Pension vs Lump Sum Payment

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Topic Author
target4321
Posts: 21
Joined: Sat Jul 22, 2017 1:30 pm

Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 8:08 pm

My former employer "megacorp" is offering a one time option to take a lump sum payout of the pension.

Should I take the lump sum and roll it to my IRA at vanguard OR wait for the pension annuity

Details:
My Age 49
Wife’s age 48
married with two kids
owe $250k on my 3.5% fixed mortgage (home is worth $450k)
Life expectancy = 83 years old
Lump Sum = $45,775

Rolling the $45,775 into my IRA at Vanguard - VBIAX Vanguard Balanced Index Fund (has earned 6.33% per year past 19 years)
Age 49 to 65 IRA investment at 6% per year (compounding interest) = $119,264 by year 2035
Age 49 to 83 IRA investment at 6% per year (compounding interest) = $350,253 by year 2053

OR
NOTE: My Pension Annuity DOES NOT have a cost of living adjustment

Single
Start payments at Age 55 Life Pension Annuity = $318
Total payments from 55 to 83 = $106,995
Start payments at Age 62 Life Pension Annuity = $485
Total payments from 62 to 83 = $122,255
Start payments at Age 65 Life Pension Annuity = $590
Total payments from 65 to 83 = $127,459

100% joint And survivor pension annuity
My Wife would be paid full amount after I die
Age 55 $283 per month
Age 62 $417 per month
Age 65 $499 per month

$714,420 in retirement savings
$157,365 taxable investments
$30,000 emergency fund
Last edited by target4321 on Wed Oct 09, 2019 8:59 pm, edited 4 times in total.

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MillennialFinance19
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Re: Pension vs Lump Sum Payment

Post by MillennialFinance19 » Wed Oct 09, 2019 8:10 pm

At face value, that lump sum seems quite generous. Not sure I’d be debating this much. Good luck!

Silk McCue
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Re: Pension vs Lump Sum Payment

Post by Silk McCue » Wed Oct 09, 2019 8:27 pm

Is the pension Single or Joint life? Please update the original post with that info.

Cheers

Topic Author
target4321
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Joined: Sat Jul 22, 2017 1:30 pm

Re: Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 8:27 pm

Hopefully the collective wisdom of this forum will guide me in the right direction

Dottie57
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Re: Pension vs Lump Sum Payment

Post by Dottie57 » Wed Oct 09, 2019 8:34 pm

Immediateannuities.com shows an annuity amount for 1 life using $45.775k input will receive $379 per month at age 65. This is $221 less than the monthly pension. I would take the pension.

Topic Author
target4321
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Re: Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 8:38 pm

Updated to single

Silk McCue
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Re: Pension vs Lump Sum Payment

Post by Silk McCue » Wed Oct 09, 2019 8:40 pm

Dottie57 wrote:
Wed Oct 09, 2019 8:34 pm
Immediateannuities.com shows an annuity amount for 1 life using $45.775k input will receive $379 per month at age 65. This is $221 less than the monthly pension. I would take the pension.
Does that still hold true since pension numbers provided have been annotated to show they are Single Life?

Cheers

Silk McCue
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Re: Pension vs Lump Sum Payment

Post by Silk McCue » Wed Oct 09, 2019 8:41 pm

target4321 wrote:
Wed Oct 09, 2019 8:38 pm
Updated to single
Can you provide us with Joint Life pension numbers. That makes a big difference in the analysis.

Cheers

Topic Author
target4321
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Re: Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 8:44 pm

Yes. It’s $379 if I buy an annuity.

But if I invest the lump sum I will have more money in my pocket at age 65

Topic Author
target4321
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Re: Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 8:51 pm

I added 100% full payment to survivor numbers.

Dottie57
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Re: Pension vs Lump Sum Payment

Post by Dottie57 » Wed Oct 09, 2019 8:54 pm

Silk McCue wrote:
Wed Oct 09, 2019 8:40 pm
Dottie57 wrote:
Wed Oct 09, 2019 8:34 pm
Immediateannuities.com shows an annuity amount for 1 life using $45.775k input will receive $379 per month at age 65. This is $221 less than the monthly pension. I would take the pension.
Does that still hold true since pension numbers provided have been annotated to show they are Single Life?

Cheers
The annuity is for single life. We don’t know wife’s age or the various pension options for joint life. Without the extra info an apples to apples comparison cannot be made.

Topic Author
target4321
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Re: Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 9:00 pm

Updated with wife’s age

Topic Author
target4321
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Re: Pension vs Lump Sum Payment

Post by target4321 » Wed Oct 09, 2019 9:03 pm

I do not believe purchasing a annuity would ever be competitive with my old company pension plan
Therefore the question is should I stay with the pension or move it to my IRA and earn 6% per year?

ExitStageLeft
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Re: Pension vs Lump Sum Payment

Post by ExitStageLeft » Wed Oct 09, 2019 9:11 pm

What is your faith in the company's ability to pay out the pension over the life of you and your spouse? If it's less than 100% then you may be better off with the lump sum.

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Wiggums
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Re: Pension vs Lump Sum Payment

Post by Wiggums » Wed Oct 09, 2019 9:21 pm

target4321 wrote:
Wed Oct 09, 2019 9:03 pm
I do not believe purchasing a annuity would ever be competitive with my old company pension plan
Therefore the question is should I stay with the pension or move it to my IRA and earn 6% per year?
I took the company pension because it covered me and my wife. I also didn’t have a lump-sum option. The new hires get that option, but I like having the diversity of a pension, SS, stocks and fixed income.

Have you looked at the fund(s) you’ll invest in, using portfolio visualizer, to see the maximum downturn.
https://www.portfoliovisualizer.com/bac ... sisResults

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Watty
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Re: Pension vs Lump Sum Payment

Post by Watty » Wed Oct 09, 2019 10:17 pm

target4321 wrote:
Wed Oct 09, 2019 8:08 pm
Rolling the $45,775 into my IRA at Vanguard
....
Start payments at Age 65 Life Pension Annuity = $590
This is just one example but I like to turn this question around and ask,

"I have $46K in my IRA, should I buy a deferred annuity that will pay me $590 a month(not adjusted for inflation) when I turn 65?"

They actually will sell deferred annuities like that but it is very rare that anyone buys one since there are so many ways that it could work out badly. In fact you have a lot of other money in your accounts and I would be willing to bet that you have never even considered buying a deferred annuity even if it is a mathematically good deal.

Sometimes a pension can be such a good deal that it is too good to pass up but I don't see any of option you have as being all that great since a couple of hundred dollars a month will not be all that significant especially after taxes and inflation.

dandinsac
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Re: Pension vs Lump Sum Payment

Post by dandinsac » Wed Oct 09, 2019 10:49 pm

Taking the lump sum is probably a better financial move as long as things go to plan. The lump sum give you more flexibility and earning potential comes with some risk

Taking the annuity is a guarantee for life for both of you. But, once you both pass, the money stops.

If you take the lump sum, and get to $119,000 by age 65, the $499 will be a 5% withdrawal rate. (I simply focused on the $499 payment at age 65.) This should last you well past age 83. If you don’t earn $119,000, you may have to withdraw less, or you may run out if one of you lives long enough.

I think I would take the lump sum if I were in your shoes. You can always convert it to an annuity in the future.

retired@50
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Re: Pension vs Lump Sum Payment

Post by retired@50 » Wed Oct 09, 2019 11:58 pm

I'd take the lump sum. There's no telling if the company will be solvent for the rest of your life, or your spouse's life. In my view you're taking on a firm-specific risk. I'd rather invest the money on my own and decide upon my own level of risk.

cyndessa
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Re: Pension vs Lump Sum Payment

Post by cyndessa » Thu Oct 10, 2019 11:35 am

retired@50 wrote:
Wed Oct 09, 2019 11:58 pm
I'd take the lump sum. There's no telling if the company will be solvent for the rest of your life, or your spouse's life. In my view you're taking on a firm-specific risk. I'd rather invest the money on my own and decide upon my own level of risk.
If the pension is insured by the PBGC then the pension trust will just transfer over, and as long as you are not at a max allowed you will get your benefit.

Also annual funding notices are a good thing to look at. Is the company putting money into the trust to increase the funding level?

Topic Author
target4321
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Joined: Sat Jul 22, 2017 1:30 pm

Re: Pension vs Lump Sum Payment

Post by target4321 » Thu Oct 10, 2019 5:05 pm

I started the rollover to my IRA.
Thanks for all your advice.
It was a tough decision.

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