Lump sum on pension or wait

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wbrandy
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Lump sum on pension or wait

Post by wbrandy »

I have a small pension from a former employer. I received an offer of a lump sum of $107,000 or take the pension when I retire. I'm currently 62 & plan on retiring in 3 years. The annuity at 65 would be $550/month, if I die first my wife would continue with the $ 550/month amount.
I'm trying to decide to just take the pension or take the lump sum now & invest the money.
retiredflyboy
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Re: Lump sum on pension or wait

Post by retiredflyboy »

1. Is the former employer solid financially and is the pension well funded?
2. Do you and wife have good longevity prospects.
3. How many dollar assets will you have at 65. Does the lump sum offer represent a large percentage of dollars you would have in 3 yests?
4. Do you or you wife have any other pension income? Social security?
5. Are you and your wife good with handling retirement savings/withdraw strategy.
6. How does the $550 per month compare with an annuity if purchased with lump sum in 3 years
7. Would your pension have a COLA?

I think it’s usual best to have your base case be take the pension unless the answers to the above questions push you towards lump sum. Guaranteed life time income is very desirable and should be your default starting point, but there are certainly times where a lump sum may be better.
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Facts are stubborn things. Everything works until it doesn’t.
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Watty
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Re: Lump sum on pension or wait

Post by Watty »

Deciding to take the lump sum or pension should be made in conjunction with your decision about when to start Social Security. You can use this web site to see what it suggests for an optimal Social Security claiming strategy.

https://opensocialsecurity.com/

If you are not currently planning on following that strategy then one option to look at would be to roll the lump sum into an IRA and then use that money to fund your retirement so that you could delay starting Social Security longer so that you would get a larger inflation adjusted Social Security check for the rest of your life.

Another option to consider would be to take the lump sum and invest it then buy a single premium immediate annuity when you are much older if it still makes sense then.

I like to turn this question around and ask it this way, "I have $107k in an IRA, should I use it to buy a single premium deferred annuity that will not start for three years and then pay me $550 a month." That is really the same question but it sounds a lot less appealing when you ask it that way.

You can actually buy a deferred annuity like that but people rarely do.

A few things to find out about the pension;

1) Is it tied to any benefits like retiree health care? Sometimes when you take the lump sum you lose that.

2) What happens to the pension if both you and your wife die before you start the pension then what happens to the pension? It varies but in sometimes your estate will not get anything so it would be good to know that. There is nothing nefarious about that it is just how the pension plan can pay more to people who live longer.

3) If you work for three more years under the pension plan then will your pension amount increase?

4) If you will have the ability to take a lump sum in the future then you need to consider that it could actually be smaller. The reason is that interest rates are a major factor in determining how large the lump sum amount will be. When interest rates are lower the lump sum is higher because the future income is discounted based on the interest rate.

If you do expect to have a lump sum option in three years when you retire you cannot count on that since a company can take that away. I had a pension where they took away the lump sum option for about 5 years then the pension funding numbers were too low.
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beernutz
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Re: Lump sum on pension or wait

Post by beernutz »

wbrandy wrote: Thu Oct 15, 2020 10:06 pm I have a small pension from a former employer. I received an offer of a lump sum of $107,000 or take the pension when I retire. I'm currently 62 & plan on retiring in 3 years. The annuity at 65 would be $550/month, if I die first my wife would continue with the $ 550/month amount.
I'm trying to decide to just take the pension or take the lump sum now & invest the money.
https://www.immediateannuities.com shows, assuming your wife is your age, $107k will buy you a $423/month life annuity.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
carolinaman
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Re: Lump sum on pension or wait

Post by carolinaman »

Whether or not this is a good decision depends. It depends on your overall retirement situation. For example, if the lump sum would enable you to delay SS until age 70, then that would favor taking the lump sum.

You should not decide on the pension until you consider all aspects of your retirement plans.
backpacker61
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Re: Lump sum on pension or wait

Post by backpacker61 »

Another option would be to file for it at age 72 (now possible because of the SECURE act).

My (non-COLA'ed private company) pension will go up about 12% for that last year (April 1 following year turning 72 vs April 1 following year turning 71).
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
fishnhunt
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Re: Lump sum on pension or wait

Post by fishnhunt »

It's hard to say without knowing your other retirement accounts, plans for SS, expenses and if you plan to leave money to your heirs. They are offering a fair payout for the pension, but one advantage of taking the lump sum is there may be leftover money someday to pass on but this carries more risk.
Dandy
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Re: Lump sum on pension or wait

Post by Dandy »

For healthy married people I would generally favor taking a pension vs a lump sum especially if it continues to the longest life. Post retirement income helps peace of mind, helps preserve the investment assets and helps longevity risks. Not that this amount is overly significant but added to SS and other investment income might make it worthwhile. Also, with interest rates at historic lows the fixed income portion of portfolios don't provide much income like they did in the past.
goitsme48
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Re: Lump sum on pension or wait

Post by goitsme48 »

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Last edited by goitsme48 on Fri Oct 16, 2020 6:28 pm, edited 4 times in total.
superbobbyg
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Re: Lump sum on pension or wait

Post by superbobbyg »

Need to calculate internal rate of return based on hypothetical mortalities. And can you achieve similar rate of return or greater?
This is the only true analytical way to determine a mathematical decision. I used 4% as break point and going with a lump sum.

The other risk factor is will your company survive long term, or maybe does not matter with government insurance backing the plan.

Another factor is taxes- if you take the lump and roll over to an IRA it will not be taxed initially, but the bigger factor is can you live on savings or other dividends or SS or combination for a few years? Remember an annuity is taxed income for the year it is paid to you.

You are not talking a huge amount but the concept stands. You can reduce your marginal tax bracket with lump sum if you can live on "after tax" money for a period of time.

bob
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AlabamaPaul
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Re: Lump sum on pension or wait

Post by AlabamaPaul »

Even though it's a relatively small amount, it is a 6.17% return on that payout offer, which isn't bad at all given that it has a 100% survivor benefit. I don't know where you live, but many states do not tax pensions from a defined benefit plan. If your state has an income tax, that may be another consideration..
Last edited by AlabamaPaul on Fri Oct 16, 2020 4:53 pm, edited 1 time in total.
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Watty
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Re: Lump sum on pension or wait

Post by Watty »

beernutz wrote: Thu Oct 15, 2020 11:05 pm
wbrandy wrote: Thu Oct 15, 2020 10:06 pm I have a small pension from a former employer. I received an offer of a lump sum of $107,000 or take the pension when I retire. I'm currently 62 & plan on retiring in 3 years. The annuity at 65 would be $550/month, if I die first my wife would continue with the $ 550/month amount.
I'm trying to decide to just take the pension or take the lump sum now & invest the money.
https://www.immediateannuities.com shows, assuming your wife is your age, $107k will buy you a $423/month life annuity.
Comparing the options to an annuity that you can buy is a reasonable thing to do but you need to be careful that all the terms are exactly the same. It sounds like the OP has the choice of taking the lump sum now, ot starting the annuity in three years when they are 65.

If you got a quote on that web site for an annuity that started today that would be a lot different.
Beehave
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Re: Lump sum on pension or wait

Post by Beehave »

Diversified sources of income are a wonderful thing to have.
Regular, life-long monthly income in retirement is a wonderful thing to have.
Maxed out (age 70) Social Security is a wonderful thing to have.

If taking the pension helps you in your circumstances obtain these wonderful things, then grab it and don't look back.

If it's a hinderance, then be careful. There are obvious inflation and credit risks with a pension.

The benefits of a pension, pre-retirement, are hard to truly appreciate. Post-retirement, the benefits of a pension are manifest and hugely significant.

Best wishes.
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beernutz
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Re: Lump sum on pension or wait

Post by beernutz »

Watty wrote: Fri Oct 16, 2020 4:46 pm
beernutz wrote: Thu Oct 15, 2020 11:05 pm
wbrandy wrote: Thu Oct 15, 2020 10:06 pm I have a small pension from a former employer. I received an offer of a lump sum of $107,000 or take the pension when I retire. I'm currently 62 & plan on retiring in 3 years. The annuity at 65 would be $550/month, if I die first my wife would continue with the $ 550/month amount.
I'm trying to decide to just take the pension or take the lump sum now & invest the money.
https://www.immediateannuities.com shows, assuming your wife is your age, $107k will buy you a $423/month life annuity.
Comparing the options to an annuity that you can buy is a reasonable thing to do but you need to be careful that all the terms are exactly the same. It sounds like the OP has the choice of taking the lump sum now, ot starting the annuity in three years when they are 65.

If you got a quote on that web site for an annuity that started today that would be a lot different.
It's $488/month if he invests the $107k today for a life annuity with 100% survivorship starting in 3 years.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
chassis
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Re: Lump sum on pension or wait

Post by chassis »

wbrandy wrote: Thu Oct 15, 2020 10:06 pm I have a small pension from a former employer. I received an offer of a lump sum of $107,000 or take the pension when I retire. I'm currently 62 & plan on retiring in 3 years. The annuity at 65 would be $550/month, if I die first my wife would continue with the $ 550/month amount.
I'm trying to decide to just take the pension or take the lump sum now & invest the money.
@wbrandy Take it now. I received the same type of offer, probably from the same employer as you.

They are offering a net present value incentive to take the lump sum now. If you invest it, and if you have any financial knowledge whatsoever, you will not do worse, and will likely do better than the pension plan. The result is you will have more money than if you don't take the lump sum offer.

I calculated what I expected to be their offer, when I first received the initial communication. Their written offer exceeded my estimate by a nice margin, which made the decision easy, to take the lump sum offer now.

Take the lump sum offer now.
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