Should I take a pension buyout?

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SickInSantorini
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Joined: Tue Sep 24, 2019 10:36 am

Should I take a pension buyout?

Post by SickInSantorini » Tue Sep 24, 2019 10:47 am

Long time lurker, but now I need some advice...

I'm 66YOA. I'm currently employed, but I'm not sure how long the job will last. It could last 5 years, in could last 5 weeks. I'm in pretty good health. I have about $2 million invested in a 401k. The 401k is in a traditional 60-40 stock/bond split.

I have a pension from a previous job. The pension will pay me $3000 a month starting Jan 1, 2020. There are no survivor payments to my spouse. The pension plan is offering me $450,000.00 as a buyout.

Should I take the buyout?

soccerrules
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Re: Should I take a pension buyout?

Post by soccerrules » Tue Sep 24, 2019 11:02 am

I am no pensions expert, but have a few questions that might helps others

1) will you receive SS ?
2) What are your anticipated yearly expenses in retirement?
3) Seems like you plan to continue to work if job is still there?
4) is pension a mandatory 1/1/2020 pay out ? or take a lump distribution ?
5) Do you plan to leave inheritance or desire to leave a donation to a charity, or spend the last dollar?

Without knowing the above information i think you will get limited responses.

I would probably take the lump sum -- because I will have SS and there is no survivor benefits for spouse. I also desire to pass on some money to kids if we can.
Don't let your outflow exceed your income or your upkeep will be your downfall.

ubermax
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Re: Should I take a pension buyout?

Post by ubermax » Tue Sep 24, 2019 11:57 am

I think Soccerrules has some great questions - the 450K is in the ballpark based on mandated IRS interest and mortality assumptions for lump sums - no way of knowing whether more favorable assumptions were used for the buyout - and so in the eyes of the IRS , the life annuity is equivalent to that lump sum and so then it comes down to lifestyle ,expenses , SS expected , etc. , etc. - and also your wife , does she work and have benefits and also family healthcare expenses .

flarf
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Re: Should I take a pension buyout?

Post by flarf » Tue Sep 24, 2019 12:22 pm

ImmediateAnnuities.com is quoting a $2431 monthly payment if you pay $450k today. From that perspective, the $3000 monthly pension doesn't look bad. But at a 5% return, the lump sum wins unless you live beyond 87.

cherijoh
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Re: Should I take a pension buyout?

Post by cherijoh » Tue Sep 24, 2019 12:26 pm

SickInSantorini wrote:
Tue Sep 24, 2019 10:47 am
Long time lurker, but now I need some advice...

I'm 66YOA. I'm currently employed, but I'm not sure how long the job will last. It could last 5 years, in could last 5 weeks. I'm in pretty good health. I have about $2 million invested in a 401k. The 401k is in a traditional 60-40 stock/bond split.

I have a pension from a previous job. The pension will pay me $3000 a month starting Jan 1, 2020. There are no survivor payments to my spouse. The pension plan is offering me $450,000.00 as a buyout.

Should I take the buyout?
You can compare your pension to what an annuity bought on the open market would give you at a website like immediateannuties.com. Typically, your pension will give you a slightly better payout than if you took the lump sum and bought an annuity. So IMO it boils down to whether you want another guaranteed income stream (assuming you will be drawing SS).

Since there are no survivor benefits (was that not an option?) then I think the lump sum makes sense unless there is a huge difference based on the annuity calculator which could be a signal an anomoly like I ran into.

I was offered a pension buyout a few years ago from a former employer. I ended up sticking with the regular pension because the lump sum calculation was based on the assumption that I'd take my pension starting at 65. Since I was entitled to draw the full pension at 60 (due to years of service), the lump sum calculation wasn't actuarial fair to me.

Bacchus01
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Re: Should I take a pension buyout?

Post by Bacchus01 » Tue Sep 24, 2019 12:28 pm

Can it be rolled to a 401K or IRA? If so, I would take the lump.

cashboy
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Re: Should I take a pension buyout?

Post by cashboy » Tue Sep 24, 2019 1:57 pm

i faced a situation like yours regarding the 'cash part' of a pension (long story).

i rolled the cash lump sum over to an IRA.

i get to manage it.

if i took the annuity and me and DW passed on next week our heirs get nothing. but, since i rolled it over into an IRA, if me and my DW pass on next week it goes to our heirs.

in your case if you pass on your DW gets nothing if you take the annuity; if you roll it over to an IRA then your DW gets the lump sum.
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CD - CASH - Canned Beans - Rice - Bottled Water)

Thegame14
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Re: Should I take a pension buyout?

Post by Thegame14 » Tue Sep 24, 2019 2:25 pm

SickInSantorini wrote:
Tue Sep 24, 2019 10:47 am
Long time lurker, but now I need some advice...

I'm 66YOA. I'm currently employed, but I'm not sure how long the job will last. It could last 5 years, in could last 5 weeks. I'm in pretty good health. I have about $2 million invested in a 401k. The 401k is in a traditional 60-40 stock/bond split.

I have a pension from a previous job. The pension will pay me $3000 a month starting Jan 1, 2020. There are no survivor payments to my spouse. The pension plan is offering me $450,000.00 as a buyout.

Should I take the buyout?
Id call a broker and ask what amount of annuity you can buy for $450K, if it is more than $3,000 a month take the buyout, if it is less, don't.

ubermax
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Re: Should I take a pension buyout?

Post by ubermax » Tue Sep 24, 2019 2:33 pm

cherijoh wrote:
Tue Sep 24, 2019 12:26 pm
I was offered a pension buyout a few years ago from a former employer. I ended up sticking with the regular pension because the lump sum calculation was based on the assumption that I'd take my pension starting at 65. Since I was entitled to draw the full pension at 60 (due to years of service), the lump sum calculation wasn't actuarial fair to me.
Your employer's plan provided you with a subsidized early , no comparison to what's on the table for the OP .

ubermax
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Re: Should I take a pension buyout?

Post by ubermax » Tue Sep 24, 2019 2:39 pm

flarf wrote:
Tue Sep 24, 2019 12:22 pm
ImmediateAnnuities.com is quoting a $2431 monthly payment if you pay $450k today. From that perspective, the $3000 monthly pension doesn't look bad. But at a 5% return, the lump sum wins unless you live beyond 87.
Annuities.com uses very conservative assumptions reflecting the profit objectives of the underlying companies - $3000/month matches up fine with the 450K - also one can always pick an assumed interest rate on the lump sum to show that it's better than the annuity - as someone else noted though , lump sum to IRA can make up for the fact that there's no J&S option available and maybe tilt the decision in favor of the lump sum but in a down market that annuity will look pretty good .

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Stinky
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Re: Should I take a pension buyout?

Post by Stinky » Tue Sep 24, 2019 3:00 pm

SickInSantorini wrote:
Tue Sep 24, 2019 10:47 am
Long time lurker, but now I need some advice...

I'm 66YOA. I'm currently employed, but I'm not sure how long the job will last. It could last 5 years, in could last 5 weeks. I'm in pretty good health. I have about $2 million invested in a 401k. The 401k is in a traditional 60-40 stock/bond split.

I have a pension from a previous job. The pension will pay me $3000 a month starting Jan 1, 2020. There are no survivor payments to my spouse. The pension plan is offering me $450,000.00 as a buyout.

Should I take the buyout?
Welcome to the Board! Glad that you posted your question here.

From others in this thread, it looks like your $3,000 per month benefit from the Plan is greater than you could get if you took the $450k and used it to purchase an immediate annuity. So I wouldn't consider the SPIA route.

Personally, I have found considerable psychic comfort in having a regular monthly payout coming to me from a pension plan since I retired last year. If you have $2 million in a 401(k), then the $450k lump sum would be less than 20% of your net worth, so it's not like you would be locking all of your retirement assets up in a monthly payout.

I would inquire of the old pension plan whether the $3,000 per month could be translated into a joint-and-survivor annuity (presuming that you're married). I expect that it could, with a slightly lower monthly payout. Once again referring to my decisions, I would strongly consider a 100% joint and survivor, which will pay the same monthly benefit until both you and spouse pass away. You made no reference to your age(s) and sex, but you should know that 65 year old females live, on average, about 3-5 years longer than 65 year old males. So if your spouse is a female younger than you, she could have a long period as a widow, and I'd hate to see the pension checks cease at your death.

Best of luck to you.
It's a GREAT day to be alive - Travis Tritt

cherijoh
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Re: Should I take a pension buyout?

Post by cherijoh » Tue Sep 24, 2019 3:44 pm

ubermax wrote:
Tue Sep 24, 2019 2:33 pm
cherijoh wrote:
Tue Sep 24, 2019 12:26 pm
I was offered a pension buyout a few years ago from a former employer. I ended up sticking with the regular pension because the lump sum calculation was based on the assumption that I'd take my pension starting at 65. Since I was entitled to draw the full pension at 60 (due to years of service), the lump sum calculation wasn't actuarial fair to me.
Your employer's plan provided you with a subsidized early , no comparison to what's on the table for the OP .
My point was that anyone offered a pension buyout should validate that the buyout is a good deal for them and not just assume that it was actuarially fair equivalent.
Last edited by cherijoh on Tue Sep 24, 2019 4:42 pm, edited 1 time in total.

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JoeRetire
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Re: Should I take a pension buyout?

Post by JoeRetire » Tue Sep 24, 2019 3:51 pm

SickInSantorini wrote:
Tue Sep 24, 2019 10:47 am
I have a pension from a previous job. The pension will pay me $3000 a month starting Jan 1, 2020. There are no survivor payments to my spouse. The pension plan is offering me $450,000.00 as a buyout.

Should I take the buyout?
If you have decent Social Security benefits, and if the pension isn't COLA-adjusted, or you suspect the company may not pay out the pension for the rest of your life, I'd take the lump sum and invest it per my asset allocation plan.

If it had a COLA or survivor benefits the answer would likely be different.
Don't be a lemming.

ubermax
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Re: Should I take a pension buyout?

Post by ubermax » Tue Sep 24, 2019 4:19 pm

cherijoh wrote:
Tue Sep 24, 2019 3:44 pm

My point was that anyone offered a pension buyout should validate that the buyout is a good deal for them and not just assume that it was actuarially fair.
There's no federal requirement that the lump sum be based on the early (subsidized) benefit - evidently your employer's plan thought that a subsidized annuity , being more than actuarially fair , was reasonable and didn't see the need to also inflate the lump sum which it could have done by way of the plan provisions .

cherijoh
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Re: Should I take a pension buyout?

Post by cherijoh » Tue Sep 24, 2019 4:32 pm

ubermax wrote:
Tue Sep 24, 2019 4:19 pm
cherijoh wrote:
Tue Sep 24, 2019 3:44 pm

My point was that anyone offered a pension buyout should validate that the buyout is a good deal for them and not just assume that it was actuarially fair.
There's no federal requirement that the lump sum be based on the early (subsidized) benefit - evidently your employer's plan thought that a subsidized annuity , being more than actuarially fair , was reasonable and didn't see the need to also inflate the lump sum which it could have done by way of the plan provisions .
How about if I change that to actuarially equivalent? The lump sum I was offered was not equivalent to the value of my pension. Had I not run numbers myself, I wouldn't have known it.

BTW, I'm not sure why you are so hostile to my effort to provide fellow Bogleheads with a heads up. These lump sum vs. pension questions come up all the time. And I am aware of several companies that sweeten the deal for early retirees.

Kyleethecollie
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Re: Should I take a pension buyout?

Post by Kyleethecollie » Tue Sep 24, 2019 4:46 pm

How is the health of the company that would be paying the pension? What's the likelihood that the company will go bankrupt, leaving the Pension Benefit Guaranty Corporation to provide continuity for retirees' pensions, assuming all requirements for PBGC to step in are met in your case? If you have any doubts as to the long-term prospects for your former employer, a cash buyout might be the way to go.

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