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Being offered a lump sum payout on my pension. Advice?

Discussion in 'BBS Hangout' started by Win, Aug 30, 2016.

  1. Win

    Win Contributing Member

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    These are the rough specifics. I'm 57yo and have a pension with a former employer that would pay out roughly $300 per month till death at 65yo. The lump sum option is a $33,000 payout or $130 per month till death starting 1-1-17. I definitely will not take the $130 per mo option but am considering the pay out. If I do the payout there will be a 20% tax payment off the top leaving about $26,000. I could also roll over any portion of that into an IRA.

    I don't have any extremely pressing financial needs presently other than some dental work and then, the old Mazda I drive needs repairs. I'd like to take $6000 out and take care of that and either invest the rest or roll it over. A question I have is would the rollover amount ever be taxed when taken out after 62yo? Or for that matter would any of the $300 per mo I would receive at 65yo be taxed if I do not take the payout? I would entertain any suggestions or advice.

    Also, other than social security I would not have much else for retirement other than what my Dad leaves in his will. And finally, I will be amazed if I live past my 70's, but who knows?
     
  2. what

    what Member

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    Rollover. Only acceptable answer. Taking a 20% hit is terrible, just giving money away. Roll it over and invest it. Definitely don't let it sit in there till you are 65.

    Also, the 300 till death isn't that bad depending on what you have in other retirement options. Basically you'd be making money after you turned 74. It all depends on how agressive you need to be with your money.
     
  3. Rocket River

    Rocket River Member

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    300 * 12 * 10 = 36000$
    That is if you live 10 years after retirement.
    [75 yrs old)

    33000 * .80 = 26400 actual cash

    As WHAT says . .. unless you got some other Post Retirement or have a plan for the cash or some medical condition that may not allow you to make 75 . . . what is the advantage of taking the payout.

    If you were going into business and needed a cash influx . . . maybe
    If you needed to pay off the house/major debt . . . . maybe

    Rocket River
    I dunno if I help but . . .it is worthing thinking about.
     
    1 person likes this.
  4. what

    what Member

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    I would also say this: if the stock market crashes, and it loses major points, he might decide to rollover at that point. But putting money in the stock market right now would be a terrible idea.
     
  5. CCity Zero

    CCity Zero Member

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    Take the payout, and put it all on 00/black/red.... Okay not serious.

    I think the advice above isn't bad, 20% is harsh, the $300 doesn't sound bad but have to account for expected life/inflation etc, but river showed the math on that. I also agree stock could be dangerous, so rollover, unless paying major debts or paying house to own etc (as already stated).

    What's wrong with the car?
     
  6. peleincubus

    peleincubus Member

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    I would not be so quick to dismiss the $130 payment that would start in 2017. You could for example start collecting that money monthly. Wait until the stock market has a significant downturn in the next 2-4 years. And then throw that money into mutual funds.

    How long past 65 would you start to lose money after adding up what would accumulate before you hit 65? A rough estimate in my head would be around 70-71 years old.
     
  7. FTW Rockets FTW

    FTW Rockets FTW Contributing Member

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    At this point I would go with the $300 per month
     
  8. Rocket River

    Rocket River Member

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    Honestly. . . for me. . . the 130 is a non-starter
    He is 57 now. I will say 58 in 2017
    That leaves him 7 years of getting 130 before 65
    and then 130 a month from then on.

    When he hits 75. (That is if he lives 10 years after retirement)
    With Option 1
    300 * 12 * 10 = 36000$
    with Option 2
    130 * 12 * 7 = 10920
    130 * 12 * 10 = 15600
    10920 + 15600 = 26520

    He would have lost out on almost 10K

    After that 300/Month > 130/Month

    Rocket River
    Someone check my math . . . . I could be wrong
     
  9. Win

    Win Contributing Member

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    thanks for the great comments gents. It is much appreciated and I'm surprised on some of the advice. I thought everyone would tell me to hold on the $300 65yo retirement option.
     
  10. cheke64

    cheke64 Member

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    Paging Deckard...
     
  11. Hammer755

    Hammer755 Contributing Member

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    This is a totally awful way of looking at it because it's completely undiscounted. You simply can't base life decisions on this kind of math without taking into account the time value of money and the accurate discounting of future cash flows. You should seriously ask a financial professional instead of a bunch of guys on a message board who think they know what they're talking about.
     
  12. DudeWah

    DudeWah Member

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    All the advice in here is bad. Go to a financial planner.

    As a general rule, the lump sum is usually better. The caveat is that you need to reinvest it at a better rate.
     
  13. Kim

    Kim Contributing Member

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    I was also about to chime in on the discounting. Just use an online calculator. He doesn't need a financial planner for that amount, but it can be helpful.
     
  14. mig0s

    mig0s Member

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    OP, please do not consider anything related to finance from this FTW Rockets guy.
     
  15. superfob

    superfob Mommy WOW! I'm a Big Kid now.

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    Btw since I didn't see someone answer, the 300/mo is still taxed as income.

    Withdrawals from a IRA in the future is also taxed, unless it's a roth in which you deposit already taxed money.
     
  16. Win

    Win Contributing Member

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    thanks superfob
     
  17. peleincubus

    peleincubus Member

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    Regardless of the math. At least when it comes to this scenario, with numbers as close as this. I would always take that money later ($300). For a lot of reasons that don't need to be stated.
     
  18. DudeWah

    DudeWah Member

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    Here, i'll do the correct math for you.


    Let's say you live till 85.

    1)If you wait till 65 and start getting $300 monthly for 20 years. There will be 240 pmt periods. Your net present value at age of 65 for that money will be $72,000.

    2)If you start now at 57, you'll be getting $130 per month for roughly 28 years. There will be 336 pmt periods. Your net present value at age 57 for that money will be $43,680

    3)If you take the lump sum of $26,000 you'll need to invest it roughly greater than 12.8% (adjusted to be compounded monthly) for the next 8 years to beat option 1 and have greater than $72,000 at age 65.


    All that being said, the lump sum and reinvest strategy is still the best among the 3 if you can get a return between 10-12%. Why you ask? Two fold.

    a) there's no guarantee you will live until 85.
    b) it's better to have money sooner rather than rely on regular pmts going well into the future



    Also, keep in mind I did not account for taxes at all (aside from what you explicitly mentioned about the lump sum) so that'll shift this either a little, or quite a bit depending on a number of things. Now, ignore what everyone else said and decide based on whichever of these options fit into your personal life and what you want. Or better yet, get a professional opinion. :)

    source: one of my degrees is in finance
     
    #18 DudeWah, Aug 31, 2016
    Last edited: Aug 31, 2016
    1 person likes this.
  19. Rocket River

    Rocket River Member

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    The long story short is that there needs to be an extensive and workable plan.

    Making 26400 actual cash grow beyond 36000 over 17 years is entirely possible. Requires a bit of diligence, planning and effort.

    The OP has to 'know himself' and what he is capable of . . . .

    YES! My analysis was simple math. Based on the assumption of maximizing the amount to spend.

    but to your point
    If investment and growing the money is the plan
    [​IMG]

    would probably be a better equation.
    However It require more financial discipline.

    Rocket River
     
  20. Rocket River

    Rocket River Member

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    Thank You for the information.

    Rocket River
    I have no degree in Finance . . .just a few classes.
     
    2 people like this.
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