor benefit.
billfromct
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by billfromct »

You said that you back tested the "U.S. Total Bond market" for the past 30 years which indicated a 6% return.

That doesn't work when bonds are at close to 30 year low interest rates. I believe the 30 year Treasury bond was at 2.18% on May 1, 2016.

The 30 year Treasury bond rate was 8.42% on November 1, 1987, about 30 years ago.

The current 30 year Treasury rate is now 2.87%. About a 66% reduction in the 30 year Treasury rate.

Today's 30 year Treasury rate would have to decrease to .98% to get the same effect.

If anything, long term Treasury bond rates will likely increase over the next 30 years, not decrease.

My understanding is that if you hold bonds for the long term (until maturity), you will basically earn the bond interest rate.

I don't think putting retirement money into bonds for 30 years would be a good idea. If you believe that technology developments & productivity improvements will improve the standard of living, you have to be in the stock market for the long haul.

bill
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

Maverick3320 wrote: Tue Oct 03, 2017 3:54 pm 130k in today's dollars (adjusted for inflation)?
The 130k would be the lump sum payout in 2046
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

zaboomafoozarg wrote: Wed Oct 04, 2017 8:06 am How much would your pension pay per year if you didn't do the buyout or lump sum, and instead just received the normal pension payments starting at age 65?

Most pension buyouts I've seen have been a better deal for the company than the recipient.
If I take it today the payments are $80/month or 960/yr. At age 65 in 2046 it would be $1,038/month or $12,456/yr. I agree that most companies are doing it for their benefit rather than the employees.
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

rgs92 wrote: Wed Oct 04, 2017 11:20 am Wouldn't the PBGC stand behind this pension (fully at this level)?
They should. I believe today they guarantee about 5k/month. In 2046, when I get 1k/month, I should be covered.
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

billfromct wrote: Wed Oct 04, 2017 5:56 pm You said that you back tested the "U.S. Total Bond market" for the past 30 years which indicated a 6% return.

That doesn't work when bonds are at close to 30 year low interest rates. I believe the 30 year Treasury bond was at 2.18% on May 1, 2016.

The 30 year Treasury bond rate was 8.42% on November 1, 1987, about 30 years ago.

The current 30 year Treasury rate is now 2.87%. About a 66% reduction in the 30 year Treasury rate.

Today's 30 year Treasury rate would have to decrease to .98% to get the same effect.

If anything, long term Treasury bond rates will likely increase over the next 30 years, not decrease.

My understanding is that if you hold bonds for the long term (until maturity), you will basically earn the bond interest rate.

I don't think putting retirement money into bonds for 30 years would be a good idea. If you believe that technology developments & productivity improvements will improve the standard of living, you have to be in the stock market for the long haul.

bill
This is also my worry. I know the past 30 years won't predict the future 30 years. I was trying to find a safe vheicle to match the guarantee at age 65. In reality I'd just have this as part of my normal asset allocation. For this thought exercise we could use a 80/20 or 60/40 (bnd, dom stk) split. Protfolio visualizer shows 7% or 8% respectively.
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

Nowizard wrote: Wed Oct 04, 2017 7:58 am I would definitely take the lump sum distribution, particularly since the pension is not subject to a COLA. Depending on your tax status, you can put it in a non-taxable bond fund or create a ladder. You might even investigate the current investment vehicles used by the pension plan and mimic them. Doing so protects against the plan becoming insolvent but essentially continues the pension other than for any immediate tax consequences for taking a lump sum payment.

Tim
I like this idea, I should try to find out thier investment vhecicles.
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Leif
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Leif »

The cash value of pension increases as interest rates increase. Many companies are trying to buy out pensions early since we are at historical low rates.
My suggestion is later.
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

Watty wrote: Tue Oct 03, 2017 3:46 pm
postitgoat wrote: Tue Oct 03, 2017 2:54 pm If I take it now at age 36 it is $25k or if I wait until age 65 it is $130k. Simple math suggest this is about 6% rate.
You need to also factor in inflation. The math gets funky but 30 years of even 3% inflation gets pretty ugly.

You also need to consider that the ability to take a lump sum is often eliminated so can't count on that when you are 65. You might be forced to take the pension at 65 and only get a couple of hundred dollars a month in inflated dollars if you have to take pension. A pension or annuity typically breaks even about 20 years or so into it so your are looking about 50 years into the future if you have to take the pension when you are 65.

I can see where taking it later could work out OK but there are not many ways that it could work out to be fantastic. There are lots of ways where waiting until you are 65 could work out very badly.

I would tend to favor taking the lump sum and rolling it into an IRA because 30 years is a long time.

That said one thing to check on is the details of how the growth of the cash value is calculated. I have a small old discontinued pension that was worth $X when the pension was discontinued. I could not take a lump sum until I left that job. The amount grew each year based on something like the ten year treasury rate or 5%, whichever was greater. Interest rates were much higher then so the 5% guarantee looked really low. The 5% turned out to be great though when interest rates dropped so even after I retired and could take a lump sum I kept the pension since it was earning more than I could get with bonds. Sometimes the details of how the calculations are done can make a compelling case for one of the options.
Inflation is factored in the sense the 130k is 2046 dollars, which is not much due to inflation.

Regarding your point on how it was calculated, I found this:
417(e) Interest Rate Assumption for up to 5 Years 1.96%
417(e) Interest Rate Assumption for 5 to 19 Years 3.77%
417(e) Interest Rate Assumption for 20 Years and Later 4.62%

However, I am not sure what this means. I read somewhere, if I take the 25k now, that's a 117% of the annutity value. I don't have that information of how they come up w/ the 130k lump sum payment.
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postitgoat
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by postitgoat »

I've been reading through everyones reasponses and its about a 50/50 either way. So far that puts me at ease, I am not missing anything big or obvious in my analysis. I think it's time to research 417e interest rate tables and what they mean.
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zaboomafoozarg
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by zaboomafoozarg »

postitgoat wrote: Wed Oct 04, 2017 10:41 pm
zaboomafoozarg wrote: Wed Oct 04, 2017 8:06 am How much would your pension pay per year if you didn't do the buyout or lump sum, and instead just received the normal pension payments starting at age 65?

Most pension buyouts I've seen have been a better deal for the company than the recipient.
If I take it today the payments are $80/month or 960/yr. At age 65 in 2046 it would be $1,038/month or $12,456/yr. I agree that most companies are doing it for their benefit rather than the employees.
So if inflation is 2.5%, $12500/yr in 29 years would be about $6000/yr in real dollars. If inflation were 2% that would be $7000 real; if 3% then $5000 real.
(12456 * (1-.025)^29)

And a 4% withdrawal rate on $130k lump sum in 2046 would be $5200/yr.
(.04 * 130000)

And a 4% withdrawal rate on $25k lump sum in 2017, getting 5% real return for 29 years, would be $4100/yr.
(.04 * 25000 * 1.05^29)
CRTR
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by CRTR »

finite_difference wrote: Wed Oct 04, 2017 7:56 am
Grt2bOutdoors wrote: Wed Oct 04, 2017 7:40 am
soupcxan wrote: Tue Oct 03, 2017 3:24 pm
Grt2bOutdoors wrote: Tue Oct 03, 2017 3:20 pm
soupcxan wrote: Tue Oct 03, 2017 3:04 pm

Arthur Andersen used to be a Big Five accounting firm with a pension plan as well.
The failure of Arthur Andersen had zero to do with the management of their pension plan. What is your point?
Is this more clear?

A federal appeals court has overturned a $5 million judgment that ordered the insurer of defunct auditor Arthur Andersen LLP to cover the firm's liability to retired employees who lost their pensions when Enron collapsed.
If you're going to post that sentence you ought to post the entire court opinion so the entire community here at Bogleheads can understand the statement above was taken out of context. The statement above does not indicate that the failure of Arthur Andersen was due to their inability to manage or fund their pension plan. Your original statement implied that because they were a Big Five accounting firm with a pension plan, they failed because of the pension plan. I stand by my original statement - failure of Arthur Andersen had zero to do with their pension plan, it was due to censure by the U.S. Government for their inability to expose blatant fraud at Enron and a history of this at a couple of their other audit clients.
I think what Grt2bOutdoors is saying is that although Arthur Andersen was shuttered, it doesn’t mean Arthur Andersen employees lost their pension plans.

So although companies may go out of business, unless there was fraud/theft related to their pension program, you are probably OK.

A guaranteed 6% rate seems good. That’s a nominal rate though, so in real terms (subtract 2% inflation) will be around 4% — correct? Still not bad for a guaranteed rate.

If you can get the income instead at 65 how much would that be?

It is an interesting and valid point. Arthur Andersen was a partnership, a professional service employer, and not protected by the PBGC. If not properly structured and funded, their pension fund assets would be subject to creditors' claims. Whether AA mismanaged their pension fund or not is irrelevant. They underwent bankruptcy proceedings, lacked adequate assets to finance their pension obligations and did not have their pension insured. In the AA case, the pensioners, unfortunately, came up short. For those that are interested: https://www.law360.com/articles/52621/c ... f-the-hook.

I don't know the particulars of POSTITGOAT's ex-employer but future pension solvency should not be ignored as a potential source of additional risk.

As for the ~6% return, the devil is in the details. Make sure you read your pension docs carefully, including details about changing the pension scheme.
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FIREchief
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by FIREchief »

In the words of Steve Miller....

"Go on, take the money and run."

A dollar in my control is worth two in somebody else's. But, that's just me.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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#Cruncher
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by #Cruncher »

postitgoat wrote: Wed Oct 04, 2017 10:41 pm
zaboomafoozarg wrote: Wed Oct 04, 2017 8:06 amHow much would your pension pay per year if you didn't do the buyout or lump sum, and instead just received the normal pension payments starting at age 65? ...
If I take it today the payments are $80/month ... At age 65 in 2046 it would be $1,038/month ...
The pension at age 65 looks good to me. As shown on the 2nd row of the following table, for a man it has an expected Internal Rate of Return (IRR) of 5.6% on the $25,000 lump sum now. As shown on the 3rd row, it has an expected return of 6.4% on the projected $130,000 lump sum at age 65. I determined these returns using my longevity estimator and the SSA 1980 Cohort Life Table.

Code: Select all

          Monthly   Begin   Years    --- IRR ----
Lump Sum   Amount  at Age  to Wait   Male  Female
--------  -------  ------  -------   ----  ------
  25,000       80     36        0    2.5%   2.8%
  25,000    1,038     65       29    5.6%   5.9%
 130,000    1,038     65        0    6.4%   7.2%
Leif wrote: Wed Oct 04, 2017 11:01 pmThe cash value of pension increases as interest rates increase.
Just the opposite. The present value of an annuity decreases when discounted at a higher rate.

postitgoat wrote: Wed Oct 04, 2017 11:05 pm... I found this:
417(e) Interest Rate Assumption for up to 5 Years 1.96%
417(e) Interest Rate Assumption for 5 to 19 Years 3.77%
417(e) Interest Rate Assumption for 20 Years and Later 4.62%
However, I am not sure what this means. I read somewhere, if I take the 25k now, that's a 117% of the [annuity] value.
I don't see how the company can get $25,000 as the equivalent value using these discount rates. My longevity estimator shows a $35,000 present value when the survival-weighted cash flow is discounted at 4.62%. (For $1,038 / month starting in 29 years for a 36-year old male weighted according to the SSA 1980 Cohort Life Table.)
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by jwhitaker »

postitgoat wrote: Wed Oct 04, 2017 10:41 pm
zaboomafoozarg wrote: Wed Oct 04, 2017 8:06 am How much would your pension pay per year if you didn't do the buyout or lump sum, and instead just received the normal pension payments starting at age 65?

Most pension buyouts I've seen have been a better deal for the company than the recipient.
If I take it today the payments are $80/month or 960/yr. At age 65 in 2046 it would be $1,038/month or $12,456/yr. I agree that most companies are doing it for their benefit rather than the employees.
Wow, okay. To buy a deferred annuity at age 40 (earliest available quote) deferred 25 years paying 1038 a month would cost $75k right now. Even adjusting for your age actually being 36 (mortality and 4 years inflation) your talking at the absolute cheapest 30% off that figure, so $50k. They are giving you a terrible deal, but to some a 50% cut to be rid of all the credit risk and hassle of tracking it might be worth it.

Is the 1038 in todays dollars and inflation adjusted going forward? i.e. 30 years from now will it actually be a nominal $1600 payment? Does it keep inflating after payments start? How about survivor benefits? The more bells and whistles the better it is to keep.
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Leif »

#Cruncher wrote: Thu Oct 05, 2017 7:09 am
Leif wrote: Wed Oct 04, 2017 11:01 pmThe cash value of pension increases as interest rates increase.
Just the opposite. The present value of an annuity decreases when discounted at a higher rate.
Which means that the payout is higher since the formula is based on interest rates. Believe me, the companies wanting to cash out a pension are not doing it out of the goodness of their heart. They have done their number crunching :wink: .
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by soupcxan »

Grt2bOutdoors wrote: Wed Oct 04, 2017 7:40 am
soupcxan wrote: Tue Oct 03, 2017 3:24 pm
Grt2bOutdoors wrote: Tue Oct 03, 2017 3:20 pm
soupcxan wrote: Tue Oct 03, 2017 3:04 pm
postitgoat wrote: Tue Oct 03, 2017 2:54 pm Giving up a low risk 6% rate. The pension is from Big 4 Accounting firm. If they can't do this right, we are all screwed.
Arthur Andersen used to be a Big Five accounting firm with a pension plan as well.
The failure of Arthur Andersen had zero to do with the management of their pension plan. What is your point?
Is this more clear?

A federal appeals court has overturned a $5 million judgment that ordered the insurer of defunct auditor Arthur Andersen LLP to cover the firm's liability to retired employees who lost their pensions when Enron collapsed.
If you're going to post that sentence you ought to post the entire court opinion so the entire community here at Bogleheads can understand the statement above was taken out of context. The statement above does not indicate that the failure of Arthur Andersen was due to their inability to manage or fund their pension plan. Your original statement implied that because they were a Big Five accounting firm with a pension plan, they failed because of the pension plan. I stand by my original statement - failure of Arthur Andersen had zero to do with their pension plan, it was due to censure by the U.S. Government for their inability to expose blatant fraud at Enron and a history of this at a couple of their other audit clients.
I'm sorry, where are you getting this from what I posted? Where did I imply that AA failed because of their pension plan? :confused

AA obviously failed because of their involvement in the Enron scandal. But the AA pensioners lost big time when the company failed. Which was my point in rebuttal to OP - that a pension from a Big Four accounting firm is low-risk.

I would not regard any pension from a private employer 30 years out as low-risk, even with PBGC coverage (a lot can change in 30 years). Even government pensions could be changed 3 decades from now.
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by Epsilon Delta »

I would also consider if there is any possibility you would ever work for that employer again. Sometimes it's worth staying in the pension scheme so you get grandfathered. This is more likely with a government pension scheme, but it's be worth checking the rules.
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by dacalo »

I am guessing you got notified from EY. I decided to take the lump sum now and dump it into 401k. There are too many uncertainties and I want control over the funds.
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by inbox788 »

I wouldn't worry too much about insolvency. While remotely possible, very unlikely. Chances are they're simply trying to get the liability and bookkeeping off heir books, so after they pay off the folks who cash out now, they'll sell the portfolio to a finance or insurance company.

I'd keep it because it has the best risk/reward, IMO. Count them as bonds and invest in a more aggressive AA with your other retirement accounts. Alternatively, given the long timeframe, you likely get higher return for higher risk investing the lump sum in equities like VOO or VTI.

What is your tax bracket now and expected when you retire? Can you roll it into an IRA or will the proceeds be subject to taxes?
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by ThePrince »

FIREchief wrote: Thu Oct 05, 2017 12:30 am In the words of Steve Miller....

"Go on, take the money and run."

A dollar in my control is worth two in somebody else's. But, that's just me.
+1
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by ubermax »

postitgoat wrote: Wed Oct 04, 2017 11:05 pmInflation is factored in the sense the 130k is 2046 dollars, which is not much due to inflation.

Regarding your point on how it was calculated, I found this:
417(e) Interest Rate Assumption for up to 5 Years 1.96%
417(e) Interest Rate Assumption for 5 to 19 Years 3.77%
417(e) Interest Rate Assumption for 20 Years and Later 4.62%

However, I am not sure what this means. I read somewhere, if I take the 25k now, that's a 117% of the annutity value. I don't have that information of how they come up w/ the 130k lump sum payment.
The three interest rates noted above are called segment rates , are published monthly by IRS , and were the rates for May of this year ; I'm not positive but my guess is that your prior employer is looking at the last quarter of this year to either start paying annuities or lump sums depending on how former employees elect their settlement - your former plan was most likely a calendar year plan and because of those May rates your former employer probably elected a calendar quarter stability period with 5 month lookback , i.e. 5 months before October is May .

The lump sum at age 65 is based on those same rates applied to your vested accrued benefit payable at age 65 , the $1,038/mo. ; it's an estimate and would be re-calculated at age 65 if you were to elect the deferred lump sum at that time - I applied those rates to the $1,038/mo. annuity and came up with roughly $169,000 versus that 130K that you provided - I also used the 2017 prescribed mortality table .

You also mentioned above that you read that the current lump sum is 117% of the annuity value - that may have appeared in what's called a relative value summary provided by your former employer to help compare various annuity options versus lump sum .

I also got roughly 40K for a current lump sum versus the 25K .

Before you decide on an option I'd recommend that you ask your former employer for more information as to how the amounts were calculated
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by ubermax »

#Cruncher wrote: Thu Oct 05, 2017 7:09 amI don't see how the company can get $25,000 as the equivalent value using these discount rates. My longevity estimator shows a $35,000 present value when the survival-weighted cash flow is discounted at 4.62%. (For $1,038 / month starting in 29 years for a 36-year old male weighted according to the SSA 1980 Cohort Life Table.)
I'm not sure why Cruncher continues to use the SSA tables in the lump sum context since the correct table is readily available on the net ; nevertheless he's suggesting that the 25K is low and I agree - I came up with around 40K because my mortality rates are lower and unisex but also I'm not so sure the approximation he uses in the "longevity estimator" for monthly annuities employs enough accuracy .

As I noted above I think the 130K is also understated by almost 40K leading to changes in the previous IRR analysis .

PostitGoat , let us know if you have questions before your post disappears to page 2 and beyond and I would continue to advise you to ask your former employer for the calculation details .
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by SirRunsabit »

Maybe try and negotiate a better deal, ask some questions about how they came up with the numbers. And take the money. "Nobody knocks on the door and gives you cake."
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celia
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Re: Pension Now (Age 36) or Later (Age 65)?

Post by celia »

Since you are in your 30s, your income, as possibly your tax bracket, is likely to increase as your career progresses. With that in mind, I propose:

1) If you rolled (converted) the money into a Roth IRA and could afford the one-time taxes on the amount you get, I would do that. Pay the taxes from a taxable account so you don't lose that tax-advantaged space.

2) If you can't afford the taxes, could you afford them if the conversion was spread over 2 or 3 years? If so, maybe you could do yearly rollovers.

3) Or you could roll it over to a Rollover IRA for a future/current rollover to a 401K plan if/when you are working for an employer that has one.
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