We've just been informed that we will have 1 month to decide what to do with my husband's former employer's pension plan. We can:1. Do nothing and take pension benefits when he turns 65 (he is 47 now).2. Begin taking a monthly annuity payment in a couple of months.3. Take a lump sum payout in a couple of months. (We could put this money into an IRA.)They haven't given us any particulars about the amount yet. I don't really like the idea of depending on a former employer to keep their promise on a pension benefit 20 years from now. It is a large company, but they may or may not even be in business then, who knows. Here are a few questions we have:a. Is there general wisdom about what choice would be best?b. Is a bird in the hand worth two in the bush?c. Are there some calculations we can do to figure out what option would be best?Sorry if these are stupid questions. Just feeling kinda panicky about having only a month to make a decision that involves our future and retirement. Thanks for any advice!
Okay, I found some info online. If he waits til age 65, the benefit would be about $600 a month. If he takes an annuity now, the monthly payment would be about $400 a month. I don't know what the lump sum payment would be. I guess they'll send a letter soon with that info.
If he waits til age 65, the benefit would be about $600 a month. If he takes an annuity now, the monthly payment would be about $400 a month. You also need to find out how long those payments will last. Are they for a certain number of years? For his lifetime? For the longer of his lifetime or yours? If it's for both of your lifetimes, is there a reduction in the monthly benefit if he dies first?--Peter
You have the most flexibility if you take a lump sum payment and roll it over to an IRA, providing you can do this tax free. If you take the monthly payments, they will probably be taxed.So the tax information is what you need.This is assuming that you have enough money to live on at this time, of course.
Peter, from what I can see so far, for the 65 or "now" monthly payment options, there are choices he has for how much he wants and how much I would get as a survivor. So he could get a higher amount and I would get 0, or he could get a lowest amount and I get equal...and a few choices in between those two extremes. I believe it is for life.
Okay, I found some info online. If he waits til age 65, the benefit would be about $600 a month. If he takes an annuity now, the monthly payment would be about $400 a month.The rollover amount is the missing part of this equation but a quick eyeballing of these amounts has me picking the $400 now (not accounting for any other variables) over the $600 later. You would have to live to over age 95 to offset the nearly 20 years of monthly payments before the $600 would make sense.Need more specifics (e.g. remove the "about's").
Thanks, no we don't need the money now. I see what you mean about the taxes. It doesn't really make sense for us to pay taxes on the money now...unless as part of us putting it aside for retirement we decide to roll it from an IRA to a Roth, over time, believing that taxes will be higher when we retire. I agree, there would be flexibility with taking the lump sum and putting it in an IRA and we can invest it how we want to.Oh, they said the lump sum payout would be actuarily equivalent to if he took the benefits at age 65. Sounds like a good deal to take that money now, and invest it, and let it grow over time so in the end he gets even more than he would have if he just took the benefits at 65.
Hawkwin, it looks like a difference of 40k between taking a monthly payment now or waiting til 65. I know, I want more specifics too! We'll find out this week by mail.
Oh, they said the lump sum payout would be actuarily equivalent to if he took the benefits at age 65. Don't take their word for it. Find out the amount and then do your own math. The amount they might give you in a rollover could be tiny compared to $4800 a month you could take now - and invest that money if you don't need it.I've run a number of these calcs over the years and one solution is not always the best. The most recent case I reviewed was a good example where the person was far better off leaving it in the pension and taking income from the state than rolling it to an IRA and taking income now or in the future. I simply could not beat what the state was going to pay the person guaranteed - so I advisded her to take the annuity from the state.
Thanks! Will do. I forgot to say in my above calculation, I was assuming 20 years of payments for age 65 and 38 years if we take payments now. I'm itching to know what the lump sum payout would be so I can start figurin'!
You might want to consider if there are any other aspects involved. Some plans allow you to participate in the company health insurance plan at group rates when you retire early. If that is an option, you may want to factor it into your thinking.Other things being equal, I would give careful consideration to lumpsum/IRA. That gives you control of the funds and lets you pick your own custodian and investments and distributions that fit your needs. This does depend on finding the right investment choices. But you know your level of expertise in that area. That too should be considered as you decide.
$4800 a month Gah! $4800 a year. That is what I get for typing with numb fingers.
Hawkwin: <<<Oh, they said the lump sum payout would be actuarily equivalent to if he took the benefits at age 65.>>> "Don't take their word for it. Find out the amount and then do your own math. The amount they might give you in a rollover could be tiny compared to $4800 a month you could take now - and invest that money if you don't need it."$4,800 a year (i.e. 400/month) now versus$7,2000 a year (i.e. 600 month) in the future at 65(?),not $4,800 a month.Otherwise, I agree with you about getting the number and doing the math.With interest rates so low right now, the lump payment might be reatlively high and rolled into the IRA could grow quite nicely.I do not know if state pensions qualify for PBGC coverage, but given financial problems in so many states, there is a credit risk associated with leaving the money for future pay-out.4,800 year * 18 years is $86,400 depending upon taxation of current benefits (ignoring TMV) it takes about 36 years for the $600/month to catch up to the early take amount (86,400/2,400), which would be age 101 (65 + 36). In addition, 400 month now versus 600 month in 18 years is a CAGR of about 2.4%, which is probably barely above inflation (if at all).Regards, JAFO
Hawkwin, it looks like a difference of 40k between taking a monthly payment now or waiting til 65. I know, I want more specifics too! We'll find out this week by mail. bankrate.com as well as a few other sites will let you do the math on taking $400 a month now vs $600 a month later.There are tons of variables like whether or not the amount will inflate or go up with COL but a basic calc should show that you won't breakeven on the $600 until well after age 95.
...If you take the monthly payments, they will probably be taxed...If you are not maxing out all your deductable retirment accounts(401k, IRA, etc)then you could do something like increase your 401k contributions by $400 a month and it woulk mostly offset the extra $400 pension income on your taxes. There could be some phase in or phase out income limits that might be involved so the offset might not be exact.
Here are some items #1 At age 47 a person has life expectancy of at least 35 years. Even if inflation averages only 2% (it has been just over 2.5% for few decades) the $400 per month figure will have purchasing power of a mere $200. Now the bad news -- life expectancy means half the people live longer.#2 Insurance companies are the folks that make up, sell and administer annuities - both the one you could get now and one you might get in the future. Those people are not doing this for free. #3 If you take $10,000 (not a prediction, just a figure I made up) and put it in an IRA and invest in a dull, boring index fund earning an average of 6.5% (well under average over last several decades) would grow to $35,235 in 20 years -- full retirement age for a person 37 currently is 67, but that is likely to be extend several months. Option #3 will not work if you lack the discipline and maturity to leave the money invested. You cannot take it out to buy a car, fix a roof, pay for a kid's college. The lack of discipline is the major reason annuities make sense for many people. The real issue you need to address is very simple. Do you have the maturity and guts to not spend money before you are 65? If you have doubts, take one annuity or the other and just expect to have very little income 30 or 40 years out because even moderate inflation will eat you alive. If you have the average of 3% for 35 years, that $400 will have purchasing power of $137.GordonAtlanta
I forgot to say in my above calculation, I was assuming 20 years of payments for age 65 and 38 years if we take payments now.For periods that are decades long, you can't just do the simple math of $-per-month * #-of-months. The compounding is the dominating factor, and that simple calculation completely ignores it.What you have to do is compute the NPV (net present value) of the different options and compare those.Almost certainly, the NPV's will be almost the same. The company's accountants and actuaries certainly know all about NPV, even though most employees don't. I'm itching to know what the lump sum payout would be so I can start figurin'! I predict you will be sorely disappointed. The discount due to compounding is much larger than most people think.IMHO, the most important factor is getting that money into your (his) name and away from the company. The company might well not still exist 20-30 years from now.
I just wanted to thank everyone for your feedback! I'll post again when I have more info sometime this week.The company did say that the value of each option (NVP?) is essentially the same.
Be sure to ask for the equation (or at least the inputs they are using), especially if you take the lump sum. My husband and I have each taken a lump sum pension distribution when leaving a job, and in both cases the companies had some data significantly wrong--like crediting my husband for 30 years' service instead of 15.Kathleen
Like present value, actuarial present value is calculated by discounting future payments back to the present. The difference is that the payment to be received in each of the future years is multiplied by the probability of the intended recipient being alive in that year. The probabilities come from a "mortality table." Employers use a single mortality table, i.e. one that does not account for gender differences and other factors. Options like continuing payments to a surviving spouse use different payments and different expressions for probability in future years.Ratio ~(I'm not an actuary, but I happen to know a little about what actuaries do.)
I personally vote for lump sum payments. Bird in the hand (your lump sum payment) is worth two in the bush (some one promising to pay you in the future). JLC
From your description, this sounds like a private employer (not government) with greater than 20 employees. Assuming this is not a family owned or church-based business, the pension plan is likely covered by ERISA and the accrued benefits are insured by the PBGC. If so, you need not worry that the employer will not be in business in the future. And the benefit amounts you are speaking of are well within the insured maximums.The plan is right in saying all benefit options are actuarially equivalent....they are required to be by law. The only reason to begin benefits now is if you require the income. If you do not, I would not consider this option, as the benefit paid will be taxable to you as ordinary income while you are still working and likely would be taxed at a higher marginal tax rate than it will be if you withdraw it during retirement when, presumably, your marginal tax rate will be lower.Taking the lump sum now is a good option ONLY if you have a disciplined investment approach, as another poster noted above. This is critical. For example, if we go through another 2008/2009 stock market, would you have the will to leave your investments alone? Or equally important, if the market 'takes off' and the S&P 500 index grows by 30%, will you leave your bond allocation alone and stay the course? This is easy to say, but due to human nature, very hard to do in practice.Leaving the $$ in the pension plan will provide an automatice annual return equal to the 'discount rate' the plan uses in computing the present value of the accrued benefit payable at the plan's full retirement age (usually 65).A word on the effects of inflation. This is not a factor here, as it will effect all 3 options equally...unless you were to take more investment risk with the lump sum option.And assuming this is an ERISA plan, a qualified joint survivorship annuity must be offered to you, the spouse. The defult is 50%, although most plans now also will offer a 75% and 100% option. These options will actuarily decrease the retirement benefit. The election not to take the survivorship option can only be done by you, in writing.One final point. The 'insurance' part of a life annuity from the plan is that the the former employee can never outlive the benefit. Like an insurance company sold life annuity, it must payout its benefit as long as the person lives. Counterbalancing this is the risk that any 'unused' benefit will be lost if the former employee dies early, assuming there is not a survivorship annuity option taken. So if he takes the benefit next month or waits until age 65....if after beginning the beneift he unexpectedly dies the next month, all remaining benefits will be lost. Of course, this benefit/risk is avoided by taking the lump sum.BruceM
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