Has anyone had the fortunate circumstance of working for a company that offered a pension?
My prior company had one - and went from defined benefit to defined contribution years ago.
This week, I was informed they now want to buy out that pension - in lump sum.
I know this is better for the company than me (most likely) but given they send you #s - take x $ now vs. Y $ a month for you or Z $ a month for you and then more for your wife should you pass first.
Recently, some health issues have also entered life which makes you wonder - like the social security argument, is it wise to take at 62 or wait til 66 or 70 - but if you don’t live as long, then earlier is better - but one doesn’t know. I’m not saying life won’t be as long - but issues have arisen that makes one wonder if taking the buyout would be smarter.
Anyway, if you’ve been offered a pension buyout, what have you done to understand the differences or risks/rewards?
One thing I looked at was the amount that I’d get and say I invested in a muni bond at 4% a year. It’d be less than I’d get later but I’d also have it starting now vs. later. I’d have to roll it into an IRA.
I know - talk to a financial advisor.
I don’t have one - and paying someone then takes away from what I earn.
I also have to review - they gave me an amount for today - but I know it can fluctuate with rates - going higher or lower. I assume if rates go lower, the $ offered will go higher - because their returns will shrink and they’ll need more $$ to fund it. But that premise may be opposite - not sure.
I have til November 12 - just got the offer in the mail yesterday and headed to drop my daughter off at school today.
Just wondering how others have handled - if you’ve been in this situation.
You should look at annuity rates instead, which is the appropriate comparison, since those include a return of capital element. Given you have a bit of time, you might even go so far as to get some quotes based on the amount of money you are being offered that attempt to match the specific terms of the pension (how many years from now does it start, what if any annual increase is included, what spousal benefits, etc). That will help you see how good the offer is.
H was in that position. His pension was frozen and eventually he was offered the option of monthly payments or lump sum when he retired. We know people who took the pension & people who took the lump sum. We chose lump sum.
The conventional wisdom seems to be that you can go to an annuity calculator to determine if the lump sum amount you are being offered is competitive with annuities available in the market. If it is, it may be a good option for you. The Bogleheads forums discuss this, if you want to search. This article is pretty good: Your Pension - Take a Lump Sum or the Annuity? - Sensible Money
We looked at it from a different perspective, though. If H were to pass away first, the amount I would receive as a survivor benefit was quite low. It really skewed the picture, as did the fact that it was not inflation adjusted.
In the end, we chose lump sum. If we did not have significant savings, we may well have chosen the lump sum so that we would have a guaranteed amount for the rest of our lives. But we felt confident that we were at least as well off with the lump sum as we would be with the guaranteed amount, as long as we were disciplined in terms of our investments. We have been drawing down for 4 years & we’re still feeling comfortable about our decision.
We do have a financial planner, and for us, he is worth the money. If you are good with investing, you can do it yourself, of course. You can always pay a fee for service advisor to go over your situation with you, though. Good luck!
An annuity is the best analog. You’d essentially be buying your pension back. That said, it may not be what you want. It depends on your goals. The purpose of an annuity is predictably, to eliminate most of the risk (there’s still some risk because the company holding it can go out of business). If you aren’t risk adverse, moving the lump sum into a 60/40 balanced fund would be the approach I’d take.
You’re thinking about it backwards. People worry about losing their money in a pension if they die early, but that isn’t the purpose of a pension. A pension, like an annuity, is insurance against the opposite…longevity. If you don’t foresee running out of money, take the lump sum and invest it.
I was offered a buyout several years ago. My neighbor’s dh had been offered one a couple of months earlier, and she ran the math and said for him it was a no-brainer. So I ran the math, and it didn’t seem nearly as clear-cut for me so I asked her (she’s a CPA) to help me. She agreed that my situation wasn’t nearly as clear-cut. Huh.
I ended up turning it down. In retrospect, I’m glad that I did. In the years since, I learned a lot more about how my particular pension works. I now know that I don’t have to take it at 65, which I had assumed. I can let it sit there until 72 and let it grow 8% a year. That’s my current plan. Another thing I learned: If I don’t take it and get hit by a bus, my former company will assume that I would have picked an option that leaves some to dh (I wouldn’t have) and will automatically give dh 50% of what my monthly amount would’ve been at the time of my death. I liked knowing that all the money wouldn’t have been lost.
Agree that you should hire a CFP. Don’t be penny wise and pound foolish. Ask them to run the numbers and maybe also to do some larger planning for you. I am as cheap as they come, but the peace of mind of having a good, well-vetted plan is priceless.
My husband got offered one and jumped on it. We didn’t do any fancy calculations to figure it out. His pension was sitting there not increasing, as they had stopped contributions years ago (and stopped offering pensions to new employees). He had been let go and no longer worked at the company.
So we looked at the current lump sum value and the value they were offering to buy him out at. The buyout was significantly larger (making up numbers here but something like the cash value of the pension at that time was $750K and they were offering to buy him out at $1 mill).
We thought better in our control instead of theirs, no risk of it disappearing if we have it in our pocket (think of those poor folks who lost their pension during the 2008 crash when companies went under), and the increased amount seemed like a good deal.
Generally pension buyout deals are good. The company usually wants out of the pension business and wants to wipe out that debt/responsibility from their books.
No regrets at this time. We took that money and the 401K account they were managing for him and started our own 401K account that we now control. BTW - no tax implications as long as you put it in a retirement account.
This is a basic explanation of 4 types of annuities:
One can develop different investment strategies based off of annuities if one is over age 59.5 years. A simple one is to place a lump sum into a fixed annuity and use the annual 10% penalty free (early withdrawal penalty detailed in the insurance annuity contract) withdrawal feature to move those funds into a mutual fund. Particulars vary, but the concept is simple.
The strategies are similar to those used in the past by post tax dollars being invested into a single premium whole life insurance contract although the accounting will not necessarily be on a FIFO basis for use of an annuity receiving qualified funds. If I recall correctly, Fidelity Investments offers free advising on use of annuity contracts.
Typically, the use of variable annuities is disfavored due to the high management fees involved, but that can vary by company.
Also check out the guaranteed minimum interest rate on any single premium (lump sum) deferred annuity contract as well as the financial grade of the issuing insurance company.
I had to make this decision when I turned 65, 10 years ago. I anticipate living a very long time – till mid-90s, probably. So taking the annuity was the better deal for me. It’s by no means a huge amount, but getting that direct deposit every single month without fail is wonderful.
The likelihood of the company going out of business is virtually nil. (It’s from JPMorgan Chase.)
PS - my amount is significantly lower than the person above stated they had (that’s was my dream when I opened the envelope - alas it wasn’t close to $750K) - a bit less than $250K - but still worth doing it right.
There is a significant risk of “reckless conservativism” in retirement planning- i.e. the fear of loss overwhelming any rational decision making re: upside and payout. If your spouse is better at the rational stuff- that’s an easy solution. And if not, paying for a few hours of a professional’s time to create the comparative models for you is well worth it. You are pretty good with detail- so minimizing the costs of a professional will be easy for you with some detailed prep ahead of time.
I think so - and it’s interesting, my current employer also had a defined benefit til a few years ago - now defined contribution. So that happened twice in my career.
And honestly, I’m set in retirement even without the pensions - they’re icing on the cake. I’ve created my own with muni bonds.
So that, without analysis, leads me to what @eyemgh stated - because I can invest now - maybe even a taxable bond at 5% in an IRA - generate that money without gain and pull off another $12K a year - years b4 I would have taken it to begin with.
Or put in high dividend stocks like Verizon and oil pipelines but I’ve done that b4 - and while I get great income, the principal has suffered.
But will look into getting a referral for a local pro.
Again, it depends on how you view the world and what your objectives are. A pension/annuity will very likely underperform a balanced portfolio over the long haul, but it eliminates the risk of running out of money. Rational people could easily defend either position.
I would echo what @blossom said though and caution against being too conservative, unless you are certain that you have enough money to last your lifetime after inflation. In that rare case, you can simply eliminate all risk if you have “enough.” Otherwise, inflation, even when it’s at the target range of the Fed, is always eating away at spending power.
One thing I need to research because the $$ offered are as of today - but I have til Nov 12th and will fluctuate. I assume as interest rates fall the value goes up because they’d have to spend more to create the annuity.
But I could be wrong.
We know rates are going down - so it may be smart to wait if I do the lump sum - or it may be smart to bail like today if the value offered will go down.
Of course I’m on the way to drop my daughter off for her senior year as I write.