Pension buyout WWYD?

[The Captain]

A previous employer is offering a pension buyout. Right now I am eligible for $300 per month for life starting at age 65.

The buyout offer is for $17.5K to be paid into an rollover IRA.
That equates to about 5 years worth of payments.

The big unknown is, of course, how long do I expect to live. Usually the women in my family are very long lived (85-92) but my mom died at age 64 from essentially the same medical condition I have. I'm as pro-active as possible in managing my health, but you never know...

So, would you take the buyout or count on living to age 71?

[Deleted]

how old are you?

[The Captain]

44

[hoops902]

Aug 6, 2012 10:31:57 GMT -5 The Captain said:

44

So then you also need to factor in that your payout will go well beyond 71 as you have 21 more years to grow that money.

[justme]

Do you know why they are offering the payout now? I.e. is it a solvency issue that not taking the buyout might risk the pension still being there in 20 years?

[Deleted]

I would take the buy out. In 21 years that $300 a month is going to be worth about half of what it is worth today. In 21 years $17.5k would be worth $48k by earning 5%/year, or $110k at 9%/year.

[hoops902]

A quick, rough estimate says that the $17,500 offer has a discounted rate of return of approximately 5% (I assumed you'd live to around 90). If you think you can do better than 5% on your own, you should take the cashout and do just that. If you think you cannot, you should leave the pension alone and take the $300/month later. This is strictly from a #'s perspective, other things could affect your decision obviously.

[The Captain]

Solvency is not an issue. My understanding is that they are trying to limit plan administrative costs.

As far as doing better that 5%, that's what my life-to-date portfolio is averaging. I'm still trying to chase Phil's elusive 12% average

[phil5185]

I would definitely take the Rollover IRA, invest it in equities with a goal of about $150,000 in 21 years (historical average). You can let it grow until age 70 1/2, then you will be required to start cashing it out (RMD), you'll have to sell about 4%/ year.

Importantly, you will have the money under your control - who knows where that pension holder will be in 21 years - how many times they will be bought out/merged/name changed.?

The $300/m pension, 21 years from now, will be worth about $160/m (at 3%/yr inflation).

[hoops902]

Aug 6, 2012 10:46:14 GMT -5 The Captain said:

Solvency is not an issue. My understanding is that they are trying to limit plan administrative costs.

As far as doing better that 5%, that's what my life-to-date portfolio is averaging. I'm still trying to chase Phil's elusive 12% average

So if you think the way you invest the funds will return the same as the discount rate, I'd take the buyout. All else equal I'd want the funds under my control.

[Deleted]

If I were in your shoes, I would take the buyout.

[bean29]

Captain,

Take the buyout. At least begin investigating where to put it.

I have received this offer twice now. The second time I got the offer I began investigating what to do with the $$. One very good option is to add it to my current employer's 401K.

I wanted to put it in index funds...the investment adviser I talked to wanted to put it some high grade annuity.

Anyways I missed the documentation date to withdraw my $$ but I expect to receive the offer again (seems to come around every 6 months to a year), next time I will move the $$.

The concern with your $$ is my understanding is they only make the offer to people with smaller amounts in the fund. Since yours is close to $20,000 I would be afraid that you would be above the cut off next time.

[Rocky Mtn Saver]

Aug 6, 2012 11:29:02 GMT -5 bean29 said:

Captain,

Take the buyout. At least begin investigating where to put it.

I have received this offer twice now. The second time I got the offer I began investigating what to do with the $$. One very good option is to add it to my current employer's 401K.

I wanted to put it in index funds...the investment adviser I talked to wanted to put it some high grade annuity.

Just out of curiosity, are you considering the annuity? I thought those things weren't usually recommended outside of the salesperson who will receive a commission for it. If so, what are the upsides to doing so?

[Bluerobin]

Captain, I had the same choice a few years ago. I opted for the monthly payments, but chose the option to pay either myself or my wife for life. The pittance they offered for a lump sum, was surpassed about 2 years ago. I have already collected that amount and about 30% more. See if the lump amount is negotiable - it will be if they really want you to take it.

[The Walk of the Penguin Mich]

I actually did take this option when I was 40. I had the choice of a small pension when I was 65, or taking my money and rolling it over into an IRA.

After 12 years, the money's doubled, and am hoping it doubles again over the next 12 years.....when I'll be looking at retirement.

[The Captain]

I appreciate the comments and feedback - almost universally consistent with what I was thinking. It is nice to know I haven't missed anything obvious... ;D

[bean29]

Yes, but only becasue my DH can sell me one.

If I buy one, he will make the commission and probably qualify for a secondary bonus greater than the amount I would even be investing. Not sure what I will do b/c my DH seems to threaten to divorce me every other day now. Last weekend it was b/c I did not have my cell phone in the basement with me and he could not reach me for an hour or so (If I had taken it down in the basement, I probably would not have gotten the call anyways b/c we don't have very good reception in the basement)

[tskeeter]

Just out of curiosity, are you considering the annuity? I thought those things weren't usually recommended outside of the salesperson who will receive a commission for it. If so, what are the upsides to doing so?

The conventional wisdom that an annuity is only good for the annuity salesman isn't necessarily true. There are times and situations where an annuity is appropriate.

Annuities with good, stable insurance companies can provide you protection against large fluctuations in the financial markets. If you were getting annuity payments when the market tanked in 2008, your annuity payments would have continued on. If you were drawing from an investment account to pay your living expenses, you would have drawn down the investment account quite a bit while the market was down or you would have had to reduce your withdrawal rate to keep from depleting your funds.

Annuities can be good if you have a longer than average life expectancy. DW's grandmother lived to nearly 103. DW's 84 year old Aunt walked all over Paris with us for a week and seems to have genes that make it possible she will outlive her mother. If DW got some of those genes, she would be a good candidate for an annuity. An annuity shifts the risk of living nearly forever from the investor to the insurance company.

Some annuities are designed to provide some protection against inflation. This shifts the risk of significant inflation increasing the cost of the goods and services you consume from the investor to the insurance company.

Basically, an annuity can allow you to insure against the risk of financial market fluctuations, inflation, or longevity. If you have no money, a very large pot of money, or a very good defined benefit pension, annuities may not be for you. If you've got no money, SS and medicaid are your safety nets. If you've got lots of money, you have adequate resources to ride out bad financial markets, a period of inflation, or living longer than most people. And if you've got a defined benefit pension, you've already got an annuity.

[Rocky Mtn Saver]

Thanks, tskeeter, for the analysis!

[Clever Username]

Without getting into question if an annuity is the correct investment choice or not, for this example, it does allow you to make a good apples to apples comparison.

[gs11rmb]

Aug 6, 2012 12:22:35 GMT -5 bean29 said:

Yes, but only becasue my DH can sell me one.

If I buy one, he will make the commission and probably qualify for a secondary bonus greater than the amount I would even be investing. Not sure what I will do b/c my DH seems to threaten to divorce me every other day now. Last weekend it was b/c I did not have my cell phone in the basement with me and he could not reach me for an hour or so (If I had taken it down in the basement, I probably would not have gotten the call anyways b/c we don't have very good reception in the basement)

If you are joking, my sense of humor detector is clearly not working today. If you are not joking, I would save the money and prepare for divorce - why would you want to stay married to this man?

[Wisconsin Beth]

Aug 6, 2012 12:46:49 GMT -5 Rocky Mtn Saver said:

Thanks, tskeeter, for the analysis!

Yes, that was helpful and interesting. Thanks!