Lump sum vs pension

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tundratoy
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Lump sum vs pension

Post by tundratoy » Wed Oct 10, 2018 9:00 pm

If I do the math, my pension is paying a rate of 5.75% of my lump sum. I know there are many other factors to consider when making my choice, but am I crazy to think I could invest a lump sum and withdraw at a rate of 5.75%?

Thanks in advance for your assistance.

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Watty
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Re: Lump sum vs pension

Post by Watty » Wed Oct 10, 2018 9:30 pm

5.75% sounds very low.

You can put your numbers in here to see what how large an annuity you could buy with the lump sum.

https://www.immediateannuities.com/

gamboolman
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Re: Lump sum vs pension

Post by gamboolman » Thu Oct 11, 2018 12:58 am

Is the pension COLA?

Inflation scares me

My pension is not COLA so I’m pretty sure I will take the lump sum

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Earl Lemongrab
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Re: Lump sum vs pension

Post by Earl Lemongrab » Thu Oct 11, 2018 2:15 am

It might help if you showed us the math.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

tundratoy
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Re: Lump sum vs pension

Post by tundratoy » Thu Oct 11, 2018 7:59 am

Immediate annuities, I've checked that before, but I will check it again.

My pension does not have cola.

The math:

A June 1, 2019 retirement. Projected numbers

Lump Sum 413,056

Pension with 75% for my wife if I should die first.

23,520 per year and 17,640 per year.

Thanks!

Valuethinker
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Re: Lump sum vs pension

Post by Valuethinker » Thu Oct 11, 2018 8:27 am

tundratoy wrote:
Wed Oct 10, 2018 9:00 pm
If I do the math, my pension is paying a rate of 5.75% of my lump sum. I know there are many other factors to consider when making my choice, but am I crazy to think I could invest a lump sum and withdraw at a rate of 5.75%?

Thanks in advance for your assistance.
Given where interest rates are now, at 5.75% there is a significant risk that you would exhaust your capital before death - for you or your spouse. US risk free bonds are at c 3% rates, and your equity portfolio could fall 50% in value in the next bear market (it could be more, it might be less, I think the average bear market is something like 35-40%, but that's devastating if you have live off that capital and you have to sell assets.

The rate in the pension includes a mortality credit. But it's better than an SPIA annuity, because SPIA annuitants live longer than average, and also there is commission for each individual sale + higher administrative costs for the insurance company. A pension plan, by risk pooling (some pensioners will live less than the expected life expectancy) and savings on admin costs can usually offer a superior rate.

The bias should pretty much always be to take the pension except:

- you have reason to believe you and your spouse will live less than average e.g. a diagnosed condition, poor current health (these days that is not always a ticket to a shorter life span)

- it's important to you to leave a capital sum to your inheritors

- you have a pension that is not fully protected by PBGC and you have reason to believe that employer might go into default on its pension obligations (if you are in a multi-employer scheme, the PBGC itself warns the fund is essentially exhausted). Airline pilots are an example of those hit hard by PBGC limits on what pension income is protected

If you are a recipient of a pension you can increase the risky assets weighting of the rest of your portfolio.

If you seek additional inflation protection the best way to do this is to delay taking Social Security, subject to spousal rules and also issues with tax brackets & SS (I am not an American resident, so I am vague on these). SS is inflation protected income.

ralph124cf
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Re: Lump sum vs pension

Post by ralph124cf » Thu Oct 11, 2018 8:48 am

How old are you? Male or female?

Ralph

InvMoney
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Re: Lump sum vs pension

Post by InvMoney » Thu Oct 11, 2018 9:06 am

I recommend the lump sum option.

Years ago I retired at age 55 after a 34 years career with a Fortune 500 company. The company's pension plan did not offer a lump sum option. After I was retired for less than a year, the company declared Chapter 11 bankruptcy, and the Pension Benefit Guaranty Corporation (PBGC), a federal government pension insurance agency, terminated and seized the pension plan's assets. Thereafter, the PBGC reduced my monthly pension benefit by 55%.

If you elect the lump sum option, you assume long-term responsibility for managing the lump sum in a manner that it lasts a lifetime, but you do not have the risk of your pension being reduced because of the under funding of the pension plan by your former employer or the bankruptcy of your former employer.

Another advantage of the lump sum option is that your estate gets the full value of that option in the event of your death. That's not the case if you elect the pension option and die after only several months in pension status.

Regarding investment of a lump sum, you could invest the proceeds in a mix of low cost conservative and moderate risk managed and indexed Vanguard balanced funds such as Wellesley Income - VWINX (37% stocks / 63% bonds), Wellington - VWELX (65% stocks / 35% bonds), Target Retirement Income - VTINX (30% stocks / 70% bonds), LS Conservative Growth - VSCGX (40% stocks / 60% bonds), LS Moderate Growth - VSMGX (60% stocks / 40% bonds) and the Balanced Index - VBINX (60% stocks / 40% bonds).
Last edited by InvMoney on Thu Oct 11, 2018 9:45 am, edited 6 times in total.

bighatnohorse
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Re: Lump sum vs pension

Post by bighatnohorse » Thu Oct 11, 2018 9:08 am

Valuethinker wrote:
Thu Oct 11, 2018 8:27 am
tundratoy wrote:
Wed Oct 10, 2018 9:00 pm
If I do the math, my pension is paying a rate of 5.75% of my lump sum. I know there are many other factors to consider when making my choice, but am I crazy to think I could invest a lump sum and withdraw at a rate of 5.75%?

Thanks in advance for your assistance.
Given where interest rates are now, at 5.75% there is a significant risk that you would exhaust your capital before death - for you or your spouse. US risk free bonds are at c 3% rates, and your equity portfolio could fall 50% in value in the next bear market (it could be more, it might be less, I think the average bear market is something like 35-40%, but that's devastating if you have live off that capital and you have to sell assets.

The rate in the pension includes a mortality credit. But it's better than an SPIA annuity, because SPIA annuitants live longer than average, and also there is commission for each individual sale + higher administrative costs for the insurance company. A pension plan, by risk pooling (some pensioners will live less than the expected life expectancy) and savings on admin costs can usually offer a superior rate.

The bias should pretty much always be to take the pension except:

- you have reason to believe you and your spouse will live less than average e.g. a diagnosed condition, poor current health (these days that is not always a ticket to a shorter life span)

- it's important to you to leave a capital sum to your inheritors

- you have a pension that is not fully protected by PBGC and you have reason to believe that employer might go into default on its pension obligations (if you are in a multi-employer scheme, the PBGC itself warns the fund is essentially exhausted). Airline pilots are an example of those hit hard by PBGC limits on what pension income is protected

If you are a recipient of a pension you can increase the risky assets weighting of the rest of your portfolio.

If you seek additional inflation protection the best way to do this is to delay taking Social Security, subject to spousal rules and also issues with tax brackets & SS (I am not an American resident, so I am vague on these). SS is inflation protected income.
Our conclusion X2
I agree. . .

bsteiner
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Re: Lump sum vs pension

Post by bsteiner » Thu Oct 11, 2018 9:14 am

tundratoy wrote:
Wed Oct 10, 2018 9:00 pm
If I do the math, my pension is paying a rate of 5.75% of my lump sum. I know there are many other factors to consider when making my choice, but am I crazy to think I could invest a lump sum and withdraw at a rate of 5.75%?
...
You probably can. If you earn 5.75% and withdraw 5.75%, you'll still have your entire initial principal amount. A balanced portfolio might earn 5.75%.

Another benefit of the lump sum is that it gives you the opportunity to do Roth conversions, which will often add substantial value. If you retire before your RMDs and Social Security begin, you may have a window for Roth conversions where you're in a lower tax bracket.

However, ignoring the risk that the pension plan isn't sufficiently funded, the pension provides a guarantee against the possibility that your investments don't do as well as expected.

tundratoy
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Re: Lump sum vs pension

Post by tundratoy » Thu Oct 11, 2018 8:20 pm

Thanks for all your information. Your Points are well taken. This is one of the biggest decisions of my life to date.

I feel I could manage the lump sum but if the stock market tanks for the next 5 years I do not want to look like a fool. I remember back in 2008-2009 people that retired from my company telling me that they regretted taking the Lump Sum.

I will be 62 next month and my wife is 60, soon to be 61. My father died of cancer at the age of 54 and my sister died of cancer at the age of 55. I know we are guaranteed of nothing in this life. Which makes the Lump Sum look good.

I too work for a very large corporation that if I would name it here everyone would know of it. Corporations cannot be trusted today, let alone 30 years from now. But how do we predict the Stock Market?

Thanks again for your help

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#Cruncher
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Re: Lump sum vs pension

Post by #Cruncher » Fri Oct 12, 2018 7:32 am

tundratoy wrote:
Thu Oct 11, 2018 7:59 am
My pension does not have cola. … A June 1, 2019 retirement. Projected numbers
Lump Sum 413,056
Pension with 75% for my wife if I should die first.
23,520 per year and 17,640 per year.
tundratoy wrote:
Thu Oct 11, 2018 8:20 pm
I will be 62 next month and my wife is 60, soon to be 61.
Assuming you can roll it into an IRA, I suggest taking the lump sum. When I plug your figures [*] into my longevity estimator, I get an Internal Rate of Return of only 3.1% on the $413,056 lump sum. This is a pretty low return. Also, Immediate Annuities shows that money would buy a 100% survivor annuity of $1,830 / month ($21,960 / year), which is comparable to your $23,520 / $17,640 pension. Usually in these pension / lump sum threads, the pension is much better than a commercial annuity. Yours is only about the same.

* 62 year old man & 61 year old woman each with mortality given by the SSA 1960 Cohort Life Table receiving $1,960 / month while the man is alive and $1,470 / month while only the woman is alive.

Valuethinker
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Re: Lump sum vs pension

Post by Valuethinker » Fri Oct 12, 2018 10:49 am

tundratoy wrote:
Thu Oct 11, 2018 8:20 pm
Thanks for all your information. Your Points are well taken. This is one of the biggest decisions of my life to date.

I feel I could manage the lump sum but if the stock market tanks for the next 5 years I do not want to look like a fool. I remember back in 2008-2009 people that retired from my company telling me that they regretted taking the Lump Sum.
US 10 year Treasury bonds are paying c. 3%. US TIPS bonds are paying c. 1% real (10 year). You could put a large proportion of the lump sum into Treasury Bonds and or TIPS bonds. Say you put 60% into that allocation. Then if the stock market drops 50% you have lost 20%, which is a tolerable loss.

If inflation is significantly above current market expectations of around 2% for 10 years and you hold TIPS bonds then you could even beat the 5%ish guaranteed return.
I will be 62 next month and my wife is 60, soon to be 61. My father died of cancer at the age of 54 and my sister died of cancer at the age of 55. I know we are guaranteed of nothing in this life. Which makes the Lump Sum look good.

I too work for a very large corporation that if I would name it here everyone would know of it. Corporations cannot be trusted today, let alone 30 years from now. But how do we predict the Stock Market?

Thanks again for your help
Legal position of pension fund benefits is somewhat protected.

If the company goes into Chapter 11, then the fund would fall into the hands of the PBGC. The PBGC does have a deficit and I am guessing that in the case of the main fund (but not the multi employer one) that at some point Congress will make it up - it would be politically difficult not to. But that doesn't mean that there won't be some compromises struck.

#Cruncher's numbers seem to suggest taking the lump sum is quite attractive.

I would encourage you, then, to be relatively conservative in how you invest in. Perhaps putting as much as 30% into a TIPS bond fund. History shows that that will be volatile, but it also provides the best protection against unexpected inflation you can buy. In any case, making fixed income (bonds + TIPS) be over 50% of the total sum.

You could then look at buying an SPIA annuity with some or all of the money at a later date.

Dandy
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Re: Lump sum vs pension

Post by Dandy » Fri Oct 12, 2018 1:05 pm

these are tough decisions especially if you are retiring on the younger side. A lot depends on the viability of the company, your age, how large of a retirement nest egg you have, your retirement expenses, etc.

I generally favor a pension vs a lump sum. Life time income, a bit of a bridge to taking Social Security later etc. But, inflation is a real concern. That is why it is nice to have some decent nest egg to supplement the pension. The other risk is the risk of taking the lump sum and the investment not doing well. Sometimes the size of the lump sum is quite dazzling because it is more money than we usually have seen in our life. I was glad to off load some of the money management to a pension rather than take a lump sum (I didn't have a choice).

Retirement can be quite different with no salary, contributions and matching to a 401k, drawing down from assets instead of adding to them, etc. And retirement can be 30 years almost as long as a working career. A 20+% equity correction feels a lot different in retirement.

NewOldGuy
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Re: Lump sum vs pension

Post by NewOldGuy » Fri Oct 12, 2018 4:28 pm

tundratoy wrote:
Thu Oct 11, 2018 7:59 am
Immediate annuities, I've checked that before, but I will check it again.

My pension does not have cola.

The math:

A June 1, 2019 retirement. Projected numbers

Lump Sum 413,056

Pension with 75% for my wife if I should die first.

23,520 per year and 17,640 per year.

Thanks!
It would be interesting to see numbers if your projected retirement date 11/01/2018. If I project my wife's pension out into next year, the software, provided by her company, sets the interest rates at 6 or 8%. Suddenly the lump sum is down more than 20%. Not saying yours is similar, but best to check it out for accuracy.

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