Pension Buyout Offer

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MJK
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Pension Buyout Offer

Post by MJK »

[Topic is now in Personal Finance (Not Investing) - mod mkc]

I received a buyout offer on a small pension I have with a former employer. I haven't been able to find an online calculator that fits my exact situation, and my inclination is to take the buyout and put it in my 403B or an IRA but would like to get some opinions.

Here's my info:
Age 41 M (spouse age 42 F)

I was given three options for the pension:

1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
3. Monthly benefit starting now at age 41: $119.50

Using reasonably conservative estimates for the next 25 years I expect to have a little over 2 MM in my 403B at age 65.

Thanks for any help!
stan1
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Re: Pension Buyout Offer

Post by stan1 »

Does it have a COLA or are the monthly benefit amounts fixed forever? Is it a corporate pension or state/local government?
123
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Re: Pension Buyout Offer

Post by 123 »

If the monthly benefit option, at any age, comes with access to healthcare benefits that could tip the scales. Otherwise a rollover to an IRA might be your best option.
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Topic Author
MJK
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Re: Pension Buyout Offer

Post by MJK »

Thanks for the replies. There is no cost of living increase, the monthly amounts are fixed permanently. It is also a corporate pension (The company has been around for over 100 years but who knows what the future will hold) and there's no health care benefits included.
the_wiki
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Re: Pension Buyout Offer

Post by the_wiki »

MJK wrote: Mon May 13, 2024 12:03 pm I received a buyout offer on a small pension I have with a former employer. I haven't been able to find an online calculator that fits my exact situation, and my inclination is to take the buyout and put it in my 403B or an IRA but would like to get some opinions.

Here's my info:
Age 41 M (spouse age 42 F)

I was given three options for the pension:

1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
3. Monthly benefit starting now at age 41: $119.50

Using reasonably conservative estimates for the next 25 years I expect to have a little over 2 MM in my 403B at age 65.

Thanks for any help!

Assuming a relatively conservative 7% rate of return:

1. Turns into $132k by age 65. That would give $5300 yr ($442/mo) with 4% rule.
2. $672 a month or $8k a year. Would need 9% returns for #1 to beat it for safe monthly income.
3. If you saved that it turn into $83k a year. In retirement that would be $276 per month + continued $119 or $395 a month.

For me, I would lean towards #1, unless you feel like your retirement will be very tight or are afraid of stock market.

1. You get paid now and don't have to wonder if company will be around to pay out the pension.
2. Very likely more safe monthly income, but lets be honest. $672 is not a lot of money when you think about decades of inflation.
3. Not enough to bother with.
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ResearchMed
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Re: Pension Buyout Offer

Post by ResearchMed »

Play around a bit with the choices at

www.immediateannuities.com

That will help you to see if the offer is competitive with what you might be able to get from commercial life annuities (SPIAs), which are basically one's own pension.
Or if it's much worse.... or better (!?).

RM
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nyclon
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Re: Pension Buyout Offer

Post by nyclon »

Might make sense to do this just to take default risk off of the table (as you noted earlier). There is a discount to be applied for that risk.
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slow n steady
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Re: Pension Buyout Offer

Post by slow n steady »

the_wiki wrote: Mon May 13, 2024 12:58 pm
MJK wrote: Mon May 13, 2024 12:03 pm I received a buyout offer on a small pension I have with a former employer. I haven't been able to find an online calculator that fits my exact situation, and my inclination is to take the buyout and put it in my 403B or an IRA but would like to get some opinions.

Here's my info:
Age 41 M (spouse age 42 F)

I was given three options for the pension:

1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
3. Monthly benefit starting now at age 41: $119.50

Using reasonably conservative estimates for the next 25 years I expect to have a little over 2 MM in my 403B at age 65.

Thanks for any help!

Assuming a relatively conservative 7% rate of return:

1. Turns into $132k by age 65. That would give $5300 yr ($442/mo) with 4% rule.
2. $672 a month or $8k a year. Would need 9% returns for #1 to beat it for safe monthly income.
3. If you saved that it turn into $83k a year. In retirement that would be $276 per month + continued $119 or $395 a month.

For me, I would lean towards #1, unless you feel like your retirement will be very tight or are afraid of stock market.

1. You get paid now and don't have to wonder if company will be around to pay out the pension.
2. Very likely more safe monthly income, but lets be honest. $672 is not a lot of money when you think about decades of inflation.
3. Not enough to bother with.
The 4% rule includes an inflation adjustment every year, so your 1 vs. 2 isn't as clear.

Myself, I would take the buyout and roll it into an IRA if possible. Not enough money to keep in the back of your head for decades before it starts paying out. Also, less risk of a bankruptcy.
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celia
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Re: Pension Buyout Offer

Post by celia »

If you rolled it into an IRA now, you could start converting it (pay the taxes) and have a golden egg in retirement! If you ended up not needing it, your heirs would love it, but it would also be your emergency fund while living.

But if you currently do Backdoor Roths, the conversions would be impacted by the pro rata rule.

Lots to think about!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
LongRoad
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Re: Pension Buyout Offer

Post by LongRoad »

slow n steady wrote: Mon May 13, 2024 1:21 pm
the_wiki wrote: Mon May 13, 2024 12:58 pm
MJK wrote: Mon May 13, 2024 12:03 pm I received a buyout offer on a small pension I have with a former employer. I haven't been able to find an online calculator that fits my exact situation, and my inclination is to take the buyout and put it in my 403B or an IRA but would like to get some opinions.

Here's my info:
Age 41 M (spouse age 42 F)

I was given three options for the pension:

1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
3. Monthly benefit starting now at age 41: $119.50

Using reasonably conservative estimates for the next 25 years I expect to have a little over 2 MM in my 403B at age 65.

Thanks for any help!

Assuming a relatively conservative 7% rate of return:

1. Turns into $132k by age 65. That would give $5300 yr ($442/mo) with 4% rule.
2. $672 a month or $8k a year. Would need 9% returns for #1 to beat it for safe monthly income.
3. If you saved that it turn into $83k a year. In retirement that would be $276 per month + continued $119 or $395 a month.

For me, I would lean towards #1, unless you feel like your retirement will be very tight or are afraid of stock market.

1. You get paid now and don't have to wonder if company will be around to pay out the pension.
2. Very likely more safe monthly income, but lets be honest. $672 is not a lot of money when you think about decades of inflation.
3. Not enough to bother with.
The 4% rule includes an inflation adjustment every year, so your 1 vs. 2 isn't as clear.

Myself, I would take the buyout and roll it into an IRA if possible. Not enough money to keep in the back of your head for decades before it starts paying out. Also, less risk of a bankruptcy.
Also, #1 is implicitly 100% (vs. 50%) survivor benefit to the spouse (or heirs).
toddthebod
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Re: Pension Buyout Offer

Post by toddthebod »

MJK wrote: Mon May 13, 2024 12:03 pm I received a buyout offer on a small pension I have with a former employer. I haven't been able to find an online calculator that fits my exact situation, and my inclination is to take the buyout and put it in my 403B or an IRA but would like to get some opinions.

Here's my info:
Age 41 M (spouse age 42 F)

I was given three options for the pension:

1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
3. Monthly benefit starting now at age 41: $119.50

Using reasonably conservative estimates for the next 25 years I expect to have a little over 2 MM in my 403B at age 65.

Thanks for any help!
That's a bit less than 5% return if you live to 85. I'd call it a wash. I'd take the lump sum just to simplify your life.
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Watty
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Re: Pension Buyout Offer

Post by Watty »

MJK wrote: Mon May 13, 2024 12:03 pm Age 41 M (spouse age 42 F)
...
1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
You can crunch the numbers all sorts of ways but if you put the lump sum into an IRA and invest it for 24 years it should grown a lot. If you then started withdrawing $672 a month it would last a long time, a wild guess might be the age of 71(????) which is when you would "breakeven" and come out ahead with the pension. That would be 30 years from now and 30 years of inflation would make that $672 not be worth a lot so it would not be a life altering amount.

It would also be good to find out what happens to your pension if both you and your wife die before starting the pension. With some pension plans your estate would get nothing, that can just be the way that the pension plan math works to pay the long lived people get paid their pensions. Still it would be good to know about that.

If I was in your situation I would just roll the amount out to the IRA as a lump sum since it is not a huge amount.
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#Cruncher
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Re: Pension Buyout Offer

Post by #Cruncher »

MJK wrote: Mon May 13, 2024 12:03 pmHere's my info: Age 41 M (spouse age 42 F)
I was given three options for the pension:
  1. lump sum offer: $26,150
  2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
  3. Monthly benefit starting now at age 41: $119.50
On the "Alive" sheet of my Longevity Estimator Excel workbook, using the 1980 SSA Cohort Life Table for both spouses, the survival-weighted amounts for option 2 produce a 5.4% return versus the lump sum, while the ones for option 3 produce a 4.7% return. (I'm assuming option 3 has the same 50% survivor benefit as option 2.)

Code: Select all

  Cell  Item                         Value
    F3  Table - Pers 1          Cohort1980
    F4  Table - Pers 2          Cohort1980
    H3  Sex - Pers 1                     M
    H4  Sex - Pers 2                     F
    I3  Age Years - Pers 1              41
    I4  Age Years - Pers 2              42
    I5  Years - Delay                   24 <=== starts in 24 years
    O1  Amount - Pers 1 only        672.00
    O2  Amount - Pers 2 only        336.00
    O3  Amount - Both Alive         672.00
    O4  Discount Rate - Joint       5.418% <=== option 2 return
    O5  Present Value - Joint       26,150

Code: Select all

  Cell  Item                         Value
    F3  Table - Pers 1          Cohort1980
    F4  Table - Pers 2          Cohort1980
    H3  Sex - Pers 1                     M
    H4  Sex - Pers 2                     F
    I3  Age Years - Pers 1              41
    I4  Age Years - Pers 2              42
    I5  Years - Delay                    0 <=== starts right away
    O1  Amount - Pers 1 only        119.50
    O2  Amount - Pers 2 only         59.75
    O3  Amount - Both Alive         119.50
    O4  Discount Rate - Joint       4.742% <=== option 3 return
    O5  Present Value - Joint       26,150
delamer
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Re: Pension Buyout Offer

Post by delamer »

My default position is to recommend taking the monthly pension option in these circumstances. The benefits of having an annuitized income stream (in addition to Social Security) are large, especially when there is a separate, significant pot of liquid retirement assets.

But in this case, it is a wash between #1 and #2. The long deferral and small amount are arguments to just take the money now.
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Stinky
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Re: Pension Buyout Offer

Post by Stinky »

Dollars are small.

Deferral time is long.

Take the lump sum. Roll it onto an IRA. Convert it to a Roth if you’d like.

No brainer in my mind.
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Topic Author
MJK
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Re: Pension Buyout Offer

Post by MJK »

Thanks all for the helpful advice. I'll plan to take the buyout and roll into an IRA, and potentially convert that into a Roth after that. I'll need to look into that to see what makes sense. Right now all of our retirement savings is in tax deferred 403B accounts and it may be good to have an after tax account as well.
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AllMostThere
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Re: Pension Buyout Offer

Post by AllMostThere »

MJK wrote: Mon May 13, 2024 12:03 pm I was given three options for the pension:

1. lump sum offer: $26,150
2. Monthly benefit at age 65: $672 (50% spouse survivor benefit)
3. Monthly benefit starting now at age 41: $119.50
When I left my Mega Corp, I took my pension lump sum and rolled into my 401k. My thought process was that I wanted a clean break from Mega Corp and there were no issues with spouse benefit should I die first. Spouse gets 100% of my 401k or my kids get it should she leave this earth before me (heaven forbid). Take the lump sum, roll into your IRA and don't ever think about your prior employer again.
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Miles131
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Re: Pension Buyout Offer

Post by Miles131 »

Keep in mind that your employer is "making money" by having you take a lump sum. They are not offering more than the what it would cost to buy the same defined benefit. The HR consultants that made my spouse an offer were clearly low balling the buyout. She was close to retirement and we had sufficient IRAs, etc. to want a fixed benefit in our portfolio. Good luck!
retireIn2020
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Re: Pension Buyout Offer

Post by retireIn2020 »

Stinky wrote: Mon May 13, 2024 5:25 pm Dollars are small.

Deferral time is long.

Take the lump sum. Roll it onto an IRA. Convert it to a Roth if you’d like.

No brainer in my mind.
X2, and convert it to Roth sooner rather than later. Pay your tax on the seed and not the harvest.
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Valuethinker
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Re: Pension Buyout Offer

Post by Valuethinker »

Stinky wrote: Mon May 13, 2024 5:25 pm Dollars are small.

Deferral time is long.

Take the lump sum. Roll it onto an IRA. Convert it to a Roth if you’d like.

No brainer in my mind.
Agree with all of the above.

The absence of COLA indexation or health benefits tips it. 24 years is a very long time to accept inflation risk for. (Health benefits are also a form of COLA protection, potentially).

Better to have the money.

These deals are "actuarially fair". The company can certainly push assumptions which are favourable to it through in the calculation, but there are limits to what it can do and the underlying principle is NPV neutrality - all options, given average life expectancy and other factors, come to the same Net Present Value in present day terms.

For maximum similarity to a pension put the lump sum 100% into TIPS. More likely, just put it into the existing investment allocation
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Wiggums
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Re: Pension Buyout Offer

Post by Wiggums »

I’d take the lump-sum. The amount is small and one less company to deal with.
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Onlineid3089
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Re: Pension Buyout Offer

Post by Onlineid3089 »

Normally I lean towards taking the pension. In this case I agree with others and I'd just take the lump sum and roll it into your 403b or IRA for simplicity. Personally, I wouldn't consider the dollars to be big enough for me to spend time analyzing it either way.

This isn't the case here, but if it was a governmental pension and there was any chance I'd go back to employment covered by that pension later in my career, I'd keep the pension.
queenofthemadhouse
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Re: Pension Buyout Offer

Post by queenofthemadhouse »

The implicit interest rate is likely between 5.75 percent and 6.25 percent. That’s higher (smaller buyout) than we’ve seen for a few years, particularly for participants under 45 years old.
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