Small Pension Buy out..

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tesuzuki2002
Posts: 78
Joined: Fri Dec 11, 2015 12:40 pm

Small Pension Buy out..

Post by tesuzuki2002 » Wed Sep 13, 2017 11:58 am

I have been offered a buy out of small pension I have.

The offer is $14K now, or pension payments at 65 of $300 a month. I am currently 35.

If I take the buyout now it would get rolled directly into my TIRA into index funds..

It such a small amount I feel like it would be easier to just clear this pension off the list and roll it with my other investments and move on with life.

I would be missing out on having this Annuity type option at retirement if I do this, but I'm setting myself up with other investments instead.

If it were a large amount I might feel differently, but I'm only talking about $14K here.

Thanks!

student
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Re: Small Pension Buy out..

Post by student » Wed Sep 13, 2017 12:34 pm

I think you are right. For $14,000, it is more convenient to consolidate.

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welderwannabe
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Re: Small Pension Buy out..

Post by welderwannabe » Wed Sep 13, 2017 12:47 pm

Right, and no one says you can't take some $$$ when you are ready to retire and buy a SPIA with it. Not all annuities have to be pensions.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

deltaneutral83
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Re: Small Pension Buy out..

Post by deltaneutral83 » Wed Sep 13, 2017 1:03 pm

at 8% CAGR of VTI, and using a 4% SWR at 65, your have $469 a month at age 65 if you are 35 now with the $14k. $352/month at ultra safe 3% SWR.

Grt2bOutdoors
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Re: Small Pension Buy out..

Post by Grt2bOutdoors » Wed Sep 13, 2017 2:43 pm

deltaneutral83 wrote:
Wed Sep 13, 2017 1:03 pm
at 8% CAGR of VTI, and using a 4% SWR at 65, your have $469 a month at age 65 if you are 35 now with the $14k. $352/month at ultra safe 3% SWR.

One should take these calculations with a grain of salt. First, given current projections of 3% real, how do you get to 8% nominal?
Second, "ultra safe" is contingent on 8% materializing on average for the next 30 years, if 8% becomes 6%, then $352/month becomes $201 a month at 3% WR.. At 4% WR, it becomes $268 a month. Lots can transpire over the next 30 years, so what ever the OP decides they have to be willing to accept the range of outcomes, good and bad.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

deltaneutral83
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Re: Small Pension Buy out..

Post by deltaneutral83 » Wed Sep 13, 2017 3:43 pm

Grt2bOutdoors wrote:
Wed Sep 13, 2017 2:43 pm
deltaneutral83 wrote:
Wed Sep 13, 2017 1:03 pm
at 8% CAGR of VTI, and using a 4% SWR at 65, your have $469 a month at age 65 if you are 35 now with the $14k. $352/month at ultra safe 3% SWR.

One should take these calculations with a grain of salt. First, given current projections of 3% real, how do you get to 8% nominal?
Second, "ultra safe" is contingent on 8% materializing on average for the next 30 years, if 8% becomes 6%, then $352/month becomes $201 a month at 3% WR.. At 4% WR, it becomes $268 a month. Lots can transpire over the next 30 years, so what ever the OP decides they have to be willing to accept the range of outcomes, good and bad.
The past is certainly no guarantee of future returns but it is the best indicator we have in my opinion. All else equal (and this is an important disclaimer because everyone's situation and AA is different and taxes come into play) and the goal being growth in equities for this money, this is a slam dunk to take the lump sum. I don't think we've had a rolling 30 below 7.6% nominal and that includes the year right before the Depression. Sure, we could get a rolling 30 of 6% CAGR from this day on, but is that actionable based off this point in time (again all things equal), the answer I believe being no.

Valuethinker
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Re: Small Pension Buy out..

Post by Valuethinker » Wed Sep 13, 2017 4:50 pm

tesuzuki2002 wrote:
Wed Sep 13, 2017 11:58 am
I have been offered a buy out of small pension I have.

The offer is $14K now, or pension payments at 65 of $300 a month. I am currently 35.

If I take the buyout now it would get rolled directly into my TIRA into index funds..

It such a small amount I feel like it would be easier to just clear this pension off the list and roll it with my other investments and move on with life.

I would be missing out on having this Annuity type option at retirement if I do this, but I'm setting myself up with other investments instead.

If it were a large amount I might feel differently, but I'm only talking about $14K here.

Thanks!
I am assuming this is not cpi indexed?

So buying power will be one half at 65 assuming 2.5 per cent inflation?

If you have any reason to believe you have an impaired life expectancy you should take the lump sum.

If there is a spousal survivor benefit associated w the pension it may be much more valuable to you.

I would assume something like a 5 per cent nominal return in calculating the value of 14k at retirement. Assuming a 60 40 portfolio now that is pretty optimistic.

Normally I suggest people keep the pension in most circumstances especially if they are married. It lowers the risk of your whole portfolio ie the risk that you fail to meet your financial needs in retirement.

However 14k is not a lot of money. Makes me think simplification is better. Poster hash tag crunchers #cruncher has a spreadsheet for these calculations though.

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celia
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Re: Small Pension Buy out..

Post by celia » Wed Sep 13, 2017 5:09 pm

I think many posters are assuming you are leaving the employer. If you are staying at the employer and continuing contributions, it could be a big mistake to withdraw part of your pension now as it will obviously impact how much you get at 65. You might then be treated as if you were a "new" employee starting now. An employee with over 40 years at the same company often gets a lot more than the total of pensions at two companies where they worked 10 years at A, then 30 years at B. So if you are not leaving, I recommend you keep building up as many years in one place as you can. Don't start over as a "newbie".

The worst case is if the employer offered a buy-out every 5 or 10 years and you took them all. If you have no faith in the longevity of the company or that the money will be there when you are 65, of course, it makes sense to take the payouts and put them in a tIRA. But barring that, I would leave them there.

Valuethinker
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Re: Small Pension Buy out..

Post by Valuethinker » Thu Sep 14, 2017 9:39 am

celia wrote:
Wed Sep 13, 2017 5:09 pm
I think many posters are assuming you are leaving the employer. If you are staying at the employer and continuing contributions, it could be a big mistake to withdraw part of your pension now as it will obviously impact how much you get at 65. You might then be treated as if you were a "new" employee starting now. An employee with over 40 years at the same company often gets a lot more than the total of pensions at two companies where they worked 10 years at A, then 30 years at B. So if you are not leaving, I recommend you keep building up as many years in one place as you can. Don't start over as a "newbie".

The worst case is if the employer offered a buy-out every 5 or 10 years and you took them all. If you have no faith in the longevity of the company or that the money will be there when you are 65, of course, it makes sense to take the payouts and put them in a tIRA. But barring that, I would leave them there.
Ahhh.. Good point.

Assume makes an ASS out of U ME . As they taught us once in a law class ;-).

Unless the pension scheme is in serious deficit, it is a mistake to leave a DB pension scheme, normally, if you are a continuing employee. Can't speak to Cash Balance plans.

If fund is covered by PBGC it is possible to work out what the likely benefit reduction would be (if any). However if with the "Multi Employer" PBGC plans, then I think best advice is to consider to pull your money when you can-- the PBGC itself has some pretty frightening warnings about their continued viability.

If public sector pension it really depends on deficit position of the fund and of sponsoring municipality or state.

tesuzuki2002
Posts: 78
Joined: Fri Dec 11, 2015 12:40 pm

Re: Small Pension Buy out..

Post by tesuzuki2002 » Thu Oct 26, 2017 2:27 pm

Valuethinker wrote:
Wed Sep 13, 2017 4:50 pm
tesuzuki2002 wrote:
Wed Sep 13, 2017 11:58 am
I have been offered a buy out of small pension I have.

The offer is $14K now, or pension payments at 65 of $300 a month. I am currently 35.

If I take the buyout now it would get rolled directly into my TIRA into index funds..

It such a small amount I feel like it would be easier to just clear this pension off the list and roll it with my other investments and move on with life.

I would be missing out on having this Annuity type option at retirement if I do this, but I'm setting myself up with other investments instead.

If it were a large amount I might feel differently, but I'm only talking about $14K here.

Thanks!
I am assuming this is not cpi indexed?

So buying power will be one half at 65 assuming 2.5 per cent inflation?

If you have any reason to believe you have an impaired life expectancy you should take the lump sum.

If there is a spousal survivor benefit associated w the pension it may be much more valuable to you.

I would assume something like a 5 per cent nominal return in calculating the value of 14k at retirement. Assuming a 60 40 portfolio now that is pretty optimistic.

Normally I suggest people keep the pension in most circumstances especially if they are married. It lowers the risk of your whole portfolio ie the risk that you fail to meet your financial needs in retirement.

However 14k is not a lot of money. Makes me think simplification is better. Poster hash tag crunchers #cruncher has a spreadsheet for these calculations though.

I did move forward with cashing this out and Rolling it over to me TIRA. Another $15K in there this year will be nice, and it has 30 years to grow before I consider touching it. I'm investing close to $45K a year here so I think that will mitigate risk of running out of money...

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