pension: lump sum or payments

[LazyBoy]

When I was younger, I thought I was mature because my lottery fantasies involved monthly payments. I wasn't going to be the guy that blew the jackpot in short order and was poor again. Now, I'm more aware of inflation and counterparty risk.

Anyway, soon I'm eligible for an early retirement package. Ignoring the question of whether or not it's a good idea to retire, I'm looking for validation on the lump sum vs payments question.

• I can take a monthly payment Y, or a lump X = Y * 217.7295.
• The reduction in Y for a "Joint & 100% Survivor Annuity" is minimal.
• I'm no longer accruing. So if I delay, Y stays the same and X gets smaller. There's no COLA or inflation adjustment.
• The company is proud of not paying into the pension fund for the last several years.
  • They changed the pension a few years ago so that nobody's accruing. That's how it has stayed funded despite the company not paying in.
  
  
• The company is seriously struggling.
  • If the pension fund became underfunded, I'm quite sure they'd avoid paying in, if legally possible.
  
  
• There's a not-insignificant chance I get laid off this year.
• There are a lot of older, pension eligible employees still in the company who could also be laid off this year.
• They say the pension is well funded, by whatever requirements. But how to judge it's ability to survive going forward?
• I'm 50 and have a 5 year old daughter. I'd be working somewhere else.
• We have enough cash and income to roll a lump into a tax-advantaged account.
  
• It's a large, public, international company.

Anyway, I'm thinking I'd take the lump and risk losing it myself vs. the risks of inflation eating the monthly payments and the pension fund failing. Thoughts?

Thanks.

[Milton Kuo]

Re: pension: lump sum or payments

When I was younger, I thought I was mature because my lottery fantasies involved monthly payments. I wasn't going to be the guy that blew the jackpot in short order and was poor again. Now, I'm more aware of inflation and counterparty risk.

Anyway, soon I'm eligible for an early retirement package. Ignoring the question of whether or not it's a good idea to retire, I'm looking for validation on the lump sum vs payments question.

• I can take a monthly payment Y, or a lump X = Y * 217.7295.
• The reduction in Y for a "Joint & 100% Survivor Annuity" is minimal.
• I'm no longer accruing. So if I delay, Y stays the same and X gets smaller. There's no COLA or inflation adjustment.
• The company is proud of not paying into the pension fund for the last several years.
• The company is struggling.
• There's a not-insignificant chance I get laid off this year.
• There are a lot of older, pension eligible employees still in the company who could also be laid off this year.
• They say the pension is well funded, by whatever requirements. But how to judge it's ability to survive going forward?
• I'm 50 and have a 5 year old daughter. I'd be working somewhere else.

Anyway, I'm thinking I'd take the lump and risk losing it myself vs. the risks of inflation eating the monthly payments and the pension fund failing. Thoughts?

Thanks.

Note: I'm not certified to give financial advice. This is just my opinion of what I would do if I were in your shoes.

Based on your statements that the company has not paid into the fund for the last several years, I can't imagine it being in very good shape since I seriously doubt it avoided losses in the 2008 crash. I also seriously doubt the pension was "overfunded" prior to 2008.

If I were you, I'd take the lump sum payment. (I'm assuming you'll put the proceeds into a tax-advantaged account to invest until you're truly ready to call it quits.) The fact that you feel that other employees with pensions could be laid off this year means that there could be a considerable number of people taking lump sum payments from the pension fund. You should act before they do to ensure you are paid 100% of what is being offered. I would not be surprised if later withdrawals do not get terms as favorable as yours.

Note that I am offering my opinion under the favorable assumption that you can start drawing the pension immediately. If you have to wait until you're 65 or so before you can start drawing the monthly payments, then it's an even bigger no-brainer to take the money now.

[jiimbergin]

Re: pension: lump sum or payments

Note: I'm not certified to give financial advice. This is just my opinion of what I would do if I were in your shoes.

Based on your statements that the company has not paid into the fund for the last several years, I can't imagine it being in very good shape since I seriously doubt it avoided losses in the 2008 crash. I also seriously doubt the pension was "overfunded" prior to 2008.

If I were you, I'd take the lump sum payment. (I'm assuming you'll put the proceeds into a tax-advantaged account to invest until you're truly ready to call it quits.) The fact that you feel that other employees with pensions could be laid off this year means that there could be a considerable number of people taking lump sum payments from the pension fund. You should act before they do to ensure you are paid 100% of what is being offered. I would not be surprised if later withdrawals do not get terms as favorable as yours.

Note that I am offering my opinion under the favorable assumption that you can start drawing the pension immediately. If you have to wait until you're 65 or so before you can start drawing the monthly payments, then it's an even bigger no-brainer to take the money now.

+1

[LazyBoy]

Re: pension: lump sum or payments

Thank you, Milton. I'm definitely thinking "get mine before something goes wrong", too. I'm just making sure I'm not too close and being too negative, which I tend to be about this company.

A couple of clarifications I'll add into the original post:

• They changed the pension a few years ago so that nobody's accruing. That's how it's stayed funded despite the company not paying in.
  • That said, if the pension fund became underfunded, I'm quite sure they'd avoid paying in, if legally possible.
  
  
• We have enough cash and income to roll a lump into a tax-advantaged account.
• It's a large, public, international company.

[Raz]

Re: pension: lump sum or payments

Thank you, Milton. I'm definitely thinking "get mine before something goes wrong", too. I'm just making sure I'm not too close and being too negative, which I tend to be about this company.

A couple of clarifications I'll add into the original post:

• They changed the pension a few years ago so that nobody's accruing. That's how it's stayed funded despite the company not paying in.
  • That said, if the pension fund became underfunded, I'm quite sure they'd avoid paying in, if legally possible.
• We have enough cash and income to roll a lump into a tax-advantaged account.
• It's a large, public, international company.

In equity investing there are two clear risks: (1) market risk, and (2) company risk. Market risk can only be mitigated by asset allocation (raise cash, buy gold instead of stocks, bonds, currencies, etc.). Diversification (owning ten or twelve stocks in an investment portfolio) will greatly reduce company specific risk - you won't be wiped out if your investment turns out to be Worldcon or Enron.

Right now you are subject to enormous company risk.

[don]

Re: pension: lump sum or payments

There is a psychological aspect to this decision as well. Taking a retirement, regardless of how short-lived, on a fixed monthly pension is an easy, expected transition. Taking a lump sum payout and drawing it down monthly isn't so easy on the old coconut. Don't ambush yourself. Keep a clear head. We're in an era of widespread corruption, especially aimed at the lifetime savers/pensioners. Mapping out a personal strategy that includes a limited but expected capital draw down may help to short-circuit this predicament.

[charliebrown]

Re: pension: lump sum or payments

not to be morbid, by my dad retired at 60 with a similar deal. he took the guaranteed monthly payment option. He passed at 62. So the estate lost a lot of money.
The company he worked for went BK 10 years later. I'm not sure what happened to the pension fund after that as it did not matter to me. A lot of those guaranteed payout funds can be mimiced with zero-coupon bonds and options. Sometimes they buy a 5 year zero coupon at a discount to face value, and invest the rest in a leap call option. You could do the same alchemy in a retirement account. Being in your shoes I would take the lump. Then it is under your control.

[thriftyandboringinohio]

Re: pension: lump sum or payments

You can add me to those above who think one bird in the hand now is worth two in the bush, maybe, someday.

Raz makes the good point that taking a future monthly payout is a kind of investment in your employer. You are essentially reinvesting the lump sum payout back into the company for future returns.

[jk]

Re: pension: lump sum or payments

take the money and run.

[doom&gloom]

Re: pension: lump sum or payments

take the money and run.

Dittos...

[ddn3f]

Re: pension: lump sum or payments

Dittos...

+1

[wayiwalk]

Re: pension: lump sum or payments

What a world of crazy life decisions we've entered.

I'd take the lump. Seems like the company is in a tough situation and that even if it survives, I'd guess their approach towards pension obligations would be to do what is legally required at best. I have a pension from a former employer, and my expectations are that by the time I reach retirement age, at most it will cover me for lunch money a few days a week.

Question - do lump distributions get taxed as income in the given year? I can only guess what your monthly pension is to be, but if yes that lump sum payout will definitely have a sizable tax bite taken out of it.

[jiimbergin]

Re: pension: lump sum or payments

What a world of crazy life decisions we've entered.

I'd take the lump. Seems like the company is in a tough situation and that even if it survives, I'd guess their approach towards pension obligations would be to do what is legally required at best. I have a pension from a former employer, and my expectations are that by the time I reach retirement age, at most it will cover me for lunch money a few days a week.

Question - do lump distributions get taxed as income in the given year? I can only guess what your monthly pension is to be, but if yes that lump sum payout will definitely have a sizable tax bite taken out of it.

you normally could roll over the lump sum within 60 days to an IRA

[doom&gloom]

Re: pension: lump sum or payments

you normally could roll over the lump sum within 60 days to an IRA

Yup, and best to set up one before the distribution so it never touches your hands but just moves company to company.

[jiimbergin]

Re: pension: lump sum or payments

Yup, and best to set up one before the distribution so it never touches your hands but just moves company to company.

yes, best to set it up beforehand, but nice to know it can be done other ways also.