Taking a pension to invest in stocks

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TheTimeLord
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Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 5:29 am

I have a friend who is a huge Dave Ramsey fan and works with a financial advisor somehow associated with Ramsey from what I gather. He is eligible pension with a benefit increases 5% a year until he claims it. His was separation from his previous company was acrimonious and he doesn't really trust the management at his old company. Anyway, he has come up with an idea to start taking his pension and investing the payments 100% in stocks. He has a good job and the pension does have a COLA option, but I don't know if he will choose it. He claims his financial advisor is supportive of this move. He has a good job and is probably going to be working at least another 5 years. Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
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Cigarman
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Re: Taking a pension to invest in stocks

Post by Cigarman » Sun May 27, 2018 5:57 am

If he is a huge Ramsey fan and the financial advisor is an ELP, than is that 100% stock investment in mutual funds (as Dave recommends along with Bogleheads) or actual stocks? Can't speak to the taking pension while remaining employed but I would wonder how well the company's pension has performed over the last 5-10 years as a bellwether of where he should put his money. I suspect that in picking the right funds, or doing a 3 fund portfolio, he should be able to outperform his company's plan.

student
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Re: Taking a pension to invest in stocks

Post by student » Sun May 27, 2018 6:02 am

I am suspicious of the motive of his financial advisor in supporting this move, if the financial advisor charges a fee based on asset size. Personally, I find it hard to give up a pension with a COLA adjustment, if the pension is well-funded. I think there may also be substantial tax liability as the pension income may push him to a higher bracket.

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Re: Taking a pension to invest in stocks

Post by Valuethinker » Sun May 27, 2018 6:08 am

TheTimeLord wrote:
Sun May 27, 2018 5:29 am
I have a friend who is a huge Dave Ramsey fan and works with a financial advisor somehow associated with Ramsey from what I gather. He is eligible pension with a benefit increases 5% a year until he claims it. His was separation from his previous company was acrimonious and he doesn't really trust the management at his old company. Anyway, he has come up with an idea to start taking his pension and investing the payments 100% in stocks. He has a good job and the pension does have a COLA option, but I don't know if he will choose it. He claims his financial advisor is supportive of this move. He has a good job and is probably going to be working at least another 5 years. Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
You need to check PBGC rules if in private sector and scheme is covered.

(I wasn't aware of CPI indexation in the private sector - -that's both incredibly valuable to the recipient *and* very expensive for the plan sponsor)

It can be a good move to draw a pension if there is significant risk that pension will fall under PBGC, I believe (do not know for sure) that the benefits are then more protected (but CPI indexation will go out the window- pretty sure of that).

PBGC multi employer schemes, the PBGC is on the brink of insolvency-- read the statement on their website. Something is going to give, and it's going to hurt.

Public sector I cannot say but I would think that existing pensions are more protected than future benefits. There have been post retirement cuts to public sector pension schemes as I understand it (New Jersey). Illinois some sort of crisis now seems to be inevitable. Cannot speak to other states or municipalities.

5% a year is a phenomenal return, given that there is (arguably, pace the above) no risk. I wouldn't give that up in a hurry.

I think the adviser is playing on your friend's emotions, and he would normally be ill-advised to give up his Defined Benefit pension benefits. He can take more equity risk with the rest of his portfolio, should he wish to, given that he has that benefit. If he has a spouse, then he is particularly ill-advised (for a middle class person, a wife who lives to be 95+ has a significant probability).

It does really depend on the financial health of that pension scheme, though.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 6:09 am

Cigarman wrote:
Sun May 27, 2018 5:57 am
If he is a huge Ramsey fan and the financial advisor is an ELP, than is that 100% stock investment in mutual funds (as Dave recommends along with Bogleheads) or actual stocks? Can't speak to the taking pension while remaining employed but I would wonder how well the company's pension has performed over the last 5-10 years as a bellwether of where he should put his money. I suspect that in picking the right funds, or doing a 3 fund portfolio, he should be able to outperform his company's plan.
Mutual funds that Dave Ramsey recommends. His company plan is going to grow 5% a year until he claims the benefit so I am missing the significance of the performance comment. He is convinced the mutual funds will grow faster than the pension and that the pension might not be stable because he doesn't trust the company management. Personally, I have always looked at pension like an annuity like security blanket to smooth out the ups and downs of the market so this is a new way of looking at things to me.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 6:17 am

Valuethinker wrote:
Sun May 27, 2018 6:08 am
TheTimeLord wrote:
Sun May 27, 2018 5:29 am
I have a friend who is a huge Dave Ramsey fan and works with a financial advisor somehow associated with Ramsey from what I gather. He is eligible pension with a benefit increases 5% a year until he claims it. His was separation from his previous company was acrimonious and he doesn't really trust the management at his old company. Anyway, he has come up with an idea to start taking his pension and investing the payments 100% in stocks. He has a good job and the pension does have a COLA option, but I don't know if he will choose it. He claims his financial advisor is supportive of this move. He has a good job and is probably going to be working at least another 5 years. Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
You need to check PBGC rules if in private sector and scheme is covered.

(I wasn't aware of CPI indexation in the private sector - -that's both incredibly valuable to the recipient *and* very expensive for the plan sponsor)

It can be a good move to draw a pension if there is significant risk that pension will fall under PBGC, I believe (do not know for sure) that the benefits are then more protected (but CPI indexation will go out the window- pretty sure of that).

PBGC multi employer schemes, the PBGC is on the brink of insolvency-- read the statement on their website. Something is going to give, and it's going to hurt.

Public sector I cannot say but I would think that existing pensions are more protected than future benefits. There have been post retirement cuts to public sector pension schemes as I understand it (New Jersey). Illinois some sort of crisis now seems to be inevitable. Cannot speak to other states or municipalities.

5% a year is a phenomenal return, given that there is (arguably, pace the above) no risk. I wouldn't give that up in a hurry.

I think the adviser is playing on your friend's emotions, and he would normally be ill-advised to give up his Defined Benefit pension benefits. He can take more equity risk with the rest of his portfolio, should he wish to, given that he has that benefit. If he has a spouse, then he is particularly ill-advised (for a middle class person, a wife who lives to be 95+ has a significant probability).

It does really depend on the financial health of that pension scheme, though.
As I understand it the plan is a cash value plan that more or less becomes an annuity, it was at one time defined benefit but was converted. The 5% isn't fixed, it is the floor, I believe it was higher years ago and is tied to one of the key rates. I don't think it is his advisor idea, he has lamented not being able to take the cash value of the plan in the past which from everything I know would have been a massive mistake. But he is not very trusting so he wanted the cash.
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Valuethinker
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Re: Taking a pension to invest in stocks

Post by Valuethinker » Sun May 27, 2018 6:56 am

It's probably worth noting that a Defined Benefit pension scheme, CPI linked, is equivalent to an SPIA (inflation linked).

To synthesize that with US TIPS bonds would, depending on date of retirement, cost 20-40x the annual payout of the pension. I haven't tried to model it in detail, but it would be a very expensive benefit to buy at the individual level.

Value (cost) is increased if one has a spouse, especially a female spouse, especially a younger spouse. Conversely it falls if one has a significantly less than average life expectancy due to diagnosed medical condition for example.

The 5% p.a. increase is basically inflation + mortality credit, and is a pretty good return, given that it is risk free.

These things are the gold standard, and the default should be to keep rather than to discard.

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Re: Taking a pension to invest in stocks

Post by Bacchus01 » Sun May 27, 2018 7:06 am

Of course his FA agrees, the FA then gets to invest more of his money.

Not enough info here. Taxation would be the big issue that could really erode his benefit.

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Re: Taking a pension to invest in stocks

Post by retiredjg » Sun May 27, 2018 7:35 am

Lots of red flags for me, but I think it depends partly on how this idea was hatched.

If your friend was so nervous about his former company that he was actively seeking a way to make his pension safer by getting it started now...that's one thing. It might be worth it to him.

If the idea came from the "advisor" and the friend jumped on board because he is nervous about his former company....that's a different thing. This is much more consistent with an advisor slithering around grabbing for more assets under management.

I too would be concerned about raising his taxes by doing this. Or pushing himself into a higher IRMAA tier at age 63.

If your friend is a Dave Ramsey investing plan fan, there is probably little you can say or do. I would probably not say much unless directly asked.

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Re: Taking a pension to invest in stocks

Post by KSActuary » Sun May 27, 2018 9:14 am

Sounds like a cash balance plan. I haven't seen one lately where you could replace the lost income by taking the lump sum and investing it.

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Re: Taking a pension to invest in stocks

Post by dbr » Sun May 27, 2018 10:03 am

TheTimeLord wrote:
Sun May 27, 2018 5:29 am
He claims his financial advisor is supportive of this move. He has a good job and is probably going to be working at least another 5 years.
The analysis by the financial advisor should be definitive. If it isn't, then he should fire the advisor for not doing the job he is paid for.

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Re: Taking a pension to invest in stocks

Post by delamer » Sun May 27, 2018 10:11 am

It is virtually always better to take the pension rather than invest the lump sum, assuming that the pension has secure funding.

We’ve had lots of threads asking this same basic question, and I’ve never seen one where the consensus adivce was to take the lump sum.

It sounds like your friend is letting his dislike of management weigh too much on this decision. Assuming that this is a large company with proper checks-and-balances in place (not a small firm where the owners have been known to use the pension fund as their personal piggybank), then keep he should keep the pension.

And, as others have said, financial advisors benefit by having more money under their management. So he isn’t getting an unbuased opinion there.

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Re: Taking a pension to invest in stocks

Post by retiredjg » Sun May 27, 2018 10:28 am

Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.

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Re: Taking a pension to invest in stocks

Post by dbr » Sun May 27, 2018 10:38 am

retiredjg wrote:
Sun May 27, 2018 10:28 am
Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.
Correct. That is the question. I don't think the analysis is obvious, hence the snide remark about what is a financial advisor paid for. There are enough smart people on this forum that someone who wants to make the effort could probably arrive at some advice. Note the question inherently concerns choices about risk and return.

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Re: Taking a pension to invest in stocks

Post by nedsaid » Sun May 27, 2018 10:42 am

TheTimeLord wrote:
Sun May 27, 2018 5:29 am
I have a friend who is a huge Dave Ramsey fan and works with a financial advisor somehow associated with Ramsey from what I gather. He is eligible pension with a benefit increases 5% a year until he claims it. His was separation from his previous company was acrimonious and he doesn't really trust the management at his old company. Anyway, he has come up with an idea to start taking his pension and investing the payments 100% in stocks. He has a good job and the pension does have a COLA option, but I don't know if he will choose it. He claims his financial advisor is supportive of this move. He has a good job and is probably going to be working at least another 5 years. Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
What the friend should do is check up on the financial soundness of the pension. How much of the future obligations of the pension are currently funded? You want a minimum of 80% funding. Then I would check if the pension is within the insurance limits of the Pension Benefit Guaranty Corporation, a Federal Agency. If for some reason the pension went bust, the PBGC would step in. I would be inclined to wait until retirement to take the pension as he gets a 5% a year step up. COLA options on a pension are also hard to get.

If he took the pension now, he would just have another layer of income to pay taxes on. Perhaps this would put him in a higher tax bracket while still working. I also think that a guaranteed 5% return on his pension while waiting to retire is a sweet deal.

This sounds like an advisor's hare brained scheme to get more assets under management. Your friend should pass on the advice given by his financial advisor and take the pension when he retires.
A fool and his money are good for business.

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Re: Taking a pension to invest in stocks

Post by rgs92 » Sun May 27, 2018 11:14 am

I would never give up an inflation adjusted pension for almost any reason (like severe under-funding, say 50%), private or public.
And even partial protection by the PBGC limits makes it worth keeping even it that case.

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Re: Taking a pension to invest in stocks

Post by Grt2bOutdoors » Sun May 27, 2018 11:27 am

Bacchus01 wrote:
Sun May 27, 2018 7:06 am
Of course his FA agrees, the FA then gets to invest more of his money.

Not enough info here. Taxation would be the big issue that could really erode his benefit.
+1 - What do you expect from an adviser with the "heart of a teacher"? I guess the OP's friend doesn't mind forking over 1.25% each year to the adviser. :oops:
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Re: Taking a pension to invest in stocks

Post by dbr » Sun May 27, 2018 11:30 am

rgs92 wrote:
Sun May 27, 2018 11:14 am
I would never give up an inflation adjusted pension for almost any reason (like severe under-funding, say 50%), private or public.
And even partial protection by the PBGC limits makes it worth keeping even it that case.
He isn't giving up the pension. He is taking, rather thinking of taking, current payments earlier at some cost and diverting those receipts to stock investing, presumably for better return. The calculation depends on need, ability, and willingness to take risk. I do agree the cost of losing max benefits may dominate the outcome.

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Re: Taking a pension to invest in stocks

Post by rgs92 » Sun May 27, 2018 11:36 am

Thanks dbr; great point. But this is the equivalent of taking social security early, since inflation adjusted income streams are basically prohibitively expensive these days.

So it's a very valuable opportunity that is not available elsewhere, and he doesn't need the current income since he's just diverting it anyway to other investments.

And I think his thinking in this matter is recency-biased too.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 5:57 pm

delamer wrote:
Sun May 27, 2018 10:11 am
It is virtually always better to take the pension rather than invest the lump sum, assuming that the pension has secure funding.
To be clear, he cannot take a lump sum, he is taking his pension early then investing each month benefit payment instead of waiting until after he is done working.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 5:58 pm

retiredjg wrote:
Sun May 27, 2018 10:28 am
Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.
You think correctly.I merely mentioned if given the choice he would take the lump sum, which from everything I can tell would have been an awful choice.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 6:01 pm

nedsaid wrote:
Sun May 27, 2018 10:42 am
TheTimeLord wrote:
Sun May 27, 2018 5:29 am
I have a friend who is a huge Dave Ramsey fan and works with a financial advisor somehow associated with Ramsey from what I gather. He is eligible pension with a benefit increases 5% a year until he claims it. His was separation from his previous company was acrimonious and he doesn't really trust the management at his old company. Anyway, he has come up with an idea to start taking his pension and investing the payments 100% in stocks. He has a good job and the pension does have a COLA option, but I don't know if he will choose it. He claims his financial advisor is supportive of this move. He has a good job and is probably going to be working at least another 5 years. Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
What the friend should do is check up on the financial soundness of the pension. How much of the future obligations of the pension are currently funded? You want a minimum of 80% funding. Then I would check if the pension is within the insurance limits of the Pension Benefit Guaranty Corporation, a Federal Agency. If for some reason the pension went bust, the PBGC would step in. I would be inclined to wait until retirement to take the pension as he gets a 5% a year step up. COLA options on a pension are also hard to get.

If he took the pension now, he would just have another layer of income to pay taxes on. Perhaps this would put him in a higher tax bracket while still working. I also think that a guaranteed 5% return on his pension while waiting to retire is a sweet deal.

This sounds like an advisor's hare brained scheme to get more assets under management. Your friend should pass on the advice given by his financial advisor and take the pension when he retires.
Honestly, I think it is more his believing the Dave Ramsey on the average return of the stock market without understanding what that means.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Sun May 27, 2018 6:02 pm

rgs92 wrote:
Sun May 27, 2018 11:14 am
I would never give up an inflation adjusted pension for almost any reason (like severe under-funding, say 50%), private or public.
And even partial protection by the PBGC limits makes it worth keeping even it that case.
No one is giving it up, he is reducing his benefit by taking it early so he can invest the monthly payments now.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Wed May 30, 2018 8:35 am

dbr wrote:
Sun May 27, 2018 10:38 am
retiredjg wrote:
Sun May 27, 2018 10:28 am
Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.
Correct. That is the question. I don't think the analysis is obvious, hence the snide remark about what is a financial advisor paid for. There are enough smart people on this forum that someone who wants to make the effort could probably arrive at some advice. Note the question inherently concerns choices about risk and return.
Besides the question on taxes, is it really that far fetched to believe investing the money in stocks will outperform given the 5% annual pension growth is only 2% real if you have 3% inflation? Seems the plan has greater risk, with the potential for greater reward but in the end is likely not to make much difference either way from what I can tell. There might also be some tax advantages having the money in a portfolio where you can managed its distribution once you start taking SS as opposed to a monthly check. And of course there is the favorable capital gains tax rate if things go well. My first reaction to it when I heard it was negative but the more I think about it, the more I find it a reasonable choice. That said I don't know enough details of their financial situation to do any detailed analysis beyond they may be playing a little catch up after put multiple kids through college.
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Re: Taking a pension to invest in stocks

Post by CnC » Wed May 30, 2018 9:13 am

TheTimeLord wrote:
Wed May 30, 2018 8:35 am
dbr wrote:
Sun May 27, 2018 10:38 am
retiredjg wrote:
Sun May 27, 2018 10:28 am
Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.
Correct. That is the question. I don't think the analysis is obvious, hence the snide remark about what is a financial advisor paid for. There are enough smart people on this forum that someone who wants to make the effort could probably arrive at some advice. Note the question inherently concerns choices about risk and return.
Besides the question on taxes, is it really that far fetched to believe investing the money in stocks will outperform given the 5% annual pension growth is only 2% real if you have 3% inflation? Seems the plan has greater risk, with the potential for greater reward but in the end is likely not to make much difference either way from what I can tell. There might also be some tax advantages having the money in a portfolio where you can managed its distribution once you start taking SS as opposed to a monthly check. And of course there is the favorable capital gains tax rate if things go well. My first reaction to it when I heard it was negative but the more I think about it, the more I find it a reasonable choice. That said I don't know enough details of their financial situation to do any detailed analysis beyond they may be playing a little catch up after put multiple kids through college.

Let me clarify this.

He has 2 options.

1) delay taking his monthly pension until he actually retires. Gain 5% yearly guaranteed for every year he delays.

2) start taking his monthly pension now, which he does not need and invest it in taxable funds.

We are not taking lump sum payment for killing the pension correct?

I do *NOT* think that this is a good idea. With a few caviots.

The reason is 2 fold, 5% guaranteed growth is very good at this moment. Say his pension is 3000 a month now but 3150 a month a year from now if he doesn't take it.

It will be difficult to make up $150x12monthsx30 years left to live. By investing the 36000 in the stock market 1 year. Obviously as the years left to live decrease that math gets better for taking it. If inflation ramps up it is less attractive to delay.

Reason 2, you have said multiple times that your friend has a good job. That means he will be paying hefty taxes on his pension benifit so the tax drag will eat up most of any additional growth he gets out of mutual funds. So instead of paying 12% taxes on his pension in retirement he may be paying 24% now.



If the pension has funding problems this obviously changes the makeup.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Wed May 30, 2018 9:53 am

CnC wrote:
Wed May 30, 2018 9:13 am
TheTimeLord wrote:
Wed May 30, 2018 8:35 am
dbr wrote:
Sun May 27, 2018 10:38 am
retiredjg wrote:
Sun May 27, 2018 10:28 am
Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.
Correct. That is the question. I don't think the analysis is obvious, hence the snide remark about what is a financial advisor paid for. There are enough smart people on this forum that someone who wants to make the effort could probably arrive at some advice. Note the question inherently concerns choices about risk and return.
Besides the question on taxes, is it really that far fetched to believe investing the money in stocks will outperform given the 5% annual pension growth is only 2% real if you have 3% inflation? Seems the plan has greater risk, with the potential for greater reward but in the end is likely not to make much difference either way from what I can tell. There might also be some tax advantages having the money in a portfolio where you can managed its distribution once you start taking SS as opposed to a monthly check. And of course there is the favorable capital gains tax rate if things go well. My first reaction to it when I heard it was negative but the more I think about it, the more I find it a reasonable choice. That said I don't know enough details of their financial situation to do any detailed analysis beyond they may be playing a little catch up after put multiple kids through college.

Let me clarify this.

He has 2 options.

1) delay taking his monthly pension until he actually retires. Gain 5% yearly guaranteed for every year he delays.

2) start taking his monthly pension now, which he does not need and invest it in taxable funds.

We are not taking lump sum payment for killing the pension correct?

I do *NOT* think that this is a good idea. With a few caviots.

The reason is 2 fold, 5% guaranteed growth is very good at this moment. Say his pension is 3000 a month now but 3150 a month a year from now if he doesn't take it.

It will be difficult to make up $150x12monthsx30 years left to live. By investing the 36000 in the stock market 1 year. Obviously as the years left to live decrease that math gets better for taking it. If inflation ramps up it is less attractive to delay.

Reason 2, you have said multiple times that your friend has a good job. That means he will be paying hefty taxes on his pension benifit so the tax drag will eat up most of any additional growth he gets out of mutual funds. So instead of paying 12% taxes on his pension in retirement he may be paying 24% now.



If the pension has funding problems this obviously changes the makeup.
You have a correct understanding of the question. Let me add some questions.

1) Does it matter that a 5% annual increase is only 2%-3% real when accounting for normal inflation?
2) Does it matter that the higher his pension the more likely it is he will make his SS taxable?
3) Does it matter that the gains on his investments (let's assume US Total Market) will be taxed as capital gains not ordinary income?
4) Does it matter that his pension is likely to be closer to $1,200-$1,500 a month currently than $3,000 (i.e. you aren't talking a huge dollar amount)?
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Re: Taking a pension to invest in stocks

Post by heyyou » Thu May 31, 2018 12:34 am

From 1966 to 1982, the stock market was flat relative to inflation, so it looked okay in nominal terms, but the investors did not gain any from owning the shares. Does the friend know that buying fresh shares for that long of a period, could have no gain, before the big returns after that period?

Show him what the CAPE10 is now, relative to other times in the past. Explain to him about recency bias. And let him and his greed do whatever he thinks is best. He may well drift away from you when he realizes his mistakes and that you were wiser.

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Re: Taking a pension to invest in stocks

Post by Valuethinker » Thu May 31, 2018 2:27 am

heyyou wrote:
Thu May 31, 2018 12:34 am
From 1966 to 1982, the stock market was flat relative to inflation, so it looked okay in nominal terms, but the investors did not gain any from owning the shares. Does the friend know that buying fresh shares for that long of a period, could have no gain, before the big returns after that period?
It's quite a bit worse than that because the bull and bear markets were a roller coaster. I think just about everybody knew that stocks had badly underperformed inflation hence the famous "Death of Equities" cover by Business Week in 1979. That said, there was yet another bear market in 1981-82 so it wasn't clear we were in the bull market of all time until a lot later.

(The UK Market managed to drop over 80% in real terms 1972-74. *that* was not fun)

And there's another complication. Taxes on dividends and capital gains were a lot higher, there were not the tax exempt account options available today (or not in the amounts now available).

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Re: Taking a pension to invest in stocks

Post by Valuethinker » Thu May 31, 2018 2:31 am

TheTimeLord wrote:
Wed May 30, 2018 9:53 am
CnC wrote:
Wed May 30, 2018 9:13 am
TheTimeLord wrote:
Wed May 30, 2018 8:35 am
dbr wrote:
Sun May 27, 2018 10:38 am
retiredjg wrote:
Sun May 27, 2018 10:28 am
Some people think the person is considering taking a lump sum and investing it. That's a different question from what the original post is asking.

I think the question is whether to start taking pension payments monthly and investing that.
Correct. That is the question. I don't think the analysis is obvious, hence the snide remark about what is a financial advisor paid for. There are enough smart people on this forum that someone who wants to make the effort could probably arrive at some advice. Note the question inherently concerns choices about risk and return.
Besides the question on taxes, is it really that far fetched to believe investing the money in stocks will outperform given the 5% annual pension growth is only 2% real if you have 3% inflation? Seems the plan has greater risk, with the potential for greater reward but in the end is likely not to make much difference either way from what I can tell. There might also be some tax advantages having the money in a portfolio where you can managed its distribution once you start taking SS as opposed to a monthly check. And of course there is the favorable capital gains tax rate if things go well. My first reaction to it when I heard it was negative but the more I think about it, the more I find it a reasonable choice. That said I don't know enough details of their financial situation to do any detailed analysis beyond they may be playing a little catch up after put multiple kids through college.

Let me clarify this.

He has 2 options.

1) delay taking his monthly pension until he actually retires. Gain 5% yearly guaranteed for every year he delays.

2) start taking his monthly pension now, which he does not need and invest it in taxable funds.

We are not taking lump sum payment for killing the pension correct?

I do *NOT* think that this is a good idea. With a few caviots.

The reason is 2 fold, 5% guaranteed growth is very good at this moment. Say his pension is 3000 a month now but 3150 a month a year from now if he doesn't take it.

It will be difficult to make up $150x12monthsx30 years left to live. By investing the 36000 in the stock market 1 year. Obviously as the years left to live decrease that math gets better for taking it. If inflation ramps up it is less attractive to delay.

Reason 2, you have said multiple times that your friend has a good job. That means he will be paying hefty taxes on his pension benifit so the tax drag will eat up most of any additional growth he gets out of mutual funds. So instead of paying 12% taxes on his pension in retirement he may be paying 24% now.



If the pension has funding problems this obviously changes the makeup.
You have a correct understanding of the question. Let me add some questions.

1) Does it matter that a 5% annual increase is only 2%-3% real when accounting for normal inflation?
Yes, but it's still a 5% increment. The important thing is that it is actuarially neutral, the same present value. It's only worth taking early/ taking a lump sum if you have a reduced life expectancy and/ or no spouse and/ or an urgent need for the money (say to pay off high interest credit).
2) Does it matter that the higher his pension the more likely it is he will make his SS taxable?
It matters a lot, if you can figure out all the uncertainties.
3) Does it matter that the gains on his investments (let's assume US Total Market) will be taxed as capital gains not ordinary income?
4) Does it matter that his pension is likely to be closer to $1,200-$1,500 a month currently than $3,000 (i.e. you aren't talking a huge dollar amount)?
You can't really scale the dollar amount without knowing the need. $1,200-1,500 pcm is quite a lot of money to someone who does not have a lot.

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Re: Taking a pension to invest in stocks

Post by SGM » Thu May 31, 2018 3:39 am

I would delay the pension if still working. The health of the pension plan should be accessible information. He could use the higher payments to help pay his expenses if he is delaying SS later on. The stock market is risky as well and using an advisor he is likely paying higher expense ratios for his mutual funds as well as a fee for assets under management. The costs could be an additional 2.5% of assets or more per year.


Having an additional cost of living adjusted pension is rare these days outside of government employment.

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Re: Taking a pension to invest in stocks

Post by JoeRetire » Thu May 31, 2018 7:37 am

TheTimeLord wrote:
Sun May 27, 2018 5:29 am
Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
Certainly it could be a good move. But you haven't provided any details at all, so it's not possible to draw any conclusions.

Hopefully, the friend isn't relying on the Dave Ramsey "12% return on investment" theory as his motivation.

When you say "taking his pension", it appears that he has decided to take monthly payments rather than a lump sum. That may or may not be wise if he is truly worried about management and the potential impact on the pension fund. Similarly that worry may translate into a "start taking now" versus a "wait until later" decision.

100% in stocks may or may not be a wise allocation. That might depend on the rest of your friends portfolio and other projected income streams.

Choosing a COLA option or declining it is an important choice. It only involves a little math and a guess as to future inflation.

It would be hard to turn down a guaranteed 5% a year increase (plus COLA!), particularly when working for at least another 5 years. But there may be details that make it wise to start now. It's not unlike deciding to start collecting social security at 62 and investing the benefits versus waiting until age 70 and collecting a lot more each month. Sometimes it may make sense, but usually not.
Last edited by JoeRetire on Thu May 31, 2018 7:56 am, edited 7 times in total.

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Re: Taking a pension to invest in stocks

Post by CyclingDuo » Thu May 31, 2018 7:44 am

TheTimeLord wrote:
Wed May 30, 2018 9:53 am

You have a correct understanding of the question. Let me add some questions.

1) Does it matter that a 5% annual increase is only 2%-3% real when accounting for normal inflation?
2) Does it matter that the higher his pension the more likely it is he will make his SS taxable?
3) Does it matter that the gains on his investments (let's assume US Total Market) will be taxed as capital gains not ordinary income?
4) Does it matter that his pension is likely to be closer to $1,200-$1,500 a month currently than $3,000 (i.e. you aren't talking a huge dollar amount)?
Why doesn't your friend just bump up the amount of his gross income that he is currently saving to a higher percentage in equities by placing more of his pre-tax and post-tax income in all the usual investment vehicles (401k, IRA, taxable account, tax-deferred variable annuity, etc...)?
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Re: Taking a pension to invest in stocks

Post by cheese_breath » Thu May 31, 2018 7:45 am

Really, really dumb. Give up a sure thing to go 100% in stocks? Of course his financial advisor likes it. Now he'll be able to put his kids in that private school.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 8:04 am

heyyou wrote:
Thu May 31, 2018 12:34 am
From 1966 to 1982, the stock market was flat relative to inflation, so it looked okay in nominal terms, but the investors did not gain any from owning the shares. Does the friend know that buying fresh shares for that long of a period, could have no gain, before the big returns after that period?

Show him what the CAPE10 is now, relative to other times in the past. Explain to him about recency bias. And let him and his greed do whatever he thinks is best. He may well drift away from you when he realizes his mistakes and that you were wiser.
So you aren't buying equities right now? I am missing something because he isn't talking about investing necessarily short term. Equities obviously involve more risk and I think from what I know Dave Ramsey is overly optimistic about them but so are Buffet and Bogle. Just giving you the Devil Advocate position but aren't BH for buying equities in all markets irregardless of things like CAPE10?
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 8:10 am

JoeRetire wrote:
Thu May 31, 2018 7:37 am
TheTimeLord wrote:
Sun May 27, 2018 5:29 am
Could this be a good move on his part? I guess I never really thought much about people taking their pensions when they were still drawing a sufficient paycheck.
Certainly it could be a good move. But you haven't provided any details at all, so it's not possible to draw any conclusions.

Hopefully, the friend isn't relying on the Dave Ramsey "12% return on investment" theory as his motivation.

When you say "taking his pension", it appears that he has decided to take monthly payments rather than a lump sum. That may or may not be wise if he is truly worried about management and the potential impact on the pension fund. Similarly that worry may translate into a "start taking now" versus a "wait until later" decision.

100% in stocks may or may not be a wise allocation. That might depend on the rest of your friends portfolio and other projected income streams.

Choosing a COLA option or declining it is an important choice. It only involves a little math and a guess as to future inflation.

It would be hard to turn down a guaranteed 5% a year increase (plus COLA!), particularly when working for at least another 5 years. But there may be details that make it wise to start now. It's not unlike deciding to start collecting social security at 62 and investing the benefits versus waiting until age 70 and collecting a lot more each month. Sometimes it may make sense, but usually not.
It is a take it now or delay situation. The annual increase is a flat 5%, COLA is an option when you take the pension. To give him a fair shake on this it is a present dollar versus future dollar thing so it well over 20 years before he goes negative on the amount dispersed to him on a real basis ignoring taxes.
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 8:12 am

CyclingDuo wrote:
Thu May 31, 2018 7:44 am
TheTimeLord wrote:
Wed May 30, 2018 9:53 am

You have a correct understanding of the question. Let me add some questions.

1) Does it matter that a 5% annual increase is only 2%-3% real when accounting for normal inflation?
2) Does it matter that the higher his pension the more likely it is he will make his SS taxable?
3) Does it matter that the gains on his investments (let's assume US Total Market) will be taxed as capital gains not ordinary income?
4) Does it matter that his pension is likely to be closer to $1,200-$1,500 a month currently than $3,000 (i.e. you aren't talking a huge dollar amount)?
Why doesn't your friend just bump up the amount of his gross income that he is currently saving to a higher percentage in equities by placing more of his pre-tax and post-tax income in all the usual investment vehicles (401k, IRA, taxable account, tax-deferred variable annuity, etc...)?
He doesn't trust the pension, would take a lump sum if he could, I think he believes he is going to get what he can get before the plan goes belly up which does not seem to be imminent from what I can see.
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Re: Taking a pension to invest in stocks

Post by JoeRetire » Thu May 31, 2018 8:16 am

TheTimeLord wrote:
Thu May 31, 2018 8:10 am
It is a take it now or delay situation. The annual increase is a flat 5%, COLA is an option when you take the pension. To give him a fair shake on this it is a present dollar versus future dollar thing so it well over 20 years before he goes negative on the amount dispersed to him on a real basis ignoring taxes.
He's a lucky guy.

As I said, it's hard to pass up a 5% per year guaranteed increase for a lifetime COLAed pension, when the money isn't needed now.

Still, not enough details to conclude if it makes sense financially or not.

For example, let's say the pension is only single life and not a joint and survior benefit and the individual is married. And let's say the individual has reason to believe he will not live beyond 5 years. Clearly, he would be crazy not to start taking the pension immediately.

A completely contrived scenario of course - but without knowing lots more details the answer to "Could this be a good move?" is often "Yes it could, but it depends!"

BTW - I'm curious how you concluded that it will be well over 20 years before he goes negative on the amount dispersed.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 8:24 am

cheese_breath wrote:
Thu May 31, 2018 7:45 am
Really, really dumb. Give up a sure thing to go 100% in stocks? Of course his financial advisor likes it. Now he'll be able to put his kids in that private school.
Personally, I don't agree with the decision ( I'm conservative) but it is in no way "really, really dumb", although it entails risk. Let's say his current pension would be a nice round $20K a year and it is taxed at an effective rate of 16% over the next 5 years what he is doing is deciding to take (A) instead of (B). Obviously the performance of VTI over the next 5 years and beyond are key but provided all my back of the napkin math is correct he would need 6.6% return to come out ahead. So if you add in his concern over the health of the pension it is a fairly reasoned plan that probably in most scenarios won't make any meaningful difference one way or the other.

(A) $20,000 a year for life plus $84,000 in VTI (plus any gains or losses over the next 5 years)
(B) $25,525 a year for life
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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 8:35 am

JoeRetire wrote:
Thu May 31, 2018 8:16 am
TheTimeLord wrote:
Thu May 31, 2018 8:10 am
It is a take it now or delay situation. The annual increase is a flat 5%, COLA is an option when you take the pension. To give him a fair shake on this it is a present dollar versus future dollar thing so it well over 20 years before he goes negative on the amount dispersed to him on a real basis ignoring taxes.
He's a lucky guy.

As I said, it's hard to pass up a 5% per year guaranteed increase for a lifetime COLAed pension, when the money isn't needed now.

Still, not enough details to conclude if it makes sense financially or not.

For example, let's say the pension is only single life and not a joint and survior benefit and the individual is married. And let's say the individual has reason to believe he will not live beyond 5 years. Clearly, he would be crazy not to start taking the pension immediately.

A completely contrived scenario of course - but without knowing lots more details the answer to "Could this be a good move?" is often "Yes it could, but it depends!"

BTW - I'm curious how you concluded that it will be well over 20 years before he goes negative on the amount dispersed.
Just to be clear there is no lifetime 5% guarantee. The cash value on which the benefit is based grows at 5% a year until he takes the benefit at which time he has several options, one of which is a COLA. He also has the choice of several survivor benefit levels which of course reduces the benefit but would provide security for his spouse. The 20+ years was a guess using the 5% which does compound but accounting for the difference in being paid in present dollars versus future dollars. If he takes the COLA and inflation is 2.5%, then his benefit grows 2.5% annually if he takes it versus the 5% difference if he doesn't for a compounded difference of 2.5% a year instead of 5% that people seem to be assuming. But maybe I am missing something or calculating something incorrectly.
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Re: Taking a pension to invest in stocks

Post by dbr » Thu May 31, 2018 8:40 am

TheTimeLord wrote:
Thu May 31, 2018 8:35 am

Just to be clear there is no lifetime 5% guarantee. The cash value on which the benefit is based grows at 5% a year until he takes the benefit at which time he has several options, one of which is a COLA. He also has the choice of several survivor benefit levels which of course reduces the benefit but would provide security for his spouse. The 20+ years was a guess using the 5% which does compound but accounting for the difference in being paid in present dollars versus future dollars. If he takes the COLA and inflation is 2.5%, then his benefit grows 2.5% annually if he takes it versus the 5% difference if he doesn't for a compounded difference of 2.5% a year instead of 5% that people seem to be assuming. But maybe I am missing something or calculating something incorrectly.
No, you are just enumerating a large number of variables that make the proposition difficult to evaluate. But it is still at heart a risk problem and not a return/income problem.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 8:49 am

dbr wrote:
Thu May 31, 2018 8:40 am
TheTimeLord wrote:
Thu May 31, 2018 8:35 am

Just to be clear there is no lifetime 5% guarantee. The cash value on which the benefit is based grows at 5% a year until he takes the benefit at which time he has several options, one of which is a COLA. He also has the choice of several survivor benefit levels which of course reduces the benefit but would provide security for his spouse. The 20+ years was a guess using the 5% which does compound but accounting for the difference in being paid in present dollars versus future dollars. If he takes the COLA and inflation is 2.5%, then his benefit grows 2.5% annually if he takes it versus the 5% difference if he doesn't for a compounded difference of 2.5% a year instead of 5% that people seem to be assuming. But maybe I am missing something or calculating something incorrectly.
No, you are just enumerating a large number of variables that make the proposition difficult to evaluate. But it is still at heart a risk problem and not a return/income problem.
That was my conclusion and I think his decision is being made on the basis of his perception he has more control if he invest the money rather depending on the company to honor the pension fully over time. He is a control enthusiast.
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Re: Taking a pension to invest in stocks

Post by CnC » Thu May 31, 2018 9:07 am

TheTimeLord wrote:
Wed May 30, 2018 9:53 am


You have a correct understanding of the question. Let me add some questions.

1) Does it matter that a 5% annual increase is only 2%-3% real when accounting for normal inflation?
2) Does it matter that the higher his pension the more likely it is he will make his SS taxable?
3) Does it matter that the gains on his investments (let's assume US Total Market) will be taxed as capital gains not ordinary income?
4) Does it matter that his pension is likely to be closer to $1,200-$1,500 a month currently than $3,000 (i.e. you aren't talking a huge dollar amount)?

I too have a pension coming so I have looked into this quite a bit.

1) no it does not. We are strictly talking about exchanging 1 years pension invested for 1 year for remaining years of life being 5% more. Each year you look at this calculation separately. Ie delaying it for 10 years is probably a bad idea but delaying it for 1-2 years is probably a good one. Look at in so how 1 year bites. Now if it turns to ±1% real then you can readjust your perspective. But I'm assuming this can be decided every year, he won't have to lock in his no for 10+ year only the yes.

2) No, if he is that serious about investing he will likely have enough saved to have his social security taxed anyway. I suppose if he had no other income it might make the math a little less clean but I don't think the results would change.

3) No, because I am talking about the distribution of the pension being taxed at his marginal tax rate. I assumed that his investment would be low tax drag index funds.

4) Only as a function of his marginal tax rate. The 5% increase in gains per month for the rest of his life and 1 month distribution and return are related regardless of the amount. Now if his pension was 10,000 yearly vs 100,000 yearly then the progressive tax rate would alternative the math substantially.

My gut feeling delay 1-3 years is the golden time. After a few years of delaying it then I would probably consider taking it.


Just to use your numbers to make this make more sense. This considers your pension as safe as bonds and the exact same as 4% drawdown on bonds. Not 100% realistic but serves the purpose. Running quick and dirty math you are trading around 18,000 dollars in stocks minus 25%+ taxes +15% ltcg taxes for 22,500 dollars -retirement taxes in pension every year you don't delay. Assuming you treat your pension like bonds at 4% srw once he is not taking that 25%+ hit in taxes his 18,000 will catch up with his pension.
Last edited by CnC on Thu May 31, 2018 9:11 am, edited 1 time in total.

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Re: Taking a pension to invest in stocks

Post by JoeRetire » Thu May 31, 2018 9:10 am

TheTimeLord wrote:
Thu May 31, 2018 8:49 am
That was my conclusion and I think his decision is being made on the basis of his perception he has more control if he invest the money rather depending on the company to honor the pension fully over time. He is a control enthusiast.
That's an interesting perception and certainly adds some color to the choice!

He's more worried about the stability of the pension fund than about the volatility of the stock market.

I'm not sure how much control he actually gains, other than a 5-year head start. If the company won't honor the pension fully over time, I'd assume that "honor" wouldn't be impacted by the start date?

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 9:17 am

JoeRetire wrote:
Thu May 31, 2018 9:10 am
TheTimeLord wrote:
Thu May 31, 2018 8:49 am
That was my conclusion and I think his decision is being made on the basis of his perception he has more control if he invest the money rather depending on the company to honor the pension fully over time. He is a control enthusiast.
That's an interesting perception and certainly adds some color to the choice!

He's more worried about the stability of the pension fund than about the volatility of the stock market.

I'm not sure how much control he actually gains, other than a 5-year head start. If the company won't honor the pension fully over time, I'd assume that "honor" wouldn't be impacted by the start date?
I assume this is sort of a Dave Ramsey thing.
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Re: Taking a pension to invest in stocks

Post by JoeRetire » Thu May 31, 2018 9:21 am

TheTimeLord wrote:
Thu May 31, 2018 8:35 am
Just to be clear there is no lifetime 5% guarantee. The cash value on which the benefit is based grows at 5% a year until he takes the benefit at which time he has several options, one of which is a COLA. He also has the choice of several survivor benefit levels which of course reduces the benefit but would provide security for his spouse. The 20+ years was a guess using the 5% which does compound but accounting for the difference in being paid in present dollars versus future dollars. If he takes the COLA and inflation is 2.5%, then his benefit grows 2.5% annually if he takes it versus the 5% difference if he doesn't for a compounded difference of 2.5% a year instead of 5% that people seem to be assuming. But maybe I am missing something or calculating something incorrectly.
I understand. It makes sense. I don't think you are missing anything here.

There are all kinds of situations where delaying makes sense and others where starting now makes sense. Lots of unknowns and lots of variables.

It sounds like the main motivation in starting now is to "get some before the company management shuts it down". And if his perception is correct, it would be hard to argue with that.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 10:01 am

JoeRetire wrote:
Thu May 31, 2018 9:21 am
TheTimeLord wrote:
Thu May 31, 2018 8:35 am
Just to be clear there is no lifetime 5% guarantee. The cash value on which the benefit is based grows at 5% a year until he takes the benefit at which time he has several options, one of which is a COLA. He also has the choice of several survivor benefit levels which of course reduces the benefit but would provide security for his spouse. The 20+ years was a guess using the 5% which does compound but accounting for the difference in being paid in present dollars versus future dollars. If he takes the COLA and inflation is 2.5%, then his benefit grows 2.5% annually if he takes it versus the 5% difference if he doesn't for a compounded difference of 2.5% a year instead of 5% that people seem to be assuming. But maybe I am missing something or calculating something incorrectly.
I understand. It makes sense. I don't think you are missing anything here.

There are all kinds of situations where delaying makes sense and others where starting now makes sense. Lots of unknowns and lots of variables.

It sounds like the main motivation in starting now is to "get some before the company management shuts it down". And if his perception is correct, it would be hard to argue with that.
True, if you believe that is about to or will happen in the next decade. That said we are talking a major company's pension, backed PBGC, who reported above expectation earnings last quarter on healthy sales.
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Re: Taking a pension to invest in stocks

Post by JoeRetire » Thu May 31, 2018 10:49 am

TheTimeLord wrote:
Thu May 31, 2018 10:01 am
True, if you believe that is about to or will happen in the next decade. That said we are talking a major company's pension, backed PBGC, who reported above expectation earnings last quarter on healthy sales.
We all perceive things differently. His perception is from an insider's point of view. Our's is from outside.

He may be right. He may be wrong. Time will tell.

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Re: Taking a pension to invest in stocks

Post by TheTimeLord » Thu May 31, 2018 11:06 am

JoeRetire wrote:
Thu May 31, 2018 10:49 am
TheTimeLord wrote:
Thu May 31, 2018 10:01 am
True, if you believe that is about to or will happen in the next decade. That said we are talking a major company's pension, backed PBGC, who reported above expectation earnings last quarter on healthy sales.
We all perceive things differently. His perception is from an insider's point of view. Our's is from outside.

He may be right. He may be wrong. Time will tell.
He no longer works for the company and hasn't for over a decade.
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