Pension Lump Sum Advice

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DrGoguma
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Pension Lump Sum Advice

Post by DrGoguma »

Hello

A former employer has offered me a pension lump sum. Except for the tax implications, the lump sum looks better than deferment. But I don't think I really understand all of the intricacies in my situation. Can anyone help me understand the details?

Here are perhaps relevant stats for me and my wife
Ages: 44 & 43
Salary: 200K & 125K
401k: 490K & 200K
Taxable: 200K

We currently live is a low to medium low COL area. We won't live here at retirement -- and I would like to retire at age 55 (in 11 years). I also may change jobs one more time before retirement to a) move to somewhere I like better and b) increase my salary. I have an extremely stable job and expect raises in the 4-6% range annually (there are no promotions left for me, but my pay band goes up to ~280k). My wife could in theory get some more raises up to my level, but no guarantees. Both jobs are stable, stable, stable.

Okay, with that background, here are the 3 options my former employer offered me:

1. Lump sum in November this year: 50,536
2. Immediate monthly payment: $99.50 for single, 97.50 for single (survivor gets 50%), 91.83 for single (survivor gets 75%)
3. Age 65 payment: 656.82 for single (0% survivor)

There may be other relevant details, just let me know what to add.
Last edited by DrGoguma on Sun Aug 30, 2020 12:51 pm, edited 1 time in total.
retiredjg
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Re: Pension Lump Sum Advice

Post by retiredjg »

I think you can roll this into an IRA, can't you? Or is that what you meant by "lump sum looks better than deferment"? If that is what you mean, why would it be better?
infotrader
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Re: Pension Lump Sum Advice

Post by infotrader »

Looks like a no-brainer for me.
If you invest at 6%, you will get $250/m which is much better than $90.
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DrGoguma
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Re: Pension Lump Sum Advice

Post by DrGoguma »

retiredjg wrote: Sun Aug 30, 2020 10:14 am I think you can roll this into an IRA, can't you? Or is that what you meant by "lump sum looks better than deferment"? If that is what you mean, why would it be better?
If I have to pay taxes on the lump sum, its a bad deal I think. Can I roll it into a pre-tax IRA? Can I later roll that into my 401k to make backdoor roth still available?
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Stinky
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Re: Pension Lump Sum Advice

Post by Stinky »

DrGoguma wrote: Sun Aug 30, 2020 10:21 am
retiredjg wrote: Sun Aug 30, 2020 10:14 am I think you can roll this into an IRA, can't you? Or is that what you meant by "lump sum looks better than deferment"? If that is what you mean, why would it be better?
If I have to pay taxes on the lump sum, its a bad deal I think. Can I roll it into a pre-tax IRA? Can I later roll that into my 401k to make backdoor roth still available?
Yes to all of your questions.

Roll into your IRA, then back into 401(k)
It's a GREAT day to be alive - Travis Tritt
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dogagility
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Re: Pension Lump Sum Advice

Post by dogagility »

DrGoguma wrote: Sun Aug 30, 2020 10:21 am If I have to pay taxes on the lump sum, its a bad deal I think. Can I roll it into a pre-tax IRA? Can I later roll that into my 401k to make backdoor roth still available?
If the pension is rolled over into an IRA or 401k within a specific period, then you won't pay tax now. Check with your 401k plan to see if it will accept the rollover.

If the pension has a COLA (most don't), then taking the pension as a monthly payout is probably best.

I faced this decision last year. I chose to do a rollover to my IRA. Reasons being: 1) I didn't trust the solvency of the pension; but mostly 2) I liked the idea of "controlling" the investment.
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
pasadena
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Re: Pension Lump Sum Advice

Post by pasadena »

dogagility wrote: Sun Aug 30, 2020 10:30 am I faced this decision last year. I chose to do a rollover to my IRA. Reasons being: 1) I didn't trust the solvency of the pension; but mostly 2) I liked the idea of "controlling" the investment.
I did the same thing two years ago for the same reason. Retirement was far enough away that I didn't want to take the risk to trust them until then (although the pension is currently very well funded, but companies have been dwindling down these things for a long time, and mine had just been frozen and closed to new employees), and I wanted to invest MY money myself.

I rolled it into my 401(k), which was still open at the time, and then once done rolled the whole thing over into my new employer's 401(k).
Last edited by pasadena on Sun Aug 30, 2020 10:51 am, edited 1 time in total.
infotrader
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Re: Pension Lump Sum Advice

Post by infotrader »

dogagility wrote: Sun Aug 30, 2020 10:30 am
DrGoguma wrote: Sun Aug 30, 2020 10:21 am If I have to pay taxes on the lump sum, its a bad deal I think. Can I roll it into a pre-tax IRA? Can I later roll that into my 401k to make backdoor roth still available?
If the pension is rolled over into an IRA or 401k within a specific period, then you won't pay tax now. Check with your 401k plan to see if it will accept the rollover.

If the pension has a COLA (most don't), then taking the pension as a monthly payout is probably best.

I faced this decision last year. I chose to do a rollover to my IRA. Reasons being: 1) I didn't trust the solvency of the pension; but mostly 2) I liked the idea of "controlling" the investment.
I never understand why people want to rollover to a 401k. Why not just have full control it by rolling over to an IRA?
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Watty
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Re: Pension Lump Sum Advice

Post by Watty »

retiredjg wrote: Sun Aug 30, 2020 10:14 am I think you can roll this into an IRA, can't you?
+1

It would be very unusual to not be able to do this.
DrGoguma wrote: Sun Aug 30, 2020 10:02 am There may be other relevant details, just let me know what to add.
Is the pension adjusted for inflation?

What happens to the pension if both you and your spouse die before you start it? In some cases your estate would get nothing. There is nothing nefarious about it if it works that way that is part of the math for how they can promise bigger pension payments.
DrGoguma wrote: Sun Aug 30, 2020 10:02 am 2. Immediate monthly payment: $90 for single, 97.50 for single (survivor gets 50%), 91.83 for single (survivor gets 75%)
If you started it now then you might end up paying a third of it in taxes. This option makes no sense so I would take it out of consideration.
DrGoguma wrote: Sun Aug 30, 2020 10:02 am Ages: 44 & 43
You have over 20 years until you would start the pension. If it is not adjusted for inflation you would be having a huge amount of inflation risk.

One thing I like doing in for questions like this is to turn it around and ask it this way, "I have $50K in an IRA, should I use it to buy a deferred annuity that starts in 20+ years that will pay me $650 a month then?"

They actually will sell you deferred annuities like that but it is rare for people to buy them unless there is some sort of very special situation.

One other thing to consider is that interest rates are really low right now. I can't make predictions about the future but that means that a lot of people are excited about getting or refinancing a mortgage at a low interest rate because it is a great time to get a 30 year mortgage. The flip side to that is that the low interest rates make it a rough time to buy an annuity. Even if you like the annuity option one alternative is to take the lump sum, invest it in an IRA, then buy an annuity when you are 65 if it makes sense then. The investment should grow and if interest rates are higher when you are 65 your money may buy a lot larger annuity then.

How they calculate the lump sum amount is based on laws so they cannot just throw out a lowball option to try to sucker people into taking it. The lower the current interest rates are the higher the lump sum is because the future pension income is discounted less.

There is an old saying, "Buying an elephant for a dime is only a good deal if you need an elephant and you have a dime."

I don't see that you have any need for the pension option so I would take the lump sum and invest it in an IRA. Even if the pension is somehow a mathematically better choice it is not something you would buy if you already had the cash.

The one exception is if the pension is fully adjusted for inflation. That makes it a lot more valuable so it would be worth looking at more.

Some retiree benefits, like retiree health care, can also be lost if you take a lump sum but I doubt that is a factor in your situation.
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DrGoguma
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Re: Pension Lump Sum Advice

Post by DrGoguma »

infotrader wrote: Sun Aug 30, 2020 10:44 am
dogagility wrote: Sun Aug 30, 2020 10:30 am
DrGoguma wrote: Sun Aug 30, 2020 10:21 am If I have to pay taxes on the lump sum, its a bad deal I think. Can I roll it into a pre-tax IRA? Can I later roll that into my 401k to make backdoor roth still available?
If the pension is rolled over into an IRA or 401k within a specific period, then you won't pay tax now. Check with your 401k plan to see if it will accept the rollover.

If the pension has a COLA (most don't), then taking the pension as a monthly payout is probably best.

I faced this decision last year. I chose to do a rollover to my IRA. Reasons being: 1) I didn't trust the solvency of the pension; but mostly 2) I liked the idea of "controlling" the investment.
I never understand why people want to rollover to a 401k. Why not just have full control it by rolling over to an IRA?
I guess because I thought that was required to do backdoor Roth's. If you have a large IRA those become impossible I thought.

My 401k also has quite cheap index funds available as options. I work in a non-profit type industry, so no one is taking any kickbacks on the 401k plan around here.
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Watty
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Re: Pension Lump Sum Advice

Post by Watty »

infotrader wrote: Sun Aug 30, 2020 10:44 am I never understand why people want to rollover to a 401k. Why not just have full control it by rolling over to an IRA?
In some states a 401k has better legal protection if you are sued.

You can usually access the 401k without a penalty when you are 55 when you leave the job instead of 59.5 with an IRA(there are ways to work around that though).

Having an IRA would also interfere with doing a back door Roth.

For a lot of people where these are not an issue the IRA would be a better choice.
pasadena
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Re: Pension Lump Sum Advice

Post by pasadena »

infotrader wrote: Sun Aug 30, 2020 10:44 am I never understand why people want to rollover to a 401k. Why not just have full control it by rolling over to an IRA?
My current 401(k) is just as good as my tIRA - Fidelity with BrokerageLink, access to Fidelity's whole catalog, and no fee. I rolled my whole previous 401(k), including the pension lump sum, into it. Having an empty tIRA allows me to do backdoor Roth.
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Re: Pension Lump Sum Advice

Post by retiredjg »

DrGoguma wrote: Sun Aug 30, 2020 10:50 am
infotrader wrote: Sun Aug 30, 2020 10:44 am
dogagility wrote: Sun Aug 30, 2020 10:30 am
DrGoguma wrote: Sun Aug 30, 2020 10:21 am If I have to pay taxes on the lump sum, its a bad deal I think. Can I roll it into a pre-tax IRA? Can I later roll that into my 401k to make backdoor roth still available?
If the pension is rolled over into an IRA or 401k within a specific period, then you won't pay tax now. Check with your 401k plan to see if it will accept the rollover.

If the pension has a COLA (most don't), then taking the pension as a monthly payout is probably best.

I faced this decision last year. I chose to do a rollover to my IRA. Reasons being: 1) I didn't trust the solvency of the pension; but mostly 2) I liked the idea of "controlling" the investment.
I never understand why people want to rollover to a 401k. Why not just have full control it by rolling over to an IRA?
I guess because I thought that was required to do backdoor Roth's. If you have a large IRA those become impossible I thought.

My 401k also has quite cheap index funds available as options. I work in a non-profit type industry, so no one is taking any kickbacks on the 401k plan around here.
The backdoor method for Roth does not become impossible - you can still do it, but most people consider it to be a bad choice because the conversion step has to be pro-rated with the rest of the IRA. I think very few people do it this way.
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Re: Pension Lump Sum Advice

Post by gr7070 »

Will you be giving up any healthcare benefits if you take the lump sum? Being a corporate pension I'm guessing not.

However, if you can buy insurance through their group plan in retirement because you're a pensioner it might be worthwhile to keep it. Especially if you're retiring plenty early. Granted that ability could very possibly change decades from now.

An unlikely benefit to confirm doesn't exist.

We will have two modest pensions in retirement including paid for healthcare. Drastically affects the value of those pensions, unsurprisingly.
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Geneyus
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Re: Pension Lump Sum Advice

Post by Geneyus »

My former employer didn't offer me a lump sum, and my pension won't grow with inflation over the next 25+ years until I can collect. It will just sit there, frozen in 2019 valuation. Pretty frustrating. :?
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DrGoguma
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Re: Pension Lump Sum Advice

Post by DrGoguma »

Geneyus wrote: Sun Aug 30, 2020 11:11 am My former employer didn't offer me a lump sum, and my pension won't grow with inflation over the next 25+ years until I can collect. It will just sit there, frozen in 2019 valuation. Pretty frustrating. :?
I don't understand the exact criteria, but I didn't get offered the buyout when I left that job 6 years ago. But other people I know who left at the same time with approximately the same service time did get offered the buyout immediately.

It may be they were waiting until I hit a certain age? So maybe don't give up hope yet. I had thought about going back to this employer at some point right before retiring just to buff up the pension amount. But I don't think that would work, and the reasons I left still work there.
Last edited by DrGoguma on Sun Aug 30, 2020 11:21 am, edited 1 time in total.
Topic Author
DrGoguma
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Re: Pension Lump Sum Advice

Post by DrGoguma »

Watty wrote: Sun Aug 30, 2020 10:46 am
retiredjg wrote: Sun Aug 30, 2020 10:14 am I think you can roll this into an IRA, can't you?
+1

It would be very unusual to not be able to do this.
DrGoguma wrote: Sun Aug 30, 2020 10:02 am There may be other relevant details, just let me know what to add.
Is the pension adjusted for inflation?

What happens to the pension if both you and your spouse die before you start it? In some cases your estate would get nothing. There is nothing nefarious about it if it works that way that is part of the math for how they can promise bigger pension payments.
DrGoguma wrote: Sun Aug 30, 2020 10:02 am 2. Immediate monthly payment: $90 for single, 97.50 for single (survivor gets 50%), 91.83 for single (survivor gets 75%)
If you started it now then you might end up paying a third of it in taxes. This option makes no sense so I would take it out of consideration.
DrGoguma wrote: Sun Aug 30, 2020 10:02 am Ages: 44 & 43
You have over 20 years until you would start the pension. If it is not adjusted for inflation you would be having a huge amount of inflation risk.

One thing I like doing in for questions like this is to turn it around and ask it this way, "I have $50K in an IRA, should I use it to buy a deferred annuity that starts in 20+ years that will pay me $650 a month then?"

They actually will sell you deferred annuities like that but it is rare for people to buy them unless there is some sort of very special situation.

One other thing to consider is that interest rates are really low right now. I can't make predictions about the future but that means that a lot of people are excited about getting or refinancing a mortgage at a low interest rate because it is a great time to get a 30 year mortgage. The flip side to that is that the low interest rates make it a rough time to buy an annuity. Even if you like the annuity option one alternative is to take the lump sum, invest it in an IRA, then buy an annuity when you are 65 if it makes sense then. The investment should grow and if interest rates are higher when you are 65 your money may buy a lot larger annuity then.

How they calculate the lump sum amount is based on laws so they cannot just throw out a lowball option to try to sucker people into taking it. The lower the current interest rates are the higher the lump sum is because the future pension income is discounted less.

There is an old saying, "Buying an elephant for a dime is only a good deal if you need an elephant and you have a dime."

I don't see that you have any need for the pension option so I would take the lump sum and invest it in an IRA. Even if the pension is somehow a mathematically better choice it is not something you would buy if you already had the cash.

The one exception is if the pension is fully adjusted for inflation. That makes it a lot more valuable so it would be worth looking at more.

Some retiree benefits, like retiree health care, can also be lost if you take a lump sum but I doubt that is a factor in your situation.
I think this post points out the things I needed to research. As far as I can tell, inflation adjustments are entirely voluntary -- so unlikely. And it doesn't seem to guarantee joining their group health either -- which is too bad that was a pretty good health plan. So yes, it seems like the lump sum is indeed the way to go since I won't be paying lump sum taxes on it.

Thank you so much for the assistance!
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DrGoguma
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Re: Pension Lump Sum Advice

Post by DrGoguma »

gr7070 wrote: Sun Aug 30, 2020 11:05 am Will you be giving up any healthcare benefits if you take the lump sum? Being a corporate pension I'm guessing not.

However, if you can buy insurance through their group plan in retirement because you're a pensioner it might be worthwhile to keep it. Especially if you're retiring plenty early. Granted that ability could very possibly change decades from now.

An unlikely benefit to confirm doesn't exist.

We will have two modest pensions in retirement including paid for healthcare. Drastically affects the value of those pensions, unsurprisingly.
Yes, great point! I checked, and no, I can't find any ability to join their health group by taking the pension.
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Re: Pension Lump Sum Advice

Post by #Cruncher »

DrGoguma wrote: Sun Aug 30, 2020 10:02 am
  1. Lump sum in November this year: 50,536
  2. Immediate monthly payment: $90 for single, 97.50 for single (survivor gets 50%), 91.83 for single (survivor gets 75%)
  3. Age 65 payment: 656.82 for single (0% survivor)
There is something screwy with the $90 single option so I'll ignore it. (It should pay more, not less, that an option with a survivor benefit.) I evaluated the other three options with my Longevity Estimator Excel workbook. Using the SSA 1980 Cohort Life Table for a man / woman age 44 / 43, the two immediate annuities have a negative survival-weighted internal rate of return. I'd ignore them.

The single annuity that would begin in 21 years, however has a good 3.1% IRR [ a ] given today's very low interest rates. If you have confidence that the annuity will be paid, I'd suggest taking that option. I'd consider this an addition to your fixed income allocation and shift some bond holdings to stocks accordingly. [ b ]

Code: Select all

                    Years  --- While Alive ----
                    Delay   You   Wife    Both    IRR
                    -----  -----  -----  ------  ------
50% survivor at 44     0   97.50  48.75   97.50  (0.1%)
75% survivor at 44     0   91.83  68.87   91.83  (0.2%)
 0% survivor at 65    21  656.82   0.00  656.82   3.1%
  1. Immediate Annuities shows only a $470 monthly payout, signficantly less than the pension's $657.
  2. To illustrate, assuming a $900K portfolio w/o the pension and a 70:30 equity:fixed income allocation, you'd shift $35K from bonds to stocks.

    Code: Select all

    Percent           70%   ---- 30% ----
                    Stocks  Bonds Pension
                    ------  ----- -------
    Before     900    630    270       0
    After      950    665    235      50
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DrGoguma
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Re: Pension Lump Sum Advice

Post by DrGoguma »

#Cruncher wrote: Sun Aug 30, 2020 12:06 pm There is something screwy with the $90 single option so I'll ignore it. (It should pay more, not less, that an option with a survivor benefit.)
Yep, should have been 99.50.

I don't think it changes your analysis. Yes, 3% return was what I calculated also. I hadn't really thought about using it to replace bonds -- but its interesting I sold all my bonds in late March when they seemed to have accomplished their purpose. This pension trades off that liquidity and inflation protection, but gets back the yield/stability I previously desired with my bond holdings. Bonds used to be better, but aren't better right now. Over the next 20 years, will bonds return back to what I desire them to be (stability, inflation protection, liquid).
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Re: Pension Lump Sum Advice

Post by BolderBoy »

At your age I'd take the lump sum, roll it into a tIRA, then move it into a 401k if I could.

I had a similar offer from a previous employer when I was 45. Did the above and have never looked back.
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Re: Pension Lump Sum Advice

Post by Geneyus »

DrGoguma wrote: Sun Aug 30, 2020 11:16 am
Geneyus wrote: Sun Aug 30, 2020 11:11 am My former employer didn't offer me a lump sum, and my pension won't grow with inflation over the next 25+ years until I can collect. It will just sit there, frozen in 2019 valuation. Pretty frustrating. :?
I don't understand the exact criteria, but I didn't get offered the buyout when I left that job 6 years ago. But other people I know who left at the same time with approximately the same service time did get offered the buyout immediately.

It may be they were waiting until I hit a certain age? So maybe don't give up hope yet. I had thought about going back to this employer at some point right before retiring just to buff up the pension amount. But I don't think that would work, and the reasons I left still work there.
I've been gone about 1 year. I called HR at my old job this past week to ask if there were any options for a lump sum payout of my pension. They seemed bothered that I was bringing it up as a former employee, even though I explained that no one gave me any exit paperwork or explained anything. It reminded me of some of the reasons I left... mismanagement and laziness.
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Re: Pension Lump Sum Advice

Post by Freckle's friend »

Instead of creating a new thread, I thought I would ask this crew their thoughts on MY situation.

Turning 65, must start taking my Pension. I have 3 options. $170K lump sum v $835 per month 50% for my wife if I pre-decease her. $772 per month for 100% for my wife if I pre-decease her. SHE is 5 years younger and in perfect health. My health is pretty good though not perfect.

I am leaning toward taking the lump sum. The monthly checks are small relatively speaking. We are just fine with retirement savings so could go without this in any case. Rolling it over into my IRA will avoid the high taxes that I will have in this and next calendar year since I am still employed. And I can protect it from inflation in my investment portfolio, something this annuity will not as it has no COLA.

But I can see it differently. Stable monthly 'dividend' for as long as I and my wife are alive. Small but not zero. Big downside if the two of us go quickly but decent upside if she lives as long as her parents (90's).

Thoughts?
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