Offered a pension buyout: Would you take it? What would you do with the $?

[SilverStone05]

Wow.... lot of thoughts! I really appreciate the input....

I have no plans to retire immediately... I could start the pension now, but at a reduced amount.

The pension (with a 65% spouse option) pays about $3400/mo if I start in 2022, or $2700 if i start in 2019... or $400k today.

Annuities were suggested because of "the guarantee" it would provide.... although, especially as I learn more about variable annuities, there is risk involved. I would hate to take this lump, put it into a 401k, and invest it in a stock portfolio... and the market take a big drop! Seems like that at this point, safety is imprtant for this investment.

Ford is motivated to get pension obligations off their books.... it's a liability that they feel is holding back their stock growth from a balance sheet perspective. They claim that the buyout is a "10% premium" but well, as previously said, they're not doing this for me.

Given your figures- I'd take the lump sum and throw it into an IRA.

Within the IRA i'd purchase some solid dividend paying companies and some highly rated laddered bond funds. A portfolio with a 4% yield will net you 16,000 in your first year alone whether or not the market goes up or down. Given the power of compounding and the tax advantages of the IRA, you will most likely have about $1MM in the account by 2022.

**edit** Again - Vanguard and Fidelity are excellent choices to examine for low cost accounts, low cost mutual funds and advice. I would start there first.

 

[nsxtasy]

Within the IRA i'd purchase some solid dividend paying companies and some highly rated laddered bond funds. A portfolio with a 4% yield will net you 16,000 in your first year alone whether or not the market goes up or down. Given the power of compounding and the tax advantages of the IRA, you will most likely have about $1MM in the account by 2022.

I have no problem with the advice, which is for the conservative investments that you may prefer. But if the market value of your $400K portfolio in 2013 increases by 4 percent per year and you don't withdraw anything from it, it will be worth $569,324 in 2022.

 

[dablackgoku1234]

I have no problem with the advice, which is for the conservative investments that you may prefer. But if the market value of your $400K portfolio in 2013 increases by 4 percent per year and you don't withdraw anything from it, it will be worth $569,324 in 2022.

And assuming you spend $40.8k a year from 2022 onwards, you'll spend all your "pension" money by 2043.

 

[nsxtasy]

And assuming you spend $40.8k a year from 2022 onwards, you'll spend all your "pension" money by 2043.

That's why you need to decide what percentage of earnings to assume, and what life expectancy to use, when calculating your annual withdrawals. If you expect to be 80 years old in 2043, that might make sense. But it does raise the possibility of exhausting that fund if you outlive your life expectancy. OTOH it means there will be something left (for someone to inherit) if you don't.

 

[cmthomson]

This is why annuities exist: to remove the risk of outliving your funds. The tradeoff is, of course, that they pay less than more hands-on assets. Most folks prefer annuities more as they get older and less capable or willing to manage their assets.

It's just that right now, and probably for several more years, an annuity is likely to have much lower total return than a stock fund, because of near term interest and inflation trends.

BTW, don't confuse a bond ladder with a bond fund. In a ladder you own the actual bonds and hold them to maturity so there is very low risk of principal reduction. Bond funds mark to market, so as yields rise along with interest rates, the principal decreases. In today's very low yield environment, that principal decrease will greatly exceed the yield increase.

 

[CL65 Captain]

At least you have a choice. Ask an airline pilot what happened to their pensions during bankruptcy?

A bird in the hand.....

 

[SilverStone05]

I have no problem with the advice, which is for the conservative investments that you may prefer. But if the market value of your $400K portfolio in 2013 increases by 4 percent per year and you don't withdraw anything from it, it will be worth $569,324 in 2022.

570k is better than 250k.

What alternative would you suggest?

And assuming you spend $40.8k a year from 2022 onwards, you'll spend all your "pension" money by 2043.

3,100/m for 21 years as a WORST case scenario? Sounds good to me. :biggrin:

Again - what would you suggest?

 

[nsxtasy]

570k is better than 250k.

What alternative would you suggest?

As I noted above, I have no quibbles with the advice you posted, only with the claim that it would be worth $1 million in 9 years, based on the 4 percent assumption.

 

[SilverStone05]

As I noted above, I have no quibbles with the advice you posted, only with the claim that it would be worth $1 million in 9 years, based on the 4 percent assumption.

Understood.

The 1MM figure was arrived at by including underlying stock appreciation in addition to the reinvested dividend yield of 4%. While past performance does not indicate future results, it has been historically accurate that- with dividends, a well diversified portfolio can be expected to double roughly every 8 years with just a 2.5% yield.

Sorry for the confusion.

 

[dablackgoku1234]

I don't think any of us are in any position to firmly give OP advice. There are other factors that come into play. Let's make a few assumptions here:

1) I own a house, paid off. No mortgage
2) I have no other big assets, other than a few cars
3) I have no debt or other liabilities
4) I am healthy and don't require meds daily
5) Kids no longer a dependent
6) Some other form of savings

If those hold true, I'd take the cash. Depending on how much other savings OP might have, he might have close to $1M by retirement. And my calculation of withdrawal was solely based on that fact that the pension payout is $3400 monthly. It's hard to gauge how much you will be spending 10/20 years from now, but if you are happy with the way you are living today, that can be a rough estimate of how much you will spend.

 

[Vega$ NSX]

You really can make an argument both ways but just some food for thought:

1) Ford is pretty solvent. They've been around, and I'm pretty sure they are going to be around for quite a while. The fact that they didn't take any government bailout money helped reaffirm that. It would be a pretty safe bet to assume that the company will be around and be able to pay out its pension in full. That pretty important in that the long term solvency should be a very large factor in which decision you decide.
2) People are living longer and longer these days. The average US life expectancy is roughly 78 years, but it continues to rise steadily. People in their 50's now should realistically live past their 100's. That could mean retirements potentially lasting 40+years. That will have a big impact on the cost-benefit analysis.

 

[nsxtasy]

2) People are living longer and longer these days. The average US life expectancy is roughly 78 years, but it continues to rise steadily. People in their 50's now should realistically live past their 100's.

Although life expectancy is indeed increasing steadily and the number of centenarians is increasing, living to 100 is still not all that common (approximately 50,000 in our country of 300,000,000 ref) and is not going to be all that common for those in their 50's now. Life expectancy is currently 78.7 years for those born now, and is another 19.1 years for those already 65 years old (ref). Those in their 50's now should realistically live into their 80's, but reaching 100 is extremely unlikely for anyone not already in their mid to late 90's.

 

[Vega$ NSX]

Although life expectancy is indeed increasing steadily and the number of centenarians is increasing, living to 100 is still not all that common (approximately 50,000 in our country of 300,000,000 ref) and is not going to be all that common for those in their 50's now. Life expectancy is currently 78.7 years for those born now, and is another 19.1 years for those already 65 years old (ref). Those in their 50's now should realistically live into their 80's, but reaching 100 is extremely unlikely for anyone not already in their mid to late 90's.

The problem is life expectancy has grown exponentially since around the 1850's in developed countries. As to be expected, as advancements in technology, medicine, information has grown equally exponentially as well. The main cause of death for those over 60 are heart disease and cancer. At the rate advancements in medicine are developing, I wouldn't be surprised if they find a very viable remedy for these diseases. If you haven't been keeping up, they are on the cusp of curing cancer. People are going to live longer than they expect, and those who don't take into account that rapid advancements in science will keep people alive much longer than they historically anticipate will be in financial trouble when that time comes. Also keep in mind, life expectancy factors in lower income deaths into the average. It has been very clearly shown that higher income individuals far exceed the "average" life expectancy by orders of magnitudes. Since the OP is clearly in a very financial advantageous position I would tend to assume he will be on the high side of the life expectancy estimation.

Also remember two very important things:

1) Life expectancy includes all deaths, including infant mortality rates. That skews the number downward so someone who is already in their 50s should realistically expect to live longer as they have already statistically cleared the probabilities of an earlier death.
2) And most importantly it's not likely that you will spend exactly your last dollar on the day you die. In this case you have to use the worst possible case scenario because the alternative is you will run out of money. Then what? It's not like you will have a means at point to generate any more. The biggest advantage of the pension is that safety factor forgiveness in that if you mis-calculate how much money you need and how long you live for.

http://www.policymic.com/articles/33947/cure-for-cancer-new-drug-which-decimates-tumors-approved-for-human-testing

http://americablog.com/2013/06/hiv-being-used-to-cure-cancer-leukemia.html

 

[nsxtasy]

someone who is already in their 50s should realistically expect to live longer as they have already statistically cleared the probabilities of an earlier death.

Yes, that's exactly why those who are already 65 can expect, on average, to live to 84. But thanks for backing away from your previous statement, and admitting that it is just not true - even though life expectancy is increasing, most of those now in their 50's will not live past 100, although a tiny fraction will. Of course, it's up to you to give whatever weight you wish to that remote possibility when making your pension decisions.

they are on the cusp of curing cancer.

Nice hope, but simply not true. As with life expectancy, incremental improvements are being made in cancer research and treatment, but no, they are nowhere near a cure.

As for the original pension question, it should be examined within the context of the OP's entire financial and life situation. What other assets/investments are available for retirement, other liabilities, other sources of income (make whatever assumptions you like about Social Security, for example - and that too is a system in which you can increase monthly payments by deferring monthly payments past age 62 when they first become available), other expenses (again, make whatever assumptions you like about health care coverage and its cost in retirement, from your employer as well as government systems), etc.

 

[docjohn]

so is it fair to say...."the older you are,the longer you will live".....:smile:

 

[nsxtasy]

so is it fair to say...."the older you are,the longer you will live".....:smile:

It's more along the lines of, "The older you are, the longer your life will be, but the shorter your remaining time will be."

Or, as the late economist John Maynard Keynes put it, "In the long run, we are all dead."

 

[Vega$ NSX]

Yes, that's exactly why those who are already 65 can expect, on average, to live to 84. But thanks for backing away from your previous statement, and admitting that it is just not true - even though life expectancy is increasing, most of those now in their 50's will not live past 100, although a tiny fraction will. Of course, it's up to you to give whatever weight you wish to that remote possibility when making your pension decisions.

Um, I don't recall backing away from my previous statement; I felt like I defended it. But whatever. I still stand by my point and I still think it holds validity. As you say, there is a small fraction that a person could live past 100 and as I said, what are the ramifications if you plan your finances for a 90 year life expectancy and you live to 100? In my opinion the guarantee of income has an insurance value that a lump sum does not have, which I feel is an important factor in one of those cases where worst case scenario is more applicable in deciding which option to chose.

 

[pjr300]

Well, I vacillate constantly on this decision, but I think I am going to take it. It's been recommended that I consider Vanguard ETFs as they are no-load funds with extremely low fees and solid returns. But again, I could change my mind again tomorrow. I have about 10 days to decide.