Old pension plan- take the lump sum or wait for the monthly payout?

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Topic Author
ACA
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Old pension plan- take the lump sum or wait for the monthly payout?

Post by ACA » Mon Jul 15, 2019 8:07 am

This place rocks!

Now for a personal question...

Old employer plan value currently at $38k. Currently interest credit rate for 2109 is 3.11%.

Estimated value at 60 years old (2032) is $57k or $302 monthly for life.

Current employer allows rollovers.

Should I grab the $38k now and invest in my three fund portfolio 401k (excellent choices and extremely low fees) or keep it in old plan and take monthly payout in 13 years?

dave_5
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by dave_5 » Mon Jul 15, 2019 8:20 am

I'm 41 and am in a similar situation should I retire as I'm currently vested in the pension system. I ran the math out on my pension and found taking the monthly payment would be better for me. Does your plan come with a COLA? I listen to Dave Ramsey and he says always to do the rollover to an IRA because if you die the pension dies with you and even if you pass pension benefits to a spouse, then it dies with them. Do you have children or anyone you'd like to pass assets to if and once you pass on? Another thing about a pension in most cases it's a steady consistent payment, not subject to the whims of the market, booms and recessions. If you're forced to take RMD's during the next recession, think about how much less mileage you'd get out of your funds?

Look into see if you pension allows for a partial rollover. Mine has this option. It's a hybrid between the straight pension and an IRA rollover and I found this to be the best option for me. That way, you get the steady monthly payment AND some additional funds into my Roth 457. I found when I did the math, this to be the very best option for me. What kind of organization are you with? Is it a company and maybe you're grandfathered into a pension system or is it government? A lot of people don't like pensions, but I'm a little bit different than most and many people do in fact like them in my organization, some don't even bother with the 457 where I work and that's a mistake. You need both, pension and social security alone is probably not going to get you there these days.

Chadnudj
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Chadnudj » Mon Jul 15, 2019 8:58 am

Couple things to think about here:

Are you married?
Does the plan allow for survivor benefits to your spouse?
What is your/your spouse's expected longevity based on family health histories/personal health?
Is there a COLA adjustment, and if so, what is it pegged to?
How safe is the pension and is it protected by suitable insurance/backup?
Does the pension benefit increase in any way if you claim after age 60?
When do you plan to retire?
How's the rest of your retirement savings doing?
Do you want/plan to leave an inheritance to future generations/charity?

All of those will factor into an analysis. If your pension allows survivorship and has a generous COLA adjustment and is safe, it may make sense to have this plan as one leg of your multi-legged retirement plan -- it provides some guaranteed income, you can access it relatively early (by age 60, which means you get something before you could even claim SS) which means you could delay SS/take out less from your portfolios for a bit longer, etc.

It's not an easy question to answer, so the more details you provide the better the advice you might receive.

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ACA
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by ACA » Mon Jul 15, 2019 9:10 am

Chadnudj wrote:
Mon Jul 15, 2019 8:58 am
Couple things to think about here:

Are you married?
Does the plan allow for survivor benefits to your spouse?
What is your/your spouse's expected longevity based on family health histories/personal health?
Is there a COLA adjustment, and if so, what is it pegged to?
How safe is the pension and is it protected by suitable insurance/backup?
Does the pension benefit increase in any way if you claim after age 60?
When do you plan to retire?
How's the rest of your retirement savings doing?
Do you want/plan to leave an inheritance to future generations/charity?
Thanks for replies.

Yes, I’m married. She has a VERY generous pension.
Yes, suviorship is available. But reduces monthly benefit.
Both are in good health and parents are equally healthy.
No COLA that I’m aware of.
Very safe pension.
No increase after 60.
Plan to retire around 55-57 (8-10 years)
Other investments are doing very well. No concerns with having “enough”.
Yes. Leaving “some” to kids is important.

retiredjg
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by retiredjg » Mon Jul 15, 2019 9:17 am

I think I'd roll it to the 401k.

Without a COLA, that $302 will be small when you first take it and small enough to be a nuisance 15 years later. Also, rolling it into the 401k means your wife will get the benefit of it's growth if you die first (so you don't have to take the reduced amount in order for her to benefit).

bradpevans
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by bradpevans » Mon Jul 15, 2019 9:33 am

If you go lump,
i) you have all the money (i.e. you remove the risk of "i lost monthly payments because of early death")
ii) you have all the burden (you now have market risk and cognitive risk to make the money last / perform)

Spousal/beneficiary concerns come in to play as well of course.

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Stinky
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Stinky » Mon Jul 15, 2019 10:04 am

I’d definitely roll now into your current 401(k) account and invest in your three fund portfolio.

By doing so, you’ll simplify your financial life by consolidating accounts. You’ll also likely be far ahead financially with your three fund investment instead of earning a bond-like yield in the current pension plan.
It's a GREAT day to be alive - Travis Tritt

Chadnudj
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Chadnudj » Mon Jul 15, 2019 1:35 pm

ACA wrote:
Mon Jul 15, 2019 9:10 am
Chadnudj wrote:
Mon Jul 15, 2019 8:58 am
Couple things to think about here:

Are you married?
Does the plan allow for survivor benefits to your spouse?
What is your/your spouse's expected longevity based on family health histories/personal health?
Is there a COLA adjustment, and if so, what is it pegged to?
How safe is the pension and is it protected by suitable insurance/backup?
Does the pension benefit increase in any way if you claim after age 60?
When do you plan to retire?
How's the rest of your retirement savings doing?
Do you want/plan to leave an inheritance to future generations/charity?
Thanks for replies.

Yes, I’m married. She has a VERY generous pension.
Yes, suviorship is available. But reduces monthly benefit.
Both are in good health and parents are equally healthy.
No COLA that I’m aware of.
Very safe pension.
No increase after 60.
Plan to retire around 55-57 (8-10 years)
Other investments are doing very well. No concerns with having “enough”.
Yes. Leaving “some” to kids is important.
Given these answers, I'd leave it be.

You're getting a 3% guaranteed rate of return, which is nothing to sneeze at. You/your spouse appear to have longevity/health on your side, so it may pay out for a long period of time. The pension is safe, and something that'd you'd claim at 60 which is pretty close to your goal retirement age. And it has a survivor benefit that you don't necessarily need (but which is nice anyways).

If you take it, it pays you $302 monthly for life ($3624 a year). That's equal to between $90,600 (using a 4% SWR) to $119,592 (using a 3.33% SWR).

If you rolled over the $38k, could you increase the $38k to $90,600-$119,592 in 13 years? Particularly given (what analysts suggest, but obviously cannot be certain are) high current stock valuations? Maybe...but I'd probably bet against it (you'd need to average around 6.9-9.2% per year in compounded returns to meet that). By using the pension as part of your plan, your reduce what you'd need to withdraw from your portfolio each year by the $3624 annual payment of the pension (except perhaps those 3-5 years before you turn 60). You shift your own longevity risk onto the pension plan (the longer you live, the more it pays out/more valuable it is as a risk-free income producing asset).

I mean, there's no "wrong" answer here, really -- you have a spouse with a good pension that's much larger, you're doing well saving/investing already, etc....but I'd be hard pressed to pass up a guaranteed pension just for the hope that I can grow the lump sum enough to not just equal it, but exceed it.

(And all of this ignores what happen if something truly catastrophic happens, like divorce/a lawsuit/etc.....where your pension would be safe from a lawsuit/something you retain in a divorce, other funds may not be -- although most retirement funds are protected from lawsuit judgments, there are sometimes limits imposed by state law, and frequently you split up retirement accounts in divorce, although maybe that factors in pensions? I'm not sure...I don't practice that type of law).

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Tyler Aspect
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Tyler Aspect » Mon Jul 15, 2019 1:51 pm

I personally favor taking the lump sum distribution into the 401k account a rollover IRA account at retirement. Taking the lifetime income option would mess up my three funds asset allocation formula unless the pension amount is relatively small.

Maybe at age 60 you would like to take advantage of selling stocks in your taxable account for its low capital gains tax rate. By taking the lifetime income option you might have increased your tax rate at age 60, and be more vulnerable to inflation later in life.
Last edited by Tyler Aspect on Mon Jul 15, 2019 6:45 pm, edited 1 time in total.
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stochastic
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by stochastic » Mon Jul 15, 2019 2:48 pm

The interest rate you are getting is quite respectable. I'd say keep it, view it as part of your bond portfolio and at 59 decide if you want to annuitize then - assuming that's permitted.

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Wiggums
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Wiggums » Mon Jul 15, 2019 2:56 pm

Thanks for the additional info. I’d roll over the lump sum payment.

Topic Author
ACA
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by ACA » Mon Jul 15, 2019 3:56 pm

Thanks for all the opinions!

Seems like it’s about equal suggestions on both sides. :oops:


Part of me wants to roll it into my 401k just to add another $38k.

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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by cherijoh » Mon Jul 15, 2019 4:20 pm

ACA wrote:
Mon Jul 15, 2019 8:07 am
This place rocks!

Now for a personal question...

Old employer plan value currently at $38k. Currently interest credit rate for 2109 is 3.11%.

Estimated value at 60 years old (2032) is $57k or $302 monthly for life.

Current employer allows rollovers.

Should I grab the $38k now and invest in my three fund portfolio 401k (excellent choices and extremely low fees) or keep it in old plan and take monthly payout in 13 years?
It sounds like you have a cash balance pension plan that is only growing with interest earned. I would definitely roll it over into your current employer 401k. Basically in "real tems" your pension is probably growing bewteen 0.5% - 1%/year after inflation. I think the odds are good that a 3-fund portfolio could handily beat those returns over a longer term period.

Three hundred dollars per month in 2032 dollars is not going to make or break your retirement unless you are depending strictly on SS for the rest of your retirement budget. (Which seems unlikely since you mention your current employer's plan). So I wouldn't worry too much about making the "wrong" decision as long as you don't take a lump sum in cash and lose the tax deferral.

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Watty
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Watty » Mon Jul 15, 2019 4:24 pm

Be sure to turn the question around and ask, "I have $38K in an IRA. Should I use it to buy a deferred annuity that will pay me $302 a month starting in 13 years."

You can actually buy deferred annuities like that but people rarely do since there is so much inflation risk.

You can crunch the numbers a lot of different ways but depending on your assumptions you might not come out ahead with taking the pension option until you are 80 or so. By then the $302 a month may not be worth much after 25(?) years of inflation.
ACA wrote:
Mon Jul 15, 2019 9:10 am
Yes, I’m married. She has a VERY generous pension.
For diversification that might favor you taking the lump sum.

To me the $302 a month is not a life changing amount and 40 or 50 years from now it will be very minor.

I would probably just take the lump sum and then use it to help me be able to afford to delay starting Social Security until I am 70. That would be like buying an inflation adjusted annuity that has tax benefits since at most only 85% of it will be taxed.

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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by SovereignInvestor » Mon Jul 15, 2019 5:32 pm

Roll it over. That is a 3.1% annualized rate of return through age 60...but that includes mortality meaning if you pass before then beneficiary may only get 1\2. Adjusting for this the ROR is likely well below 3%. I'd take the cash and if you want fixed income then put it in a mix of longer term high rated bonds since that is likely at least as safe as a pension and should offer around 3.0% yields.

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LilyFleur
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by LilyFleur » Mon Jul 15, 2019 6:35 pm

As I get closer to end-of-life issues, and having settled a rather complicated estate recently, I vote to roll it over just to keep things more simple. I have a similar situation, and that is what I am going to do.

Topic Author
ACA
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by ACA » Mon Jul 15, 2019 6:49 pm

Watty wrote:
Mon Jul 15, 2019 4:24 pm
Be sure to turn the question around and ask, "I have $38K in an IRA. Should I use it to buy a deferred annuity that will pay me $302 a month starting in 13 years."
Boom!

That is an easy “NO”, making my decision much easier. Thank you. :sharebeer

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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by averagelonghorn » Mon Jul 15, 2019 7:18 pm

My very short analysis (/TLDR) is that it probably doesn't matter much.

Your numbers are extremely similar to mine. I actually wonder if it is the same megacorp, or as a cartoonist I used to like would call it, a TIC (Three Initial Company.)
I left my megacorp around 11 years ago, and have considered frequently whether to roll it over (previously I figured my rollover IRA was the likely destination, then since I'm now self-employed, If figured my Solo-401(k) would be the place.)

The only reason I never did roll it over is the (admittedly small amount) of paperwork required to have my spouse waive her right to to default part of the pension. Or in other words, if I were less lazy than I actually am, we would have moved the pension money over to my Rollover IRA 10 years ago, or to my Solo 401(k) last year or so.

In the end, FOR NOW (this could always change) I decided to leave it where it is, earning interest of 1 year treasury rate +1%. It will be a fairly (probably extremely) small part of our retirement income under my current plan of claiming it when I'm 65 (the latest date I can.) That will likely be 5-7 years into my retirement, and at that point; will likely be just enough to put SOME food on the table, but I actually don't discount the value of some small amount of regular monthly income (with survivor benefits) at retirement. For my wife and me, there's no pension to count on, SS is the only guaranteed(ish) income stream; the rest will come from 401(k)s, IRAs, and fairly small Roth IRAs. YMMV.

I consider this fairly small Defined Contribution benefit to be part of my Bond allocation; I very much reserve the right to change my mind and take the lump sum at any point. For now it's in my spreadsheet as "Bonds/Fixed Income" as part of the 30% we have as that part of our AA, using the value that Fidelity has if I rolled it over now.

I am reading all comments with great interest, as you seem to have a very VERY similar sum involved at pretty close to the same age as me.


Oh and one more thing.... My pension is viewable on Fidelity (Netbenefits). I find their projections that the pension will grow at 6% extremely optimistic, so when doing projections I dial that back to 3%, but hope they're right.

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Watty
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Watty » Mon Jul 15, 2019 7:28 pm

averagelonghorn wrote:
Mon Jul 15, 2019 7:18 pm
I very much reserve the right to change my mind and take the lump sum at any point.
One thing to watch out for is that the lump sum option can be taken away.

I had an old pension like that where they discontinued the lump sum option for about five years when the pension funding percentage fell below a certain level. That is apparently part of the PBGC rules.

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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Bacchus01 » Mon Jul 15, 2019 7:32 pm

Understand that first you should not look at the lump value in14 years, but the value to your portfolio which is more like $90k ($302*12/4%).

That said, I’d still take the lump and roll into my 401k.

averagelonghorn
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by averagelonghorn » Mon Jul 15, 2019 8:06 pm

Watty wrote:
Mon Jul 15, 2019 7:28 pm
averagelonghorn wrote:
Mon Jul 15, 2019 7:18 pm
I very much reserve the right to change my mind and take the lump sum at any point.
One thing to watch out for is that the lump sum option can be taken away.

I had an old pension like that where they discontinued the lump sum option for about five years when the pension funding percentage fell below a certain level. That is apparently part of the PBGC rules.
I will say, this is a very important point Watty makes, and I have factored it into my own thoughts... I consider it relatively unlikely that my former megacorp will do that, but they have certainly put their own balance sheet ahead of future retirees before, so considering that possibility is not insignificant in OPs considerations.

Oh and just having read/noticed that OP said that his wife has a Very Generous Pension; I will say again, it probably doesn't matter much; but that would tilt me towards rolling it over now; just to simplify. If you have to mentally account for it somehow, just plan to use it for a fabulous retirement trip in your first year or two.

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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Beehave » Mon Jul 15, 2019 8:29 pm

An aspect of the pension to consider is that OP already has 401k/IRA funds. A monthly pension is a diversifier for his holdings. If his spouse is insuring his survivor benefit in her larger pension it probably costs about 300 bucks a month - - so this can make that up that expense - - and if the OP's spouse also has a "step up" option to restore her full penson if he predecedes her, then there's no need for him to insure his pension for her. And if the OP is not insured under his spouse's pension, this could be a building block for creating a pension of his own.

I say - - take the pension. There is nothing like guaranteed monthly income in retirement.

(Edited to clarify the "step up" condition)
Last edited by Beehave on Mon Jul 15, 2019 10:48 pm, edited 1 time in total.

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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by CurlyDave » Mon Jul 15, 2019 9:52 pm

dave_5 wrote:
Mon Jul 15, 2019 8:20 am

...If you're forced to take RMD's during the next recession, think about how much less mileage you'd get out of your funds?..
This sounds like a piece of genuine financial gibberish to me.

RMDs are based on account value at the end of the previous year. If you are unlucky and the account shrinks, your RMDs might be slightly higher than otherwise. In most cases the account value will shrink with the recession, decreasing RMDs in proportion.

If it is the case that the account shrinks dramatically after RMDs for a year are established, there are two possibilities. One is that you need the RMD to live on, and there really isn't much you can do about it. The second is that you must withdraw the RMD from tax advantaged space, but it is available to re-invest in taxable. If this is true, you can reinvest at the same bargain prices you were just forced to sell at. Of course Uncle gets his share, but you will ultimately pay LTCG rates on appreciation after that.

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Stinky
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Re: Old pension plan- take the lump sum or wait for the monthly payout?

Post by Stinky » Mon Jul 15, 2019 10:31 pm

ACA wrote:
Mon Jul 15, 2019 6:49 pm
Watty wrote:
Mon Jul 15, 2019 4:24 pm
Be sure to turn the question around and ask, "I have $38K in an IRA. Should I use it to buy a deferred annuity that will pay me $302 a month starting in 13 years."
Boom!

That is an easy “NO”, making my decision much easier. Thank you. :sharebeer
I like this way of looking at it. Certainly points me toward rolling into 401(k).

OP would still have the option of buying a SPIA in the future, If that met his needs at the time.
It's a GREAT day to be alive - Travis Tritt

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