Pension - Lump sum or annuity if young - uncertain about work?

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ThankYouJack
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Pension - Lump sum or annuity if young - uncertain about work?

Post by ThankYouJack » Mon Sep 23, 2019 7:07 pm

My spouse and I are both in our late 30's. Her pension offers an 100% Joint and Spousal Annuity of 5%. We're leaning towards taking some time off and start withdrawing (~3.5%) from our portfolio. I don't know when we would go back to work, but when we do, we would probably save a good amount and not the need or want to be taxed on the annuity.

What else should we consider and think about with these options?

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galawdawg
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by galawdawg » Mon Sep 23, 2019 7:17 pm

Is she even eligible to receive a lump sum or monthly pension in her thirties? I believe that when an employee leaves prior to retirement age but after vesting most employers only allow either a return of contributions upon employment separation OR a lump sum/monthly pension payment at full retirement age.

Can you clarify what you guidance you are seeking regarding her pension options?

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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by TheDDC » Mon Sep 23, 2019 7:20 pm

ThankYouJack wrote:
Mon Sep 23, 2019 7:07 pm
My spouse and I are both in our late 30's. Her pension offers an 100% Joint and Spousal Annuity of 5%. We're leaning towards taking some time off and start withdrawing (~3.5%) from our portfolio. I don't know when we would go back to work, but when we do, we would probably save a good amount and not the need or want to be taxed on the annuity.

What else should we consider and think about with these options?
This plan sounds like it is full of holes. Or are you retiring in your 30s? What gives? You should probably work a few more years to take advantage of a lump sum. Otherwise it's not going to be much of a sum at this point.

-TheDDC
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ThankYouJack
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by ThankYouJack » Mon Sep 23, 2019 8:13 pm

galawdawg wrote:
Mon Sep 23, 2019 7:17 pm
Is she even eligible to receive a lump sum or monthly pension in her thirties? I believe that when an employee leaves prior to retirement age but after vesting most employers only allow either a return of contributions upon employment separation OR a lump sum/monthly pension payment at full retirement age.

Can you clarify what you guidance you are seeking regarding her pension options?
I'm pretty sure she doesn't need to wait until retirement age and could at least roll it into a IRA. But we can double check.

So, I guess the question is at age 40, would you rather take $100,000 or $5,000 annually with 100% joint survivor?

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galawdawg
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by galawdawg » Mon Sep 23, 2019 8:31 pm

If in fact the options are a $100,000 lump sum now or a $5,000 annual immediate annuity now, at your ages I would take the lump sum as a direct rollover to an IRA. Invested in an appropriate index fund (like Total Stock Market or S&P 500), if annual returns average just 6% over the next thirty years you'll have over $500,000.

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Tyler Aspect
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by Tyler Aspect » Mon Sep 23, 2019 9:13 pm

Leave it in the pension until age 60, then transfer it out to a rollover IRA.
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ThankYouJack
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by ThankYouJack » Tue Sep 24, 2019 7:21 am

galawdawg wrote:
Mon Sep 23, 2019 8:31 pm
If in fact the options are a $100,000 lump sum now or a $5,000 annual immediate annuity now, at your ages I would take the lump sum as a direct rollover to an IRA. Invested in an appropriate index fund (like Total Stock Market or S&P 500), if annual returns average just 6% over the next thirty years you'll have over $500,000.
I think consistent 6% returns may be optimistic. FireCalc's standard portfolio shows a 5% withdrawal having a success rate of 48.5% chance lasting 50 years. And an average of 80% of the total lump sum at the end of 50 years.
So the lump sum may be better numbers wise but the annuity could be a good hedge with the rest of our portfolio incase there's a big bear.

Tyler Aspect wrote:
Mon Sep 23, 2019 9:13 pm
Leave it in the pension until age 60, then transfer it out to a rollover IRA.
I'm curious why leave it there until 60? Do most pensions provide guaranteed interest if you do leave it?

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Tyler Aspect
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by Tyler Aspect » Tue Sep 24, 2019 10:28 am

Check the plan document for the annual accumulation rate of the pension. It is most likely higher than current market yield because of mortality credit.
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by RollTide31457 » Tue Sep 24, 2019 10:33 am

Always take the buy out when given the chance. Most people, sadly, seem to think their pension plans will not become insolvent.

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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by Admiral » Tue Sep 24, 2019 10:39 am

RollTide31457 wrote:
Tue Sep 24, 2019 10:33 am
Always take the buy out when given the chance. Most people, sadly, seem to think their pension plans will not become insolvent.
This is 100% wrong on the math nearly 100% of the time.And solvency depends on the issuing entity.

OP: I have never heard of a pension plan that pays out to ANYONE in their 30s. The youngest I've ever heard are police and fire pensions that will pay after 20 years of service, so, possibly 38 at the youngest.

Please clarify what type of pension plan this is. Upon separation before retirement eligibility, the options are ALMOST ALWAYS lump sum (you get back your contributions) or deferred payout (you receive a monthly pension payment when you reach retirement age.)

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galawdawg
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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by galawdawg » Tue Sep 24, 2019 10:59 am

I noticed that you said in another thread that your wife's job was eliminated due to corporate reorganization and that her pension has a cash balance of high five figures.

Since it appears to be a cash balance pension plan (rather than a traditional defined benefit pension plan) and the company is eliminating her position, I would strongly recommend a direct rollover to IRA now rather than leaving the balance in the plan.

While PBGC insurance will provide protections if the company folds or if the plan is eliminated, terminates or becomes insolvent, you generally lose the ability to receive a lump sum payment unless the balance is less than $5,000.00. In that case, the only option would be a monthly annuity payment up to the limits set by PBGC/ERISA.

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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by ThankYouJack » Tue Sep 24, 2019 12:34 pm

galawdawg wrote:
Tue Sep 24, 2019 10:59 am
I noticed that you said in another thread that your wife's job was eliminated due to corporate reorganization and that her pension has a cash balance of high five figures.

Since it appears to be a cash balance pension plan (rather than a traditional defined benefit pension plan) and the company is eliminating her position, I would strongly recommend a direct rollover to IRA now rather than leaving the balance in the plan.

While PBGC insurance will provide protections if the company folds or if the plan is eliminated, terminates or becomes insolvent, you generally lose the ability to receive a lump sum payment unless the balance is less than $5,000.00. In that case, the only option would be a monthly annuity payment up to the limits set by PBGC/ERISA.
Good point. Assuming she does the lump sum and not the annuity, I wonder if she could roll it into her 401k instead of an IRA. The reason being is that if she goes back to work with a high salary, we would want to be able to do a backdoor Roth.

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Re: Pension - Lump sum or annuity if young - uncertain about work?

Post by galawdawg » Tue Sep 24, 2019 4:44 pm

I believe the IRS rules on tax treatment of lump sum distributions would permit a direct rollover to a qualified current employer 401k, however, I suspect that she would not be able to receive the cash balance pension lump sum until her employment has ended at which time she no longer has a current employer 401k. Her company's HR office should be able to advise her on whether they allow rollovers into the 401k plan and how the timing of her separation and eligibility for the lump sum distribution would impact that ability.

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