Lump sum instead of pension

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jjwpls
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Lump sum instead of pension

Post by jjwpls » Thu Oct 11, 2018 11:17 am

Hi Everyone,

There are many threads on taking pension vs lump sum already, but each person's situation is different, and I am wondering if you could help me make a decision.

Here is what my former employer offers: each month $450 payable at age 65, or take lump sum around $25,000 now. All the comparisons are based on the dollar value when I become 65-yr-old, which is 25 years from now. I am 40 now with dependents, and my wife would be eligible for the payment if I die after 65. There will be no pension if I die before 65.

Value of pension: Assume annual inflation rate is 3% after I am 65. Then

* (A) Being on pension for 10 years = $48,323,
* (B) Being on pension for 15 years = $67,628,
* (C) Being on pension for 20 years = $84,280,
* (D) Being on pension for 30 years = $111,036

All are in the dollar value when I am 65.

Value of lump sum: Assume annual investment return is 3.5% from now on. Then when I am 65, the $25,000 will grow to $59,081. If annual return is 4%, the total will be $66,645.


Assessment:

If both my wife and I die between 65 and 75- scenario (A), the pension will be worth less than $50,000. I think my wife will live longer than I am and beyond 75, so I guess the most likely scenario would be something between (B) and (C).

By there are lots of uncertainty around pension; the company may go bankrupt...etc., should I just take the lump sum, which has a lower epxected return (with 4% asssumption) than scenario (B)?
Last edited by jjwpls on Thu Oct 11, 2018 12:51 pm, edited 5 times in total.

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Steelersfan
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Re: Lump sum instead of pension - a no brainer?

Post by Steelersfan » Thu Oct 11, 2018 11:29 am

Too many things can happen in 25 years for a realistic analysis, most of them not in your favor. Take the lump sum.

basspond
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Re: Lump sum instead of pension - a no brainer?

Post by basspond » Thu Oct 11, 2018 11:30 am

Just looking at the rule of 72 you would roughly have only about $70k at 65. Review your calculation, it looks like you might be adding a yearly contribution of $25k.

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sergeant
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Re: Pension instead of lump sum -- a no brainer?

Post by sergeant » Thu Oct 11, 2018 11:45 am

Your numbers are way off. Back of the napkin says it will take you over a hundred years for $25,000 to get near a million at 3.5%. How old are you?
Lincoln 3 EOW!

pennylane
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Re: Pension instead of lump sum -- a no brainer?

Post by pennylane » Thu Oct 11, 2018 11:48 am

sergeant wrote:
Thu Oct 11, 2018 11:45 am
Your numbers are way off. Back of the napkin says it will take you over a hundred years for $25,000 to get near a million at 3.5%. How old are you?
he is negative 35 years old. lol.

just kidding. OP how did you come to this number?

JoeRetire
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Re: Lump sum instead of pension - a no brainer?

Post by JoeRetire » Thu Oct 11, 2018 11:53 am

jjwpls wrote:
Thu Oct 11, 2018 11:17 am
Here is what my former employer offers: each month $450 payable at age 65, or take lump sum around $25,000 now. All the comparisons are based on the dollar value when I am 65-yr-old, 25 years from now.

Value of pension: Assume annual inflation rate is 3% after I am 65. Then

* Being on pesion for 10 years = $48,323,
* Being on pesion for 20 years = $84,280,
* Being on pesion for 30 years = $111,036

All are in the dollar value when I am 65.

Value of lump sum: Assume annual investment return is 3.5% from now on. Then when I am 65, the $25,000 will grow to $973,746. If annual return is 4%, the total will be greater than 1 million.
Your numbers are way off.
Try this: https://www.buyupside.com/calculators/b ... tdec07.htm

JoeRetire
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Re: Lump sum instead of pension - a no brainer?

Post by JoeRetire » Thu Oct 11, 2018 11:53 am

jjwpls wrote:
Thu Oct 11, 2018 11:17 am
Here is what my former employer offers: each month $450 payable at age 65, or take lump sum around $25,000 now. All the comparisons are based on the dollar value when I am 65-yr-old, 25 years from now.

Value of pension: Assume annual inflation rate is 3% after I am 65. Then

* Being on pesion for 10 years = $48,323,
* Being on pesion for 20 years = $84,280,
* Being on pesion for 30 years = $111,036

All are in the dollar value when I am 65.

Value of lump sum: Assume annual investment return is 3.5% from now on. Then when I am 65, the $25,000 will grow to $973,746. If annual return is 4%, the total will be greater than 1 million.
Your numbers are way off.
Try this: https://www.buyupside.com/calculators/b ... tdec07.htm

jjwpls
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Re: Lump sum instead of pension - a no brainer?

Post by jjwpls » Thu Oct 11, 2018 11:54 am

JoeRetire wrote:
Thu Oct 11, 2018 11:53 am
jjwpls wrote:
Thu Oct 11, 2018 11:17 am
Here is what my former employer offers: each month $450 payable at age 65, or take lump sum around $25,000 now. All the comparisons are based on the dollar value when I am 65-yr-old, 25 years from now.

Value of pension: Assume annual inflation rate is 3% after I am 65. Then

* Being on pesion for 10 years = $48,323,
* Being on pesion for 20 years = $84,280,
* Being on pesion for 30 years = $111,036

All are in the dollar value when I am 65.

Value of lump sum: Assume annual investment return is 3.5% from now on. Then when I am 65, the $25,000 will grow to $973,746. If annual return is 4%, the total will be greater than 1 million.
Your numbers are way off.
Try this: https://www.buyupside.com/calculators/b ... tdec07.htm
Thank YOU so much -- I have revised the number in the original post.
Last edited by jjwpls on Thu Oct 11, 2018 12:12 pm, edited 1 time in total.

FoolMeOnce
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Re: Lump sum instead of pension

Post by FoolMeOnce » Thu Oct 11, 2018 11:59 am

jjwpls wrote:
Thu Oct 11, 2018 11:17 am
Hi Everyone,

There are many threads on taking pension vs lump sum already, but each person's situation is different, and I am wondering if you could help me make a decision.

Here is what my former employer offers: each month $450 payable at age 65, or take lump sum around $25,000 now. All the comparisons are based on the dollar value when I am 65-yr-old, 25 years from now.

Value of pension: Assume annual inflation rate is 3% after I am 65. Then

* (A) Being on pension for 10 years = $48,323,
* (B) Being on pension for 15 years = $67,628,
* (C) Being on pension for 20 years = $84,280,
* (D) Being on pension for 30 years = $111,036

All are in the dollar value when I am 65.

Value of lump sum: Assume annual investment return is 3.5% from now on. Then when I am 65, the $25,000 will grow to $59,081. If annual return is 4%, the total will be $66,645.


Assessment:

Pension: If I die before 75, I would receive less than $50,000, although my wife, who is of the same age as I, would be eligible for the monthly pension payment after I die. If she remains as healthy as today, something between between (B) and (C) (both of die by age 85) would be my guess.

By there are lots of uncertainty around pension; the company may go bankrupt...etc., should I just take the lump sum, which has a lower epxected return (with 4% asssumption) than scenario (B)?
$450/month 25 years from now is such a small amount I would just take the lump sum now and not worry about the risk of the company honoring it.

PVW
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Re: Lump sum instead of pension

Post by PVW » Thu Oct 11, 2018 12:27 pm

Do you need to make a decision now? If not, you can reevaluate your position in the future based on factors such as inflation, annuity rates, your health.

https://www.immediateannuities.com says you could get a lifetime payout of about $350/month using your numbers ($300/month for a joint life annuity) - so the pension is a good investment compared to what you could get in the open market (right now, maybe not in the future).

With the pension, you are taking on inflation risk and early death risk (is there any payout if you die before 65?). For comparison, remember that unexpected early death is also somewhat of a risk for personal saving since you don't get the chance to enjoy the savings, but your heirs will.

Presumably your pension is covered by the Pension Benefit Guarantee Corp, so you shouldn't worry about bankruptcy of your old employer.

How does this fit in with your other investments? e.g., any other annuity like investments for retirement, how much of your expenses would be covered by $450 per month, would you invest or blow through a $25K windfall?

If this represents a small portion of your investments, it's about a coin flip and I would probably keep the pension just because it diversifies your retirement saving. If this is a significant part of your plan for retirement then I would run some specific numbers and be much more careful about evaluating the risks.

DorothyB
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Re: Lump sum instead of pension

Post by DorothyB » Thu Oct 11, 2018 12:36 pm

Are you single? Are you wanting to leave an inheritance?

I am single w/ no dependents (other than horses & dogs)

I chose to take my pension monthly instead of lump sum for the same reason I am waiting to start social security. I look at both as longevity insurance.

If I die sooner while I still have plenty of IRA money, etc. that yes, I might not get the full "value", but I won't care :)

If I die later, after my IRA money starts getting a bit leaner, I will be glad to have more money coming in each month.

jjwpls
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Re: Lump sum instead of pension

Post by jjwpls » Thu Oct 11, 2018 1:13 pm

PVW wrote:
Thu Oct 11, 2018 12:27 pm

https://www.immediateannuities.com says you could get a lifetime payout of about $350/month using your numbers ($300/month for a joint life annuity) - so the pension is a good investment compared to what you could get in the open market (right now, maybe not in the future).
Sorry- I didn't quite get this part; would you care to explain more for me how the $350/month was generated?

And yes, the decision needs to be made in one or two month. Thanks very much.

PVW
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Re: Lump sum instead of pension

Post by PVW » Thu Oct 11, 2018 1:34 pm

jjwpls wrote:
Thu Oct 11, 2018 1:13 pm
PVW wrote:
Thu Oct 11, 2018 12:27 pm

https://www.immediateannuities.com says you could get a lifetime payout of about $350/month using your numbers ($300/month for a joint life annuity) - so the pension is a good investment compared to what you could get in the open market (right now, maybe not in the future).
Sorry- I didn't quite get this part; would you care to explain more for me how the $350/month was generated?

And yes, the decision needs to be made in one or two month. Thanks very much.
The website will give you quotes for immediate and deferred single premium annuities - effectively your pension is a 25 year deferred lifetime annuity with a $25K premium. I haven't shopped for single premium annuities, but I think www.immediateannuities.com is in the ballpark of what you will find from other sources.

The website minimum investment is $30K, so I adjusted your numbers by 10X. A 40 year old male can immediately invest $250K and receive a lifetime payout in 25 years of about $3500 per month - which is $350 for $25K premium. Choosing the joint lifetime annuity option with a 40 year old female annuitant gives about $300 per month payout in 25 years.

JGoneRiding
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Re: Lump sum instead of pension

Post by JGoneRiding » Thu Oct 11, 2018 2:25 pm

If you will take it and invest it and not touch for 25 plus years that is what I would do.

My aunt took these pay out options several times but then never saved the money. Now she has only ss in her old age where she should have 3 pensions

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Stinky
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Re: Lump sum instead of pension - a no brainer?

Post by Stinky » Thu Oct 11, 2018 2:28 pm

Steelersfan wrote:
Thu Oct 11, 2018 11:29 am
Too many things can happen in 25 years for a realistic analysis, most of them not in your favor. Take the lump sum.
Very good advice.
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LadyGeek
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Re: Lump sum instead of pension

Post by LadyGeek » Thu Oct 11, 2018 3:21 pm

jjwpls - You had a duplicate post, which I've removed. The replies have been merged into this discussion, which is in the Personal Finance (Not Investing) forum (pension).

FYI - To get a moderator's attention sooner, report the post using the "!" in the top-right corner of the post. One of the reasons is "Wrong forum".

Another reason is "Duplicate thread". Thanks to the member who reported the post after the OP started a new thread.

jjwpls - This isn't a big deal, don't worry about it.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

michaeljc70
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Re: Lump sum instead of pension

Post by michaeljc70 » Thu Oct 11, 2018 5:42 pm

Lump sum and be done with it. Hopefully wisely invested.

There are dozens of ways to figure this out, and depending what you plug into the variables, you will get dozens of different answers. Unless you are extremely risk averse, you will come out better taking the lump sum and investing it.

dknightd
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Re: Lump sum instead of pension - a no brainer?

Post by dknightd » Thu Oct 11, 2018 5:50 pm

Steelersfan wrote:
Thu Oct 11, 2018 11:29 am
Too many things can happen in 25 years for a realistic analysis, most of them not in your favor. Take the lump sum.
agreed

indexonlyplease
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Re: Lump sum instead of pension

Post by indexonlyplease » Thu Oct 11, 2018 5:57 pm

I am laughing. You are worried about something that will occur in 25 yrs. Also, if you continue to work until 65 won't the pension increase?

jjwpls
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Re: Lump sum instead of pension

Post by jjwpls » Thu Oct 11, 2018 6:18 pm

indexonlyplease wrote:
Thu Oct 11, 2018 5:57 pm
I am laughing. You are worried about something that will occur in 25 yrs. Also, if you continue to work until 65 won't the pension increase?
The pension won’t increase as I have left that company.

indexonlyplease
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Re: Lump sum instead of pension

Post by indexonlyplease » Thu Oct 11, 2018 6:39 pm

Then I would look at what $450.00 would be worth in 25 years. Inflation will make that worth nothing. Then what will 25k be worth if invested with realistic return.

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Mlm
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Re: Lump sum instead of pension

Post by Mlm » Thu Oct 11, 2018 6:51 pm

jjwpls wrote:
Thu Oct 11, 2018 6:18 pm
indexonlyplease wrote:
Thu Oct 11, 2018 5:57 pm
I am laughing. You are worried about something that will occur in 25 yrs. Also, if you continue to work until 65 won't the pension increase?
The pension won’t increase as I have left that company.
Hands down I would take the money and run

cas929
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Re: Lump sum instead of pension

Post by cas929 » Fri Oct 12, 2018 7:32 am

Is it all right if I piggy back off this thread? I'm in a similar situation, with an option to take a small lump sum from a company where I no longer work.

I'm 47, not married, with a 6 year old.

My options are to leave the pension in place and receive $332.23 per month plus an annual $1,200 "cash pension supplement" starting at age 65, or to take a lump sum of approximately $30,000. (there's also some other options to start receiving money earlier but I'm not going to do that.)

This is the second time my former employer has made this offer to me. The first time around I thought, heck no, that can be grocery money for me when I retire! But I was not considering inflation risk and the fact that $332 a month may not go very far, 20-ish years from now.

The other factor for me is that there were a few years when I had to make limited contributions to my own retirement funds, because of the expense of child care. I always kept up with my 401K enough to get the company match, but I stopped contributing to a Roth. Now that my kiddo has started school, that child care expense has gone down somewhat -- and this $30K would be a nice way to bolster my retirement funds from those lean years (rolling this into my 401K is an option, and I'm not sure if it's better to do that or to set up a rollover IRA....)

It seems, from the comments in this thread, that taking the lump sum is a good idea for me?

cherijoh
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Re: Lump sum instead of pension

Post by cherijoh » Fri Oct 12, 2018 8:00 am

jjwpls wrote:
Thu Oct 11, 2018 11:17 am
Hi Everyone,

There are many threads on taking pension vs lump sum already, but each person's situation is different, and I am wondering if you could help me make a decision.

Here is what my former employer offers: each month $450 payable at age 65, or take lump sum around $25,000 now. All the comparisons are based on the dollar value when I become 65-yr-old, which is 25 years from now. I am 40 now with dependents, and my wife would be eligible for the payment if I die after 65. There will be no pension if I die before 65.
I'm generally a big fan of taking the pension vs. a lump sum, BUT I have one a major EXCEPTION - when your current employer has frozen the pension or it is from a former employer (and therefore also frozen). In those circumstances, inflation will eat away at the value even before you get to start drawing the pension. If you assume an inflation rate of 3% (which is a typical historical average), your $450/month will be only be worth ~$245/month in 2018 dollars (i.e., current spending power) after 20 years. And of course, your spending power will continue to decline as the pension is paid out (unless there is a COLA).

Therefore my recommendation would be to take the lump sum and roll it over to an IRA or other tax-advantaged plan.

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