Sudden Early Retirement Offer - Pension Decision

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Lobsdiver1
Posts: 3
Joined: Mon May 28, 2018 6:28 pm

Sudden Early Retirement Offer - Pension Decision

Post by Lobsdiver1 » Mon Jun 29, 2020 6:31 pm

Hi All and thanks for advice here.

I have a sudden early retirement decision to make that would be a lump sum $125K plus 34 weeks of health care followed by 18 months of Cobra. I wanted to try and get thoughts on a pension decision but realize some other income information needed.

I am leaning towards the 100% contingent annuity (full life for me or my spouse if I pass before her) or 10 year certain life (spouse would get 100% for her remaining life if I pass within 10 years, 0 % if I pass after 10 years but social security would kick in), but I am wondering about the lump sum and investing given we have other income sources. I would like to leave a nice nest egg for our two children

Some background.
1. Pension is from a larger defense contractor after 34 years employment so very stable
2. It has no COLA
3. Age 57, spouse age 55 - the pension would start upon retirement anytime after my age 55, the pension has ended as far as real growth, the company now contributes monthly more into 401K. I can delay starting it but the increase for waiting is small.
4. Other income sources
-401K - $1.3M mostly taxable (current allocation - cash 20%, Bond 7%, S&P 40%, Small Cap 10%, Company Stock 23%)
-Rental Real Estate - $5500/month (Asset value ~$1M, no loans)
-Roth IRA - $100K
-HSA - $35K
-Cash - $350K currently just earning Ally interest rate
-Home value - $600K ($250K loan at 3.8% with 22 years left)
-Spouse Internet Business Income - Varies From $100K to $150K annually but I would not consider it stable constantly changing business model
-Future Social Security - $4125/month at age 67 includes spouse at 50%
5. Annual Expenses Including Health Care (assuming $20K per year) - $120K before income tax - FL, no state income tax.
6. Not really a consideration but future inheritance of ~$2M - parents in mid 80's.

Options to Consider
100% Contingent Annuity - $3595/month
50% Contingent Annuity - $3816/month
Single Life Annuity - $4067/month
10 yr Certain Life - $4003/month
Lump Sum - $631,300

Thanks Again
Last edited by Lobsdiver1 on Tue Jun 30, 2020 6:04 am, edited 1 time in total.

gorow
Posts: 49
Joined: Sat Mar 19, 2016 9:54 am

Re: Sudden Early Retirement Offer - Pension Decision

Post by gorow » Mon Jun 29, 2020 6:58 pm

I was faced with a similar situation in late 2018. My pension values were each about 10% smaller than what you show here, and the lump sum was about the same. I was 63 at the time. No COLA.
What I had to do was understand my expenses for my planned retirement and then determine how I would manage cash flow both before and after SS, which I intend to delay until I am 70.
The monthly pension, with 100% survivor benefit was what a chose for a few reasons:
1. It matched up with current mortgage, tax, and insurance obligations. So those expenses are covered.
2. If I die first, and after I claim SS, the only loss of income will be her spousal SS benefit.
3. If markets remain low for a period, we can manage just fine. We had planned to travel, but since we won't be doing that until after a vaccine is out and widely available, we are not hurt by the current downturn in any way.
4. We have enough in current taxable accounts to likely take us at least until SS benefits kick in, and likely until RMDs are required at 72.

In short, the answer needed to fit into an overall plan. Understand you expected expenses and go from there.
Retired 1/1/2019. Not concerned about sequence of returns because two years here taught me what I need to know.

02nz
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Re: Sudden Early Retirement Offer - Pension Decision

Post by 02nz » Mon Jun 29, 2020 7:04 pm

When I plug your numbers into immediateannuities.com, I get payouts around $2300/mo for a lump sum investment of $631K. Try it yourself to confirm. Assuming that's correct, the annuity from your employer is so much better than what the market is offering that it probably overwhelms any other considerations. Go with the annuity rather than lump sum. As to the survivor options, there's probably not much to choose between them - you won't know the right answer until you pass and your spouse will have enough regardless, but perhaps others have better advice there.

indexlover
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Re: Sudden Early Retirement Offer - Pension Decision

Post by indexlover » Mon Jun 29, 2020 8:14 pm

I found this very helpful blog for comparing lumpsum vs single annuity
https://grumpusmaximus.com/pension-seri ... #more-7566

Just plugin the following values in an excel spreadsheet to compare the single annuity vs lumpsum

IDV = annual pension payment
r = annual inflation rate (negative growth)
ELS = Expected Life Span after retirement starts (or any number of years you want to use)

IDV = $48804
ELS = 23.9 ( get ELS from here: https://www.ssa.gov/oact/STATS/table4c6.html )
r = 2%
TDV (Total Dollar Value) = $915843.4 ( formula for excel is : =48804*(((1-0.02)^(23.9+1)-(1-0.02))/-0.02)
Conclusion: Take the single annuity and not the lumpsum
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.” - Mr. Buffett - Berkshire Hathaway ’s 2016 annual report.

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Watty
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Re: Sudden Early Retirement Offer - Pension Decision

Post by Watty » Mon Jun 29, 2020 8:38 pm

Lobsdiver1 wrote:
Mon Jun 29, 2020 6:31 pm
I have a sudden early retirement decision to make that would be a lump sum $125K plus 34 weeks of health care followed by 18 months of Cobra.
Some things to consider;

1) If you do not take the buyout, but other people in your group do, then would your working conditions be worse?

2) If you do not take the layoff then a year from now there could be a another round of involuntary layoffs which a much worse or no severance package. I have seen this happen several times when a company had problems.

3) What is the impact on your pension if you worked another year or two?

4) Does your job expose you to a lot of people or require things like travel? Retiring a bit early during the middle of a pandemic could be very tempting and very good for your health.

Lobsdiver1 wrote:
Mon Jun 29, 2020 6:31 pm
Home value - $600K ($250K loan at 3.8% with 22 years left)
......
5. Annual Expenses Including Health Care (assuming $20K per year) - $120K before income tax - FL, no state income tax.
Be sure to consider your expenses at different phases of retirement and after you pay off the mortgage on your house. For example what would your expenses be once you are both on Medicare and your home is paid off?

You have a lot of money in taxable accounts so I would really take a hard look at paying off the mortgage, if you decide not to pay it off then you should at least refinance it to get a better rate. You have more than enough cash just sitting in a savings account earning around 1% so you could easily pay it off with that.

It is not exact but in a lot of ways having a mortgage is like having a negative bond in your asset allocation. You hardly have any bonds so when you look at it that way when you net out the mortgage you likely have a negative bond asset allocation.
Lobsdiver1 wrote:
Mon Jun 29, 2020 6:31 pm
-401K - $1.3M mostly taxable (current allocation - cash 20%, Bond 7%, S&P 40%, Small Cap 10%, Company Stock 23%)
:shock:

That is way too much company stock and your index funds likely also own stock in that company so you could have even more exposure to it. This is in a 401k so I would assume that unless there is something unusual going on I would think that you would not have any tax consequences if you sold it.

I would sell it ASAP, owning too much company stock is a classic mistake.
Lobsdiver1 wrote:
Mon Jun 29, 2020 6:31 pm
-Future Social Security - $4125/month at age 67 includes spouse at 50%
See this web site for a suggested Social Security Claiming strategy.

https://opensocialsecurity.com/

In addition to getting more Social Security later if you delay starting Social Security you might have more years when you can do Roth conversions in a low tax bracket.
Lobsdiver1 wrote:
Mon Jun 29, 2020 6:31 pm
Options to Consider
100% Contingent Annuity - $3595/month
50% Contingent Annuity - $3816/month
Single Life Annuity - $4067/month
10 yr Certain Life - $4003/month
Lump Sum - $631,300
It was not clear if the pensions would start now or when you are 65, you might want to edit your post to specify that. If it would not start until you are 65 then that might explain why the prior post had such a different quote.

One thing you might consider doing is having you and your spouse to have a good physical to learn as much as possible about your health since that could impact your decision about taking the pension or not. You can ask your doctor if they would recommend any tests even if your insurance would not pay for them.

It looks like you will have about $6,000 a month with two Social Security checks once those start and $5,000 in rental income. That is $11,000 a month or $132K a year and that should more or less keep up with inflation.

I don't see that you have any need for the pension income since you said that your expenses would be around $120k so you would just be saving your pension check each month.

There is an old saying "Buying an elephant for a dime is only a good deal if you need an elephant and have a dime."

Even if it is a marginally good deal there is no sense in taking one of the pension options when you can take the lump sum instead. It would be good to double check to see if it might be such a good deal that you just can't pass it up. That can sometimes happen with old pension plans or union pension plans but it is rare.

02nz
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Re: Sudden Early Retirement Offer - Pension Decision

Post by 02nz » Mon Jun 29, 2020 9:04 pm

Watty wrote:
Mon Jun 29, 2020 8:38 pm
Even if it is a marginally good deal there is no sense in taking one of the pension options when you can take the lump sum instead. It would be good to double check to see if it might be such a good deal that you just can't pass it up. That can sometimes happen with old pension plans or union pension plans but it is rare.
See my and indexlover's posts. In this case the annuity options are unquestionably better than the lump sum. It's not even close.

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Watty
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Re: Sudden Early Retirement Offer - Pension Decision

Post by Watty » Mon Jun 29, 2020 9:34 pm

02nz wrote:
Mon Jun 29, 2020 9:04 pm
Watty wrote:
Mon Jun 29, 2020 8:38 pm
Even if it is a marginally good deal there is no sense in taking one of the pension options when you can take the lump sum instead. It would be good to double check to see if it might be such a good deal that you just can't pass it up. That can sometimes happen with old pension plans or union pension plans but it is rare.
See my and indexlover's posts. In this case the annuity options are unquestionably better than the lump sum. It's not even close.
I saw that and the other post, but the original post was not clear if the annuity would start now or in 8 years when the OP is 65 and if it does not start for 8 years that makes a huge difference.

Topic Author
Lobsdiver1
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Joined: Mon May 28, 2018 6:28 pm

Re: Sudden Early Retirement Offer - Pension Decision

Post by Lobsdiver1 » Tue Jun 30, 2020 5:25 am

Thanks all, lots of excellent input. I love this forum. I am going to study the input and suggestions and will edit the post to clarify pension annuity will start now. Really appreciate suggestions on modifying existing portfolio. I know owning so much in company stock is risky but some in ESOP can’t be moved and I just reduced from almost 50% over last 8 months. Company stock Value has decreased around 30% vs. peak in February.

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Watty
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Re: Sudden Early Retirement Offer - Pension Decision

Post by Watty » Tue Jun 30, 2020 11:09 am

Lobsdiver1 wrote:
Tue Jun 30, 2020 5:25 am
will edit the post to clarify pension annuity will start now.
Lobsdiver1 wrote:
Mon Jun 29, 2020 6:31 pm

Age 57, spouse age 55

Options to Consider
100% Contingent Annuity - $3595/month
50% Contingent Annuity - $3816/month
Single Life Annuity - $4067/month
10 yr Certain Life - $4003/month
Lump Sum - $631,300
02nz wrote:
Mon Jun 29, 2020 7:04 pm
When I plug your numbers into immediateannuities.com, I get payouts around $2300/mo for a lump sum investment of $631K. Try it yourself to confirm.
I just checked and I got about the same numbers. A few things to consider;
1) The exact amounts would depend on when your birthday is. The pension amounts would be taking into account if you and your spouse just turned 57 and 55 or if you are near your birthdays and about to turn a year older.

2) immediateannuities.com is a great web site for being able to get a quick quote but if you were going to actually buy a SPIA you could likely get a better price by shopping around.

Those differences would be relatively minor though and the company would still pay out more than 50% more.

That annuity at $2,296 would pay about $27K a year or 4.4%
The pension at $3,595 would pay about $43K a year or 6.8%

One thing I did notice on the immediateannuities.com quotes that I saw that the Joint Life Annuity paid $2,296 and the Joint Life Annuity with 10 Years Certain paid out $2,298. That is $2 more which makes no sense because it is the same except that your estate would get paid for ten years if you both died. Adding the 10 year certain option should have decreased the payment. I am a retired software developer and when I see something like this that is a red flag to me that there might be a bigger problem going on with the computer program. Software bugs are way too common.

The huge difference and this quirk makes me wonder if that web site is giving bad quotes for some reason.

I am very suspicious when something sounds "too good to be true".

It would be good to spend more time researching just what sort of SPIA you could actually buy so I would spend some time calling around to get quotes to see what sort of SPIA you could get at other places. I am not sure if Vanguard still sells them or not.

It would also be good to double check on your pension payments again to make sure that those are right.

If everything checks out then I would agree that the pension is a better choice than the lump sum.

Which option to take could depend on your genders and health since pension plans are gender neutral but women tend to live a lot longer. If you are female in good health then the 10 year certain life would look good to me since you would be likely to outlive your older husband. If you are male then the 100% Contingent would look better since your younger wife would be more likely to outlive you.

FootballFan5548
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Re: Sudden Early Retirement Offer - Pension Decision

Post by FootballFan5548 » Tue Jun 30, 2020 12:01 pm

I agree with the poster above who mentions your mortgage rate. You could refi that to a new 30 year at 2.875% and save a bunch per month. Your duration would of course increase, but you could pay more to it when you wanted. This would free up a bunch of cash flow.

Alternatively, you could just pay off the mortgage with your cash sitting idle.

If you plan to stay in your same home for the next 10 years+, my advice would be refi to a much lower rate (increase cash flow), or pay off your mortgage, and have no more monthly payments (increase cash flow).

02nz
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Re: Sudden Early Retirement Offer - Pension Decision

Post by 02nz » Tue Jun 30, 2020 12:08 pm

FootballFan5548 wrote:
Tue Jun 30, 2020 12:01 pm
I agree with the poster above who mentions your mortgage rate. You could refi that to a new 30 year at 2.875% and save a bunch per month. Your duration would of course increase, but you could pay more to it when you wanted. This would free up a bunch of cash flow.

Alternatively, you could just pay off the mortgage with your cash sitting idle.
Agree, and I'd pay it off. No sense keeping $300K earning 1% with a mortgage at 3.8% or even 2.875% in OP's situation.

BTW, OP should also make sure the $300K at Ally falls under FDIC limits (it is if for example $250K is in OP's name only and $50K is in spouse's name or joint). Bank failures are rare but there's no reason to take that risk.

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