pension decision help

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Topic Author
MakingPlans
Posts: 3
Joined: Thu Feb 07, 2019 11:27 am

pension decision help

Post by MakingPlans » Thu Feb 07, 2019 11:56 am

Hi, long time lurker. Thanks to all for sharing your knowledge in the forums here. I have read everything I can find on the lump-sum vs monthly payments option and realize there is no “right” answer, but I am looking for any insights as I have been struggling with the decision.

I am 63 and my DW is 55. I can take a lump sum of $500,000; or an immediate pension that will pay me $32,000 for my life with a 75% survivor benefit. The pension does not have a COLA. The company is sound, and the pension is fully funded under current accounting rules. Other assets not counting the house are $600,000 in a 401k and $100,000 in taxable. SS at FRA is $2900/month. I plan to wait until then or longer if possible.

Present value calculations seem to favor the payments, I like reducing SRR with some “guaranteed” income. The payments and SS will more than cover basic needs On the other hand, the purchasing power of the payments really gets hammered with no COLA, and a portfolio of 1.2M sure looks a lot better than on of 700k. Any comments appreciated!

delamer
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Re: pension decision help

Post by delamer » Thu Feb 07, 2019 5:20 pm

Having enough pension and Social Security income in retirement to cover your basic expenses is an excellent situation to be in.

It makes you much less dependent of the vagaries of the stock market.

Also, given the 8 year age difference, it highly likely that your wife will benefit from the 75% survivor pension. Remember that when you die, the total SS will go down (she’ll only get the larger of your 2 benefits).

If I was in her position, I’d want the pension. And remember that she has to sign off on the decision to forgo the pension, so she has veto power.

Broken Man 1999
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Re: pension decision help

Post by Broken Man 1999 » Thu Feb 07, 2019 5:41 pm

I would go with the 100% survivor option if it didn't drop your pension payment too much.

It would provide more income for her at your death, if you predeceased her.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Watty
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Re: pension decision help

Post by Watty » Thu Feb 07, 2019 6:08 pm

MakingPlans wrote:
Thu Feb 07, 2019 11:56 am
SS at FRA is $2900/month. I plan to wait until then or longer if possible.
That is almost $35K a year.

It was not clear if that is your combined SS or if your wife would also get at a check too either as a spouse or on her own record.

If you took the lump sum you could live on that until you are 70. That would in essence being buying an inflation adjusted single premium immediate annuity with better survivor benefits.

You should look at your Social Security options here.

https://opensocialsecurity.com/
MakingPlans wrote:
Thu Feb 07, 2019 11:56 am
The payments and SS will more than cover basic needs...
If that is a lot more than you would need then also look at doing something like this.

Take the $500K lump sum and roll it out to an IRA.
1) Use the lump sum to buy an annuity that is just large enough to cover your expenses, maybe $250K
2) Invest the remaining $250K and use it to buy future annuities when you are maybe 75 and 80 to make up for inflation.
MakingPlans wrote:
Thu Feb 07, 2019 11:56 am
and a portfolio of 1.2M sure looks a lot better than on of 700k. Any comments appreciated!
A 4% safe withdrawal rate is frequently mentioned for someone that is 65. Since you are younger 3% might be be more reasonable. 3% of $1.2 million is $36,000 a year.

You would need to crunch the numbers some more but if that and Social Security will be more than you need then you might not have much need for a pension even if it is a mathematically good choice. There is an old saying, "Buying an elephant for a dime is only a good deal if you need and elephant and have a dime."

azianbob
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Re: pension decision help

Post by azianbob » Thu Feb 07, 2019 6:43 pm

Do you need the 32,000 to live?

If you are going to keep working and not need to spend the 32,000 for another decade it could be better to take the lump sum and invest it and let it grow for a while. If you invest the lump sum vs investing the pension payout, you'll have to live to 90 for it to break even and the pension starts to overtake the lump sum. And that's the market growing at 5% and you not using any of the money. But this is not considering the taxable impact from taking the lump sum.

If you need / want to spend the $32,000 each year, then you should take the pension. If you take the lump sum and take out 32,000 from it every year and keep the rest invested at 5%, then at 73 you will break even and after that the pension will be worth more. The lump sum will be exhausted when you are 89.

I do not know what your needs are but most likely it is best to go with the pension when you consider your spouse too. Unless you have some large outstanding debt you want to get rid of. The taxes will most likely be a lot worse if you take the lump sum as well.

Topic Author
MakingPlans
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Re: pension decision help

Post by MakingPlans » Thu Feb 07, 2019 11:32 pm

To follow up on some of the details I should have mentioned – I will be retired as of the end of March so I will either need to withdraw from the portfolio or take the pension payments to live on.

The SS payment – 2850/month to be more exact - at FRA is just mine. I guess it will be a little less since the estimate is based on me working until FRA. Per opensocialsecurity.com the best is for me to delay and for her to collect hers at 62, which as I understand will then bump up to the amount of mine when I go. She will be working for a while so I can delay at least as long as she does
.
I do not have an option of 100% survivorship benefit. I can go either 50% or 75%, but 50% wouldn’t make sense. If I take the lump sum, I will roll it over to an IRA so there will be no immediate tax implications.

I need to think about the alternatives mentioned by Watty. Taking the lump sum might make the most sense if it allows me to delay SS until 70, which would certainly be a good thing for DW.

sawdust60
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Re: pension decision help

Post by sawdust60 » Fri Feb 08, 2019 2:23 am

azianbob wrote:
Thu Feb 07, 2019 6:43 pm
...
... If you take the lump sum and take out 32,000 from it every year and keep the rest invested at 5%, then at 73 you will break even and after that the pension will be worth more. The lump sum will be exhausted when you are 89.
...
I didn't understand break even at 73.

with monthly withdrawals, 5% would be 30 years. age 93. For 30 years at 3%, you would reduce the withdrawals to $25,000/yr.

So much for the math. It looks like the lump sum is a reasonable equivalent.

If you have company stock in 401K, investigate NUA tax treatment -- you move the stock with low cost basis into a brokerage account and pay tax on the basis. The balance of 401K is rolled to IRA. Be very careful in doing this as the timing is important and there are very strict rules. Do not withdraw from 401K until you figure this out.

Enjoy retirement. Model the numbers, and you might figure out that your wife can retire sooner than planned.

Dandy
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Re: pension decision help

Post by Dandy » Fri Feb 08, 2019 9:36 am

The payments and SS will more than cover basic needs
I have always favored taking the pension if the company and pension assets are sound. I am almost 71 and my pension and SS cover our basic expenses. It is nice to not have to fret much about what is happening to the stock market. Inflation is always a concern but you should have enough assets, that if invested moderately, should help in that regard. I also liked outsourcing some of the money management rather than have most of that burden on me or my not investment savvy wife.

I think many of us that are used to a paycheck (or two) will find it disconcerting to have to rely on our investments for a good portion of our day to day living expenses. That tends to amp up the concern about the adequacy of the nest egg especially if there are a few bad years in a row. Often the lure of the lump sum is a shiny object. It is more money than most of us will ever get a chance to get. It seems like winning the lottery. The fact that we have been in a long bull market also makes it seem tempting. There are no sure things but if you can cover your basic expenses with a pension and SS and have a decent nest egg to boot -- seems like a better path. To me the goal is to fully fund our retirement not to double or triple our nest egg.

Good luck.

Topic Author
MakingPlans
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Joined: Thu Feb 07, 2019 11:27 am

Re: pension decision help

Post by MakingPlans » Tue Feb 12, 2019 12:40 am

Dandy wrote:
Fri Feb 08, 2019 9:36 am
The payments and SS will more than cover basic needs
I have always favored taking the pension if the company and pension assets are sound. I am almost 71 and my pension and SS cover our basic expenses. It is nice to not have to fret much about what is happening to the stock market. Inflation is always a concern but you should have enough assets, that if invested moderately, should help in that regard. I also liked outsourcing some of the money management rather than have most of that burden on me or my not investment savvy wife.

I think many of us that are used to a paycheck (or two) will find it disconcerting to have to rely on our investments for a good portion of our day to day living expenses. That tends to amp up the concern about the adequacy of the nest egg especially if there are a few bad years in a row. Often the lure of the lump sum is a shiny object. It is more money than most of us will ever get a chance to get. It seems like winning the lottery. The fact that we have been in a long bull market also makes it seem tempting. There are no sure things but if you can cover your basic expenses with a pension and SS and have a decent nest egg to boot -- seems like a better path. To me the goal is to fully fund our retirement not to double or triple our nest egg.

Good luck.
Thanks to everyone for the input. I have been doing a lot of number crunching and the long and short of it is either way should work out. I am discovering I am more risk adverse than I thought. I also think I have been looking too much at only numbers, and forgetting about goals.
This:
To me the goal is to fully fund our retirement not to double or triple our nest egg.
I think the pension will suit me better.

retire2022
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Location: NYC

Re: pension decision help

Post by retire2022 » Thu Feb 14, 2019 11:39 am

Makingplans

Does your 401k have RMD?

If you were to receive lump sum pension is it subject to capital gain?

Dottie57
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Re: pension decision help

Post by Dottie57 » Thu Feb 14, 2019 11:48 am

The pension is a great deal. Buying an annuity with 500k which covers both of you does not come close to 32k. If pension is sound, keep it.

RollTide31457
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Re: pension decision help

Post by RollTide31457 » Thu Feb 14, 2019 11:51 am

Always cash out of pensions when given the opportunity.

ralph124cf
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Re: pension decision help

Post by ralph124cf » Thu Feb 14, 2019 12:28 pm

Corporate pensions are not health rated.

People who buy SPIAs are self selected as believing themselves healthier and with longer life expectancies than the norm.

If you already know that you are unhealthy, such as a heart attack or cancer survivor, or a diabetic, or grossly obese, you have a good indication that your remaining life span may be shorter than average, and perhaps the lump sum would be a good idea.

Otherwise the monthly payout will be more than you could buy on the open market for the same lump sum.

Ralph

2pedals
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Re: pension decision help

Post by 2pedals » Thu Feb 14, 2019 12:40 pm

A stable pension and SS income can give you the ability sleep well at night. The pension along with SS will help insure you against longevity risks. Many recent retirees are concerned with sequence of return risks when investing. If you wanted an purchase an equivalent monthly immediate annuity the costs would be greater than the lump sum provided to you. With DW at age 55 it is a good chance you will predecease her. She may have many more years remaining without you. She also may not have good financial habits and may not act as a good steward with your retirement savings. You may have some very good reasons to take the pension.

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