Retirement moved up 1 year

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
GlennK
Posts: 83
Joined: Tue Mar 26, 2019 7:20 am

Retirement moved up 1 year

Post by GlennK » Fri Jul 31, 2020 1:11 pm

The megacorp I work for is forcing me to retire this year instead of my planned retirement in 2021. They are offering a severance package that includes accruing years of service for up to two years if I hold off filing for my pension (annuity or lump sum).

I'd like on advice on whether to hold off filing for 1 or two years. I do have enough in savings to cover my expenses for the two years.

For anyone who would like my full financial status, please see this thread: viewtopic.php?t=319848
I am leaning towards taking the pension annuity so I am showing the increase percentage for that choice.

Pension begins_____$ yearly pension________$lump sum______%increase in annuity______years to make up lost income
11/1/2020__________$34,740_______________$598,919_______--------__________________----------
11/1/2021__________$37,980_______________$677,061_______9.3%____________________10.7
11/1/2022__________$40,440_______________$704,543_______6.5%____________________15.4

I simply divided the yearly pension by the increase if I wait to determine the years to make up. I know some of you also worry about lost investment but I do not know how to include that in my calculation.

Thanks everyone in advance,
Glenn

P.S. I apologize for the amateurish table I created above. Was not sure to do it via the forum software.

User avatar
JoeRetire
Posts: 5398
Joined: Tue Jan 16, 2018 2:44 pm

Re: Retirement moved up 1 year

Post by JoeRetire » Fri Jul 31, 2020 1:16 pm

I'd probably wait two years, then take the lump sum. But it might depend on what happens financially in the interim.

Do you have to decide now? Could you wait one year, see what the financial landscape looks like, then decide to wait an additional year or not?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

User avatar
FiveK
Posts: 9603
Joined: Sun Mar 16, 2014 2:43 pm

Re: Retirement moved up 1 year

Post by FiveK » Fri Jul 31, 2020 1:39 pm

Pension vs. lump sum is akin to when to start SS benefits: if you know your lifespan and future rate of return the answer is easy. ;)

Whether you take the pension or the lump sum, consider waiting the two years to minimize taxes on Roth conversions you could do during that time.

You can see a picture of your specific pension/lump sum trade-off by putting your numbers in the "Comparison of immediate Lump Sum pension vs. immediate annual payments" (row 97 and following) section of the personal finance toolbox Excel spreadsheet.

stan1
Posts: 8613
Joined: Mon Oct 08, 2007 4:35 pm

Re: Retirement moved up 1 year

Post by stan1 » Fri Jul 31, 2020 1:51 pm

Right, you have to honestly assess your life span (and spouse's life span, if there is a spousal benefit to the pension). If there is a spousal benefit then age differences can be important too. There's no way to predict for sure but you can think about you and your spouses current health issues, fitness, family history, etc. Are you likely to live into your 90s or 100s with what you know today? 80s?

Agree it seems you have plenty of assets to wait 1 or 2 years.

Topic Author
GlennK
Posts: 83
Joined: Tue Mar 26, 2019 7:20 am

Re: Retirement moved up 1 year

Post by GlennK » Fri Jul 31, 2020 2:05 pm

Currently widowed and no active plans to change that.

Good point on the IRA conversion. I am definitely doing that next year as the company is subsidizing my health care for one year. But I was hoping to use the ACA subsidy in 2022 so I cannot have large "income" that year.

Finally, I do not have to decide till I actually want to file.

Thanks for the input so far.

nix4me
Posts: 670
Joined: Sat Oct 13, 2018 9:32 am

Re: Retirement moved up 1 year

Post by nix4me » Fri Jul 31, 2020 2:08 pm

I would take the offer and take the lump sum in 2 years. And I would move all you investments to Vanguard or Fidelity or Schwab and get out of all the Edward Jones junk. Simplify. You have enough to retire if I’m reading correctly. 1.6 plus the 700 lump sum.

tibbitts
Posts: 11129
Joined: Tue Feb 27, 2007 6:50 pm

Re: Retirement moved up 1 year

Post by tibbitts » Fri Jul 31, 2020 2:09 pm

I would be terrified to make a recommendation without knowing all the fine print. For example, my pension would have allowed me to defer payments and accumulate at an awesome rate... with the one tiny little asterisk that if I didn't take the reduced payments starting immediately upon retirement, I'd forever lose my eligibility for employer-paid healthcare (fully-paid health insurance followed by a medicare supplement) in retirement. Pensions are complicated.

User avatar
Watty
Posts: 20004
Joined: Wed Oct 10, 2007 3:55 pm

Re: Retirement moved up 1 year

Post by Watty » Fri Jul 31, 2020 2:50 pm

From your other post in rough numbers;

expenses $50K
Social Security at age 70 $3,836 a month, $46K a year
Portfolio without pension, about $1.7 million
Single(widowed)
Age 59

Even if you just get 1% in dividends and interest on your portfolio that would be $17,000 a year.

You would need to figure out how to bridge the gap until you start Social Security but you really don't have any need to take the pension option because you would just be paying taxes on it then investing it in a taxable account. If I was in your situation I would not really consider the pension/annuity option and only look at the lump sum options.

There are some other things that you might want to research more;

1) Sometimes you will lose things like retiree health benefits if you take the lump sum. Be sure to check to see if your decision impacts that.

2) What happens to the money if you die before you start the pension? In some cases your estate might not get anything. There is not anything nefarious about that that is just how the pension math works to give the other survivors a larger pension check. If that is how yours works then you might want to consider how much it would cost you to get life a $600K life insurance policy at your age. I'm not suggesting actually buying one but that would at least in part account for why you would get a larger lump sum if you delay starting it for a year or two.

3) If you delay taking the lump sum for a year or two are you guaranteed that you can still take the lump sum then? I have a small pension from an old employer that has a lump sum option but the ability to take the lump sum was suspended for about five years in 2008. The reason was that the pension ratios were not good enough and the PBGC required that they not give lump sums if the percent funding was too low. That is to prevent there being a "run on the bank" if people started bailing out of a troubled pension plan. The problem is that it is possible that you could plan on taking the lump sum in a year or two but you might not actually be able to do that and you would have to take the pension option.

4) Are your numbers firm or are they estimates. If the lump sum amount is based on the current very low interest rates then if interest rates go up then the lump sum amount could be less in a year or two if they are just estimates. The reason is that the lump sum is based on a complicated formula that discounts future pension payments. As interest rates go up promised future income is worth less.

5) I'm not sure how to really crunch the lump numbers but as a thought experiment in comparing 2020 to 2022 I would also factor in the amount of the pension that you would be giving up. By this I mean that if you started the pension in 2020 then you would get $34,740 a year, two years of that would be 69,480 that you would give up if you took the lump sum of 704,543 in 2020. When you look at it that way the lump sum really did increase nearly as much because 704,543 - 69,480=635,063 which is only about $36K more than the lump sum you could get in 2020.

6) On the decision about the pension or the lump sum turn the question around and ask, "Should I take $600K from my retirement funds and buy a single premium immediate annuity that pays me about $35K a year?" This is really just about the same question but it helps prevent what is called "anchoring" where people do not want any changes to what they have now.

If you did not have the $1.6 million in other investments the decision might be harder but if I was in your situation I would just take the lump sum in 2020 and roll it into an IRA.

ralph124cf
Posts: 2530
Joined: Tue Apr 01, 2014 11:41 am

Re: Retirement moved up 1 year

Post by ralph124cf » Fri Jul 31, 2020 3:12 pm

I looked at immediateannuities.com, and in all cases the annuities that you are being offered beat what you could buy on the open market for the lump sums being offered.

Ralph

Topic Author
GlennK
Posts: 83
Joined: Tue Mar 26, 2019 7:20 am

Re: Retirement moved up 1 year

Post by GlennK » Fri Jul 31, 2020 8:25 pm

Thanks again for all the input. These have given me quite a bit to ponder. I will try to answer all the questions.

First off, my company quit offering salary retiree health care 3 years ago. They are subsidizing my health care for one year (I pay monthly what I do as an active associate in my first year of retirement). Beyond that, I have to take care of health coverage myself regardless of whether I have applied for the pension or not.

Someone brought up the very important point of what happens if I die before filing for the pension. I lose everything. So that is a risk. Also, if I take the annuity, I only have the choice of myself or a joint beneficiary. Because I am not married, I would choose me only and again, if I die in 1 year, the pension ceases. That is why 95% of the retirees at my company are choosing the lump sum.

The pension is well funded according to the latest report earlier this year. They have never NOT offered the lump sum once they first introduced it. But I guess there is always the possibility.

The numbers I supplied are estimates from their website. I have heard that the annuity is spot on, but the lump sum is sometimes "slightly" low compared to what you actually get. Also, the lump sum was based off of October, 2019 interest rates. If anything, the lump sum will rise after they recalculate using October, 2020 interest rates. Then this remains fixed until next year.

Oh yes. Someone said take the offer to retire. I do not have a choice. But I am actually glad to have an extra year of retirement with the severance package.

MathIsMyWayr
Posts: 1929
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: Retirement moved up 1 year

Post by MathIsMyWayr » Fri Jul 31, 2020 10:45 pm

GlennK wrote:
Fri Jul 31, 2020 1:11 pm
Pension begins_____$ yearly pension________$lump sum______%increase in annuity______years to make up lost income
11/1/2020__________$34,740_______________$598,919_______--------__________________----------
11/1/2021__________$37,980_______________$677,061_______9.3%____________________10.7
11/1/2022__________$40,440_______________$704,543_______6.5%____________________15.4
You gain 16% and 17% for pension and lump sum, respectively, by waiting 2 years. Besides an adjustment of inflation, it is comparable to delaying SS until age 70. If gaining 16% for SS is a good deal, isn't it equally a decent deal?

yog
Posts: 61
Joined: Wed Jan 15, 2020 12:57 pm

Re: Retirement moved up 1 year

Post by yog » Fri Jul 31, 2020 11:36 pm

GlennK wrote:
Fri Jul 31, 2020 8:25 pm
Thanks again for all the input. These have given me quite a bit to ponder. I will try to answer all the questions.

First off, my company quit offering salary retiree health care 3 years ago. They are subsidizing my health care for one year (I pay monthly what I do as an active associate in my first year of retirement). Beyond that, I have to take care of health coverage myself regardless of whether I have applied for the pension or not.

Someone brought up the very important point of what happens if I die before filing for the pension. I lose everything. So that is a risk. Also, if I take the annuity, I only have the choice of myself or a joint beneficiary. Because I am not married, I would choose me only and again, if I die in 1 year, the pension ceases. That is why 95% of the retirees at my company are choosing the lump sum.

The pension is well funded according to the latest report earlier this year. They have never NOT offered the lump sum once they first introduced it. But I guess there is always the possibility.

The numbers I supplied are estimates from their website. I have heard that the annuity is spot on, but the lump sum is sometimes "slightly" low compared to what you actually get. Also, the lump sum was based off of October, 2019 interest rates. If anything, the lump sum will rise after they recalculate using October, 2020 interest rates. Then this remains fixed until next year.

Oh yes. Someone said take the offer to retire. I do not have a choice. But I am actually glad to have an extra year of retirement with the severance package.
Consider running your scenario in I-ORP Extended, once without planning for Roth Conversions, and once optimizing Roth conversions with no tax bracket limits. Given your relatively large 401k at a relatively early retirement age, you may find it recommends larger than expected Roth conversions until you are ~64, using up the entire 24% bracket. If the differences in the planned annual spending are material enough to you, it may better inform your pension decision on lump sum vs. annuity, and have you reconsider your ACA plan, too.

Post Reply