Pension Buyout

Parent Cafe
47

When you are in tax free munis - they are federally tax free. And in some states, state tax free. Actually in all states, the bond of your state and the US territories are triple tax free. It’s why so many of the NYC wealthy traditionally invested in Puerto Rico….oops. Also Guam, USVI, etc.

That won’t change.

I’ll have dividend income and more that is taxable but primarily my income will be tax free and short of inflation that puts us in a depression, ample to the point that I’ll grow my income year over year by investing excess in more bonds or income generating, conservative products. .

The downside is - even with tax free income - if you earn too much it can impact Medicare premiums. I think over $103k.

So I’m not sure if there’s a way around that. But I have plenty of time to learn.

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49

Having known a few people that took hits with their pensions I would lean towards taking the payout. If the rates or terms they offered for beneficiaries or inflation were fantastic maybe stay.

TIAA has some interesting annuities or guaranteed payout options. Good luck.

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50

Thx

The good news is there’s money either way….right :slight_smile:

51

I don’t think so. The basic question of whether to take a lump sum vs an annuity was posed in the OP.

The other question is timing, and even that one is not obvious. Taking the payout now means taking the benefit calculated at the current discount rate, which has increased drastically the last few years (thus lowering the benefit).

If the Fed is going to cut, then the benefit discount rate will have to come down (by law in qualified plans) and the benefit will be larger.

Without knowing what if any premium they are offering to take it now, it’s really not safe to say “take it.” I’m betting that the discount rate is going to come down in the next few years.

There is too much to analyze here. Talk to someone who understands pension mechanics for a living. One thing is sure: you get one and only one shot at this. No do-overs in pension land.

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52

I think people are saying you can’t know what the tax rate will be. You’re talking about your future tax obligation.

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53

This is my situation.

Old employer. At 55 I could have started but didn’t and now they are asking if I want to be gone.

One day my current might ask the same with its defined benefit.

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Understood but people who build their portfolio primarily in munis - and I buy actual bonds, not funds so I don’t care about the day to day value as I’m getting par (100%) at maturity (due date) or par or above on a call ( they refi the bond) - but if you build your portfolio in munis (for arguments sake let’s say 100% munis), the tax rate isn’t relevant because you will have no federal taxable income unless you buy taxable munis ( not many but some do exist) or you buy munis subject to the Alternative Minimum Tax - typically airports - and you’d need a ton to hit the AMT - so highly unlikely.

But a person with a total muni portfolio - so lending to states, cities, colleges, airports, tollways, etc will not have taxable income.

So when I hear people say move to a Roth and take the hit now - that’s, IMHO, faulty advice. If I was making $40k, then sure but not if you’re in a higher bracket, especially when you believe it will be lower later.

Yes I will have taxable income from dividends and RMDs but presumably at a much lower taxable level than today because most of my income will not be subject to federal tax. People are right - I don’t know the brackets or rates in 20 years. But neither does a CFP.

I did go to one of those dinners - where they spoke of the back door roth - and it made no sense for me. I also met them 1:1 and I’m not paying for them to add risk when I don’t need it.

Btw state tax - that can be impacted by munis. When I lived in CA, if I owned a CA, Puerto Rico, USVI or Guam bond, it was free of state tax too. The territories are tax free in every state.

If I owned an Oregon or Nevada bond - for example the Las Vegas School District - then I paid CA state income tax on that bond. TN - had no income tax but when I first lived moved there they taxed unearned income so I had to stroke a check to the state each year on non TN and non territory bonds. It’s been eliminated so for some people, a 4% coupon which you buy at 94-96 today has a taxable equivalent of maybe 6% or more or so, depending on your bracket and state you live in.

But most importantly, you won’t be paying the feds. If you look at your 1040 line, line 2a, I believe - that’s where it goes. It’s offset to the left of the taxable column.

But I’m really just trying to see if I take the lump or not on this pension buyout offer. If I took it, I’d move to the IRA and buy taxable US Govt Securities as they pay a higher rate than tax frees, would be backed by the feds, and would be shielded from taxes in an IRA.

I’ve had a health issue which has made me wake up to - maybe I won’t be 90 - and my wife’s parents passed young. So it changes your perspective.

Maybe the bird in hand now is better? That’s what I’m angling to figure out.

But I’ve been privately sent a great video to watch and I’ll plan to engage a pension pro. And I plan to re read all your helpful messages.

Thanks all.

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55

If it is an old employer, who wants you off their books, they will most likely make you an offer with a deadline. It will not change over the next months or weeks because of rate changes.

This is what my husband received. First a letter saying are you interested in a buyout, followed by another letter with the calculated buyout amount - with a send us your decision by this date note. Honestly, we were floored by how large the buyout was compared to the value. As I said before, we jumped on it.

Not sure if we had said no, if they would have come back again to ask. Maybe in a few years when they once again went through their pension list and tried to get rid of some people. I believe the offer was triggered by my husband’s age. They sent the notice to all their pension owners over a certain age at that time. He had a few former co-workers, who got and took pension buyout offers at other times (people younger and older - got their notices when they reached a certain age also).

For years we did munis to avoid paying taxes. I agree, I don’t know why people here push Roth (comes up often on the retirement page). My munis were state and federal tax free (lived in NJ - high income tax state). Tax on that income was paid and we don’t have to worry about what our future tax rate will be, or how tax laws may change.

As mentioned, the biggest benefit is realized when you avoid state taxes as well. We moved to another state. Before we did, we cashed out the munis from our old state first. We didn’t go back into the muni market, a decision based upon our now being retired with no regular earned income (not yet taking SS).

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This exactly - the package came a week after the intro letter with a Nov 12th date. When I get home I’ll read again but I thought it said it could change based on markets. Maybe not. With rates falling, the faster I do the better.

I thought it’d be more but it’s a lot. If I look at how long I worked at the company, it’s basically another $15k a year. Oddly I’d feel like I no longer have a connection although I’m still in fantasy football with my former co workers.

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Okay, this is not correct … to clarify: if we didn’t have significant savings, we would have chosen the pension, not the lump sum. Thanks to a fellow CC’er who actually reads what I say for pointing that out!

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58

It seemed odd. So I’m like you after all!!

I’d hate to lose the money (if I died b4 getting much of the pension) and I would survive living long without the annuity. That said I would in essence annuitize the payment on my own as I’ve already done with much of my investment portfolio.

Also and I can’t say this will happen but if/when we move, we’d hope to buy smaller and cheaper, thus freeing up more funds to generate even more income.

I’ve long invested like an older person - conservatively and for income generation and for me, it’s worked. So even if my equities crash, I’m well positioned. For me, it’s less about a net worth # and more about having more income than it costs to live.

The more I think about this - since you cannot lump sum SS, maybe lump summing here makes sense - it’s like someone noted above - a hybrid - some lump sum (pension), some not (social).

I have a second pension at my current place but only four or five years of contribution so it’s likely not much.

Then they switched from defined benefit to defined contribution.

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59

I don’t want you to think I was advocating that. I was suggesting that it is a good time to consider the impact of doing that, which it sounds like you already had. :+1:

Remember, an annuity should not be thought of as an investment per se. It is an insurance against longevity. If you have enough and aren’t worried about outliving your money, there’s no reason to have any annuities.

There are many advantages tucked into the Roth rules, not the least of which is being able to stash more money via backdooring into an account that’ll never be taxed again, isn’t subject to RMDs and can be passed to heirs.

Certainly everyone needs to do the math and make sure their plan jives with their risk tolerance.

Munis have their place, but not without a cost. There’s no free lunches in investing. The safety and tax benefits of munis push their return down.

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Not you - all the people who offer a free steak dinner for pitching their services. Them!! That’s their pitch.

When I met 1:1 after (they push you to set up a no obligation meeting), they acknowledged my way works better given my portfolio.

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These free dinner retirement things are marketing plain and simple. The best way to find a good financial planner is word of mouth from folks who have had good success with someone or a group.

Otherwise, you really are going for the free food.

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The education.its good to see it. But of course they didn’t treat me to a prime steakhouse for fun.

This firm is well known and reputable. Wife was out of town. Needed something to do. Sat with a nice retiree. Was all good.

And had leftovers for lunch the next day !!!

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For the younger folks reading along, it’s helpful to have a good sense of your retirement priorities before encountering this kind of big decision… for pensions and/or when to draw SS.

I’m glad we did a few retirement planning classes in the decade prior to retirement. Each was two or three nights (about $60/coupe including materials, with a free private consultation with the instructor/advisor. In the end, we didn’t go with any of those advisors (but would have if we had found the right one… in the end went to a different advisor, fee only.). But it was really helpful to pull together and refine our paperwork, think about our future needs.

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I went to 2 of those dinners with a friend a while back b/c she wanted company. I did not schedule a follow up meeting with either. But both clearly bought the same monthly newsletter from some third party because I get the same newsletter from each of them.

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When my husband turned 65 we got a surprise letter from a company he had worked for decades earlier (for about 3 years). They informed him that he was eligible for a monthly pension or a lump sum. The monthly payment was going to be about $85 and because interest rates were quite low the lump sum was higher than it might be today. We took the lump sum because the bother of having another line in our tax return every year for such a small amount of income tipped the choice into a lump sum. He rolled it into his IRA.
Because I was listed as beneficiary, we had to find a notary to have me sign of on not getting my survivor benefit.

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74

Except your own plan would be to buy muni bonds, and you (or your estate) would get the principal repaid at maturity (or earlier call). If you buy an annuity, you’re just making a bet with math people about when you’ll die. But of course you pay a price for that in the form less monthly income.

In terms of analyzing the premium, that’s where I think you need to talk to someone. The reason the company is reaching out to you is more involved than “they just want you off their books.” When companies want that, they’ll do a “lift out” and transfer the pension obligation (and a bunch of pension assets) to the a third party who essentially just replaces your company as the servicer (and obligor) of the pension. Yes, they also offer incentives to limited pools of pensioners. Maybe that’s you. But more than just getting the pension liability off the balance sheet, they’re probably wanting to reduce the pension obligation before the discount rates have to be reset. I may be off base here, but I know that’s coming. That’s how the benefit calculation (and related accounting) fundamentally work. When that rate comes down, and it’s going to, the lump sum benefit grows. You have to consider that in terms of when you take it. It’s not going to adjust in 10 years. It’s going to adjust as soon as the Fed acts, which everyone expects will be soon.

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DH’s small pension from a previous employer will stop growing at the end of the year, so he will plan to start collecting then. He will probably retire from his current job sometime next year (so he claims) and I’ve been querying about cashflow, so he plans to set it up to pay monthly, with what I guess is the 50/50 option (I still get ?? 50%??) if he dies before me.

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