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

Thank you to DudeWah and Rocket River for doing the calculations for time value of money. As another finance major on here, I was getting a little OCD as I read down this thread.

 

OP, what makes you so sure the employer will be around to pay the $300 per month?

 

/r/personalfinance

 

That's what I was going to say, all pensions are not equally assured. I don't think you said how the pension is backed or diversified it is. I personally don't trust capitalist with my best interest, like if there is a bankruptcy issue.

It could be that you could do something like take the lump sum and make a down payment on a rental property that might net more than $300 a month, give you a tax deduction and appreciate in value. (or be a black hole of trouble)

Or just take it and pay down you mortgage where you payments go down $300.

As a geezer myself, I think when you get older you need to own something, preferably a profitable business. (but I went all in on natural gas in 2006 and got F#$$@)

 

I was going to suggest the debt item as well. Depending on the OP's situation, if he has high interest debt, servicing that debt could be a viable option. I think low interest debt like a mortgage (presuming it is a low interest mortgage) probably won't outweigh the returns on the lump/sum and reinvest strategy but if there's high interest credit card debt floating around, this might be a good opportunity to get rid of all of that.

 

Getting a return of 10 to 12 percent is damn near impossible for that many years. You'd be lucky to get 5% return.

If the market corrects itself and crashes, it might be a different story. But barring some Detroit-type government pension thievery, the $300 a month would be his better option.

 

This.

$36,000 at a 4% yearly withdrawal rate would be $120 / month (or $1,440 / year). $300 / month is very reasonable.

This $36,000 will only marginally impact your retirement but ... Most people are looking to augment their Social Security benefits. Let's say you make $2,000 / month in SS. The $300 / month becomes more impactful; that is two weeks of groceries per month.

 

The $300/mo will be taxed in your retirement, when you will likely be in a lower tax bracket.

 

I agree that 10% is overstated (hence why I think servicing high interest debt with it is a better option). With that said, the OP didn't disclose the health and long term stability of the pension fund so who knows if the pension will even be around long term or whether some bankruptcy judge will find some other creditors to get the money first.

The other question is the OP's retirement currently. A lot of people are really bad at planning and if they are then absolutely stick with the pension (provided it is on sound ground). $300 may seem like a little but I've seen too many people make bad decisions on retirement and having a guaranteed $300 payout is a huge benefit to people in that category.

Now if the OP is confident in his retirement position, then potentially he can explore other options with the money.

 

It's hard for me to take anything WHAT posts as being worthwhile because of his outrageous history of BBS failure.

 

I retired in 1990. You will find everything goes up steadily ,you need to take your $300 a month.

 

you really think the market is going to be lower than it is now in 8 years? bahahaha.

do not listen to this guy at all.

 

take the lump sum and put it in spiders https://en.wikipedia.org/wiki/SPDR

 

a) There is no guarantee that you will not live to 95.

b) The financial footing of the the company funding the pension until you are 85 should be questioned. Most companies will not survive as is for another 30+ years. Through mergers, acquisitions, and bankrupcies, who knows if there will be enough money to fund their ongoing pension liabilities.

12.8% return? I would not bet on it.

$300/mo until you are 85? I also would not bet on it.

Single Payment Immediate Annuity from a major carrier would be a safer bet, but alas SPIA is not a direct option. You could take the cash out ($26,00 after taxes) and buy a SPIA.

BTW the present value calculations have a rate of return buried in them.

As an example but with future value, lets take a look at the $26,000 PV.

Given a rate of return of 3% for 8 years, your future value is $32,936.02.

Given a rate of return of 4% for 8 years, your future value is $35,582.80.

Given a rate of return of 5% for 8 years, your future value is $38,413.84.

The above future values also do not consider investment taxes paid yearly. They also do not consider inflation. BTW that promised $300/mo may very well be $150/mo in an inflation adjusted valuation when you get to 85. The SPIA I mentioned above also does not consider inflation.

The bottom line is that it is really really hard to calculate meaningful PV and FV. Financial calculators give easy answers but not the whole picture.

 

Take the lump sum, pay taxes and sail around the world on the Queen May 2.

 

First thing to understand is your own family age history. Specifically if you feel the typical age you'll live to is in your 70's you sure don't want to start taking out payments at 65 at $300 a month, though $3600 a year for life relative to a $33,000 base amount is over a 10% yield.

But due to your perceived life span that is off the table.


$130 a month is $1560 a year or less than 5% return on cash for approximately 20 years. Too low in my opinion of a rate of return.

BEST OPTION:

Your best option would be to Rollover the pension into a rollover IRA and therefore you pay no taxes whatsoever on the rollover or the total amount today. In a rollover IRA you can take out funds without any penalty starting at age 59 1/2 and only pay income tax on the amount. The benefit is that you get to invest $33,000 and the money grows until you take any funds out.

A post 59 1/2 distribution is a normal distribution, don't take it out before that or there is a penalty.

Don't go to a financial advisor, he'll most likely throw your money in an annuity that pays out 4-5 percent (and gets a 7% commission!) or mutual funds with front end sales charges or a management fee of 1% to buy you funds.

BEST ADVICE:

Rollover your IRA to a Vanguard (www.vanguard.com) IRA and invest it in 25% All Stock Index Fund 50% S&P 500 and keep 25% in the Money Market account.

Doing the above you slowly grow your $33,000 over time and as you need money starting at 59.5 you take out funds and pay taxes at that time. This is a very low cost, low fee strategy that also gives you some growth if you live even longer.

 

Lump sum and....

 

For those questioning if the company will be around to make payments, you need to take a look here:

http://www.pbgc.gov/

 

You basically said what I said better. Rollover is the only option here versus a lump sum.

I also think you brought up a good point about the 59 1/2: if he wants a lump sum, he only has about 2 years before he will be able to pull the money out without penalties. Rollover and then Keep the money in there at least till then.

I do also think that the company folding (which people have pointed out) has merit to it and that finding a safer place is probably better, but remember nothing is completely safe: bear sturns, for example.

Still, a rollover plan and waiting till 59 1/2 to take a lump sum is better, if you want the safe route. But again-it is going to be hard to make enough of a return on that money if the company still is around to match that $300 a month for life.

 

You can withdraw from an iRA before 59.5 ... but with strings attached

Early IRA Withdrawal with No Penalty – 72t Rule Explained

There is an obscure IRS code referred to as “the 72t rule” that can help you make early IRA withdrawals penalty free. Let’s say you want to retire now but you need more income. Further, assume you’d like to tap into your IRA before reaching age 59 ½ and not pay any tax penalties. The good news is that you can do this.

As you already know, if you withdraw money from your IRA prior to age 59 ½ the IRS normally slaps you with a 10% penalty on top of the income tax they levy. That’s where the 72t rule comes in.

What is the 72t exception?

It simply states that if you make a series of “substantially equal periodic withdrawals” from the IRA, you won’t be subject to the 10% penalty, even if you are under age 59 ½. So you can generate retirement income even though you aren’t 59 1/2!

The withdrawals must be made at least annually but can be taken more frequently (like monthly). They have to be made for your life expectancy or the joint life expectancy of you and your beneficiary.