Pension - Rollover to 401K or Keep it ?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
confusedinvestor
Posts: 838
Joined: Thu Mar 15, 2012 11:04 am

Pension - Rollover to 401K or Keep it ?

Post by confusedinvestor » Sun Sep 29, 2019 2:12 pm

Folks,
After working 8 years in a big telecommunications company, my job is outsourced - here is my pension situation and hoping to get your feedback and recommendations

Should I rollover my pension to my old employer 401k or keep the pension as is ?

Pension lumpsum value today = 34K ………….(I'm 42 yrs now)
Pension lumpsum value when I'll be 65 = 87K …...2040...with yearly 4.5% rate
Pension annuitized value = $600 per month when I turn 65 to rest of my life

Options A:
Rollover my 34K pension to my old employer 401K now and invest it per my AA (75:25 to glide to 64:40)
Advantages: 1. Better potential growth vs pension's 4.5% APY 2. No risk of that company belly out like GM/Ford where I get nothing...

Option B:
Keep my pension and draw $600/month which will hedge on top of my SS for my longevity risk.

What would you do you, given my situation ?

I already started the rollover, Option A but now I'm re-thinking this and need your help and thoughts. thanks!

Beehave
Posts: 727
Joined: Mon Jun 19, 2017 12:46 pm

Re: Pension - Rollover to 401K or Keep it ?

Post by Beehave » Sun Sep 29, 2019 2:27 pm

My thought is that it's best to diversify future income streams if you can do so prudently.

The pension is a diversifier. So taking it is very appealing on those grounds. However, there are risks associated with that diversificaion. One risk, as you mentioned, is that the pension money disappears and you get no benefit from it (say if company providing it goes belly-up or whatever). Another risk is that inflation significantly erodes the value of the pension.

If your earnings prospects look stable and solid, then you can save a lot over time and the risk of taking the pension as a diversifier diminishes (and yes, the need does too). If not and there are reasonable concerns, then it's better to do the rollover than to take the pension.

A different thought, and my absolute first choice, would be if you could use the opportunity for this rollover to create or add to a Roth 401k or Roth IRA. The Roth, in my opinion, would be the best diversifier and protection against potential future tax raises and probably inflation too.

Hope this helps, and best wishes.

User avatar
galawdawg
Posts: 847
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Pension - Rollover to 401K or Keep it ?

Post by galawdawg » Sun Sep 29, 2019 2:43 pm

Assuming annuity rates stay the same, you'll need about $115,000 at age 65 to purchase a $600 monthly annuity. To reach that amount at age 65 with your current lump sum, you'll need to realize a return of about 5.5%.

So if you believe you can realize that as an average annual return over the next 23 years, I believe you are better off taking the lump sum rollover. Also, what happens to the pension in the event you don't reach age 65? Would your heirs receive a lump sum distribution?

You may also want to confirm that you can rollover your lump sum distribution to your former employer 401k. I think it would be quite unusual to be able to do such a rollover when the 401k is not with your current employer. if you can't do the rollover to your former employer 401k, I'd consider a direct rollover to an IRA.

Topic Author
confusedinvestor
Posts: 838
Joined: Thu Mar 15, 2012 11:04 am

Re: Pension - Rollover to 401K or Keep it ?

Post by confusedinvestor » Sun Sep 29, 2019 2:59 pm

Thanks you.

1. How did you calculate that I will need $115,00 to purchase $600 annuity ?

Your thoughts and numbers really helps, looks like I'm better off taking the lumpsum now and yes, I spoke with Fidelity and the former employer plans allows to rollover to the former employer 401K and my former employer 401K has excellent fund choices.
galawdawg wrote:
Sun Sep 29, 2019 2:43 pm
Assuming annuity rates stay the same, you'll need about $115,000 at age 65 to purchase a $600 monthly annuity. To reach that amount at age 65 with your current lump sum, you'll need to realize a return of about 5.5%.

So if you believe you can realize that as an average annual return over the next 23 years, I believe you are better off taking the lump sum rollover. Also, what happens to the pension in the event you don't reach age 65? Would your heirs receive a lump sum distribution?

You may also want to confirm that you can rollover your lump sum distribution to your former employer 401k. I think it would be quite unusual to be able to do such a rollover when the 401k is not with your current employer. if you can't do the rollover to your former employer 401k, I'd consider a direct rollover to an IRA.

User avatar
galawdawg
Posts: 847
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Pension - Rollover to 401K or Keep it ?

Post by galawdawg » Sun Sep 29, 2019 4:40 pm

That is the current approximate cost to purchase a single life immediate annuity generating %600 per month for a 65 year old male in California. That's why I said "assuming annuity rates stay the same..."

User avatar
Stinky
Posts: 4476
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Pension - Rollover to 401K or Keep it ?

Post by Stinky » Sun Sep 29, 2019 4:57 pm

confusedinvestor wrote:
Sun Sep 29, 2019 2:59 pm
Thanks you.

1. How did you calculate that I will need $115,00 to purchase $600 annuity ?

Your thoughts and numbers really helps, looks like I'm better off taking the lumpsum now and yes, I spoke with Fidelity and the former employer plans allows to rollover to the former employer 401K and my former employer 401K has excellent fund choices.
galawdawg wrote:
Sun Sep 29, 2019 2:43 pm
Assuming annuity rates stay the same, you'll need about $115,000 at age 65 to purchase a $600 monthly annuity. To reach that amount at age 65 with your current lump sum, you'll need to realize a return of about 5.5%.

So if you believe you can realize that as an average annual return over the next 23 years, I believe you are better off taking the lump sum rollover. Also, what happens to the pension in the event you don't reach age 65? Would your heirs receive a lump sum distribution?

You may also want to confirm that you can rollover your lump sum distribution to your former employer 401k. I think it would be quite unusual to be able to do such a rollover when the 401k is not with your current employer. if you can't do the rollover to your former employer 401k, I'd consider a direct rollover to an IRA.
I’m definitely in favor of a rollover to 401(k).

Assuming you invest in a good mix of mutual funds within the 401(k), you may come out behind where you would have been, but you’ll probably come out ahead. Way ahead.
It's a GREAT day to be alive - Travis Tritt

Topic Author
confusedinvestor
Posts: 838
Joined: Thu Mar 15, 2012 11:04 am

Re: Pension - Rollover to 401K or Keep it ?

Post by confusedinvestor » Sun Sep 29, 2019 7:40 pm

Thanks.

I'm hoping my lumpsum of $34k will return 5.5% for next 23 years to match or beat 115K with my current AA 75:25 to glide down to 60:40 in next 23 years.

Are these any other considerations which one may considering keeping then pension in the former employee plan vs rolling over ?
galawdawg wrote:
Sun Sep 29, 2019 4:40 pm
That is the current approximate cost to purchase a single life immediate annuity generating %600 per month for a 65 year old male in California. That's why I said "assuming annuity rates stay the same..."

psy1
Posts: 176
Joined: Thu Jan 31, 2019 1:40 am

Re: Pension - Rollover to 401K or Keep it ?

Post by psy1 » Sun Sep 29, 2019 7:52 pm

Keeping the pension could also diversify your anxiety and bitterness in retirement.

Given that the pension is not a sweet deal, i.e. a compelling proposition, I would rollover to an IRA (+/- Roth) and invest per your AA. I have seen many people with pensions from jobs/companies long ago now bitter. the company went bankrupt, the new management changes the rules. Sometimes there are no changes but the pensioner knows there are financial problems at the company and worries about pension cuts whether it is likely or not.

Another consideration is that your pension is not heritable.

If you want to diversify your income stream in retirement, you could purchase an immediate fixed annuity when you retire rather than locking that up now.
Last edited by psy1 on Sun Sep 29, 2019 8:20 pm, edited 1 time in total.

User avatar
galawdawg
Posts: 847
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Pension - Rollover to 401K or Keep it ?

Post by galawdawg » Sun Sep 29, 2019 8:04 pm

confusedinvestor wrote:
Sun Sep 29, 2019 7:40 pm
Are these any other considerations which one may considering keeping then pension in the former employee plan vs rolling over ?
If something happens to your former company pension plan causing PBGC to take over the pension liabilities, you would lose the opportunity to elect a lump sum at a later date (as lump sum payments are capped at $5,000). In that event, your only option would be the monthly payment set by PBGC and ERISA.

Topic Author
confusedinvestor
Posts: 838
Joined: Thu Mar 15, 2012 11:04 am

Re: Pension - Rollover to 401K or Keep it ?

Post by confusedinvestor » Sun Sep 29, 2019 9:20 pm

Many Thanks.
galawdawg wrote:
Sun Sep 29, 2019 8:04 pm
confusedinvestor wrote:
Sun Sep 29, 2019 7:40 pm
Are these any other considerations which one may considering keeping then pension in the former employee plan vs rolling over ?
If something happens to your former company pension plan causing PBGC to take over the pension liabilities, you would lose the opportunity to elect a lump sum at a later date (as lump sum payments are capped at $5,000). In that event, your only option would be the monthly payment set by PBGC and ERISA.

SoAnyway
Posts: 421
Joined: Tue Jul 31, 2018 11:49 pm

Re: Pension - Rollover to 401K or Keep it ?

Post by SoAnyway » Mon Sep 30, 2019 4:29 am

confusedinvestor wrote:
Sun Sep 29, 2019 2:12 pm
What would you do you, given my situation ?
I already started the rollover, Option A but now I'm re-thinking this and need your help and thoughts. thanks!
This is a no-brainer, OP: I'd take option A, for sure - for all the reasons you did so originally and that others upthread have suggested.
Nothing in this post constitutes legal or medical advice. | Consult your attorney or physician to verify if/how anything stated might or might not be applicable to your specific situation.

Post Reply