We just received a notice in the mail from my wife’s first employer regarding her pension. They provided us the following options:
lump sum payment ~9k
50/ month for the rest of her life
~200/ month if she doesn’t take it until she turns 65.
We’re in our 30’s and hoping to retire around 60 so option 3 isn’t really in the cards. I’m looking to see if we can roll the 9k into our 401K to avoid a tax hit, but if we can’t what should we do? On one hand #2 seems smarter, but if we opt for #1, we can offset some of the tax hit by saving almost $1k in avoided interest payments if we apply it to our debt. Then again, it could be a good weekend with hookers and blow should we opt for that.
I received a similar offer a few months ago from a past employer.
1). Lump sum payout - either roll into IRA or not
2) keep the $$ in the pension plan and then draw my $$/month when I hit 65
3) get an immediate monthly payout of $$/month for rest of life
I ran the numbers and so did my advisor, and I chose to take the lump sum payout. And roll into my IRA.
If you do an NPV analysis on the options, you’ll find that the key variables are what rate of return you think you can get on your own and of course, how long you will live. Another key deciding factor is flexibility of having control of the $$ yourself and access to it if need.
Run a NPV analysis on the cash flow options, and take into account the tax impacts, depending on the options you are considering.
This is a good option. If your debt is in excess of ~6% interest rate, this could be a good use of the money. Investing the leftovers or entire balance will put you in a better spot than the other 2 options, I will show it below.
Assuming you are 35, and live until 100, you would receive $39,000 total under scenario 2, this is garbage imo
Assuming you live to 100, you would receive 84,000 under this scenario
If you took the $9k and invested it and earned 6%/yr for the next 30yrs you would have $52,000 at age 65. (this is more than option #2 would provide you with in your lifetime).If you withdraw $200/mo on that but keep it invested (lets say earning only 4%/yr moving forward) it would last you 51 years, or until you turned 116 (this is longer than your life will last and therefore you can take more per month if you’d want or pass it along in your estate).
All along the while with the lump sum you will have the flexibility to vary the amounts you withdraw, timing of those, and investments…there is value in that. This doesnt assume any tax bite or any other issues, but at face value = lump sum and do it on your own will turn out to be more money long term.
What I can’t figure out, is what is in it for the company. They are offering and pushing these pension cash-out options, so there has to be some finincial benefit for them to do this.
My tin-foil hat would say that if it benefits them, then somehow I must be getting the short end of the stick. Maybe it is a win/win thing, but I’m skeptical.
My guess is that on average for their overall pention portfolio and returns, vested participants and likely benefit payouts, their actuaries are advising them to offer a cash out. I’d like to know how this looks from their point of view.
I have a similar request sitting in front of me right now. $125K now, 55 years old. Or, pension at 65 in 2024. $900 at age 65. Guess I need to break out the calculator…
Someone more immersed in finance will likely provide a better answer, but, I bet it has to do with future liabilities and having to fund the pensions. Keep in mind, there is no gaurantee the pension will be there when you need it.
If I did my calculations correctly, looks like I could invest the lump sum assuming a 6% ROI for 10 years and accumulate $225K by age 65 years old. Then, if I assume a 4% ROI during retirement, I can withdraw approximately $1,200 per month for 25 years. I may have to take the cash Alex.
Companies are doing this now because in 2016 there will be new IRS actuarial tables upping life expectantly by around 4 years, according to the below article the expected buyout could go up by 3-8%
Agree probably just managing future liabilities, particularly since companies have excess cash today. A lot of companies are flush with cash right now.
If I did my calculations correctly, looks like I could invest the lump sum assuming a 6% ROI for 10 years and accumulate $225K by age 65 years old. Then, if I assume a 4% ROI during retirement, I can withdraw approximately $1,200 per month for 25 years. I may have to take the cash Alex.
Yes, my first calculation above did not take into account the draw down period and it should have. I am too lazy.
I just did this calculation for a client today. Not knowing your entire picture, my advice to her was to defer the annuity to age 65, she’s 50 now, good health, etc, etc. Single female with other investments, rental properties, etc. I looked at the discount rate but more importantly it gave her some longevity insurance and the more she lived past her life expectancy, obviously the more the deferred annuity was worth on a PV basis. There were some tax issues as well, if she started the annuity now and continues to work in a fairly high bracket for the next decade. In short, the qualitative outweighed the quantitative in her case and we elected to defer.
What I can’t figure out, is what is in it for the company. They are offering and pushing these pension cash-out options, so there has to be some finincial benefit for them to do this.
My tin-foil hat would say that if it benefits them, then somehowI must be getting the short end of the stick. Maybe it is a win/win thing, but I’m skeptical.
My guess is that on average for their overall pention portfolio and returns, vested participants and likely benefit payouts, their actuaries are advising them to offer a cash out. I’d like to know how this looks from their point of view.
Typically when someone offers me a “good deal”, I question their motivation. I’m a skeptic. I want to understand the hidden implications that I may not be aware of.
For example, someone above linked an article that was saying that the IRS is releasing new actuary tables next year that will up the standard life expactancy for individuals by 4 years and that this would probably cause the pension buy-out options to increase over what they are offering me today.
Things like that.
Secondly, I’m just curious in general. I work in finance.