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

[pjr300]

I'm not one to air my laundry on a public forum, but..... been looking at too many numbers, and need to get some real world perspectives from people who may have been down this path before me.

I have a vested pension from the 22 years of time served at a former employer. They are in the process of offering people cash buyouts of their pension. It's a good hunk of cash, but it needs to be invested in a way that can provide for some retirement income (and not purchase of that Zanardi NSX, as much as I would like to). I'm 55, and would expect to retire in 7-10 years.

I've spoken to a few advisors, one suggested a Fixed Income annuity; the other, a Variable Annuity that would be actively managed via investment in a portfolio of funds.

The advantage of taking the buyout is that I have the funds to pass on in the event I get hit by the bus, so to speak. I also have control of the funds. The disadvantage is loss of certainty of a fixed income once I retire.

Just curious if anyone has been presented something like this before..... would you take such an offer? And what would you do with the money?

 

[docjohn]

how many years of pension is the buyout?

 

[pjr300]

It continues as long as I am above ground..... can also elect to take about 10% per month less, but it would give spouse about 65% continuation if I pass....

 

[sahtt]

It's none of our business but without actual numbers I don't think someone can give you a worthwhile suggestion. Divide the amount by two or something if need be.

 

[jond]

I don't know much about pensions unfortunately. My only fear would be that the company that has your pension stays in business.
Not sure if that's a valid fear or not.
My GUESS is pension providers are invested in mostly bonds and know they're going to have issues with return in the near future.


.

 

[BlackbirdXX]

I say if you think you can afford to retire now , do it. I was offered (forced out) a buyout when I was 53. 7 years ago. I took it and dissolved my pension and put it into a locked in retirement account. I'm allowed to withdraw a percentage every January. I get one cheque and live off that for the year. My wife still works, she's not ready to retire. Absolutely no regrets. Hell, that's how I purchased my car. You don't know if you will be here when you're 65. I enjoy every day. I don't live an extravagant lifestyle but I don't want for anything. The worst day of retirement is still better than the best day of work.

 

[docjohn]

do the math......how much would work have payed you each month in pension vs how many years you might live vs the amount they are willing to give you now .....plus can you negotiate a higher buyout?

 

[pjr300]

It's none of our business but without actual numbers I don't think someone can give you a worthwhile suggestion. Divide the amount by two or something if need be.

Let's toss out a number; say they want to give me $500,000.... Nice and round.

....My only fear would be that the company that has your pension stays in business....

Auto manufacturer. How stable is that?

 

[Yinzer]

I'm curious - Ford Motor Co? If so I'm in the same position - worked for Ford for 7.5 years and got the offer to receive a lump sum or stay with things & get $$ every month upon retirement age. Looking at the numbers it seems pretty obvious for me at least to take the payout and roll into a roth or traditional IRA. In my case, with 20 years left to work until 65, if I were to move it into a traditional IRA and it grew at an average of around 5%, it would peter out at around age 86 after 21 years of collecting the same monthly $$ as if I had stayed with the pension. On the other hand, if I feel I could get a better average return than around 5% for the next 40 years, then taking the lump sum is a better option for my case. I was there for only 7.5 years right out of college, so I didn't collect too much since the contributions were 1.5% of monthly salary.

This did give me a sense of how much the auto companies (any company I guess) can be on the hook for pension payouts. I figure I contributed only around $xxx over 7.5 years from 1993-2000, and the current lump sum payout would be just under 4x that $xxx amount. Ford would had to have gotten somewhere near 8-9% annual returns grow my $xxx contributions into 4x that over the past ~20 years.

Ironically also, my current employer just also changed/reduced the contributory retirement option. The times, they are a changing.

Subscribed and and curious to see what comes up here...

 

[BATMANs]

why retire if ur healthy to continue working?

the difference is to do what u love to do in terms of work....

 

[SilverStone05]

Without comparing the actual numbers regarding the lump sum, or the lifetime benefit we aren't going to be able to decide what is best.

Also - should you take the lump sum- be very cautious with variable annuities. They are complicated and very expensive for the most part.

With a fixed annuity- make sure you shop around (you will get different numbers) and get a look at offerings from the low cost Titans Vanguard and Fidelity.

 

[sahtt]

SilverStone brings up a good point; many annuities end up functioning like a fixed income portfolio. By that I mean it's just an expensive and high commission interest rate trade. If rates go down, your advisor looks like a genius; they go up and he shrugs his shoulders. I very rarely recommend annuities but for some people and situations they can be the right choice; I have nothing against the idea.

 

[Vega$ NSX]

Without numbers, this is more of a philosophical question. So I'll give you a philosophical answer.

Philosophically, an annuity is more akin to an insurance policy than it is an investment. The annuity company is trying to make a profit by essentially banking on some statistic (like an actuary table) that you won't collect the full value of the fund.

Conversely, pensions were put in place as a "perk" for their employees as a benefit to them, back when companies actually cared for the long term health and security of their employees. Typically this has been at the cost of the company providing it. With people living longer and the economy being more fierce, many companies have realized that this cost is coming in much higher than anticipated when originally promised. Hence, the impetus and drive for lump sum buyouts of these pensions.

So think about that philosophically. You are the beneficiary of a company promise, made in a time before what may not make financial sense today. Their bad, your gain. Contractually they can't go back on that promise, so they are offering an alternative buyout. However, I'm sure the company did their due diligence and some statistician and bean counter has calculated out the exact amount that statistically works out in their favor, where it would be cheaper to pay you in a lump sum than to pay out in a pension. After all, if it made more financial sense to pay out the pension then they would do it instead.

So, in summary, they are trying to get out of a promise of a pension because it's costing them more than they expected. That is your gain. Second, they are trying to get out of that promise by buying you out with a lump sum value that is statistically in their favor, not yours. Lastly, to me an annuity is where companies have a vested interest for you not to collect as much of your money as possible and will stack the statistical odds in their favor to bias this as much as possible. So without any actual numbers or calculations, the philosophical analysis of motives, impetuses and strategies, suggests to me not to take the lump sum and keep the pension.

 

[racer9x]

Vegas, does it again. Nnnaiiiled it:smile:,once again what this guy said^^^^
Un les you are on Hospice or need the money now for some reason.

 

[Yinzer]

So, in summary, they are trying to get out of a promise of a pension because it's costing them more than they expected. That is your gain. Second, they are trying to get out of that promise by buying you out with a lump sum value that is statistically in their favor, not yours. Lastly, to me an annuity is where companies have a vested interest for you not to collect as much of your money as possible and will stack the statistical odds in their favor to bias this as much as possible. So without any actual numbers or calculations, the philosophical analysis of motives, impetuses and strategies, suggests to me not to take the lump sum and keep the pension.

I don't agree 100% but wouldn't mind at all being corrected since I'm making a similar decision.

Philosophically, just because it may be cheaper for a company to pay out now than later, how does that necessarily mean that the better option is for the employee to stick with the pension? I.e., doesn't that overlook that the employee may be able to get a better payback by putting the lump sum to use elsewhere? Such as a traditional IRA, for example.

Further, my numbers say - for my case at least - that it'd take a lower average interest rate for the company to keep the lump sum, grow it for the next 20 years and then start disbursements @65 rather than stay the course and try to have grown my 7.5 years of contributions from age 25 to 32 (which were 1.5% of salary over 7.5 years) to support the same monthly benefit starting @65!

I'm sure I'm missing tax considerations on their end as well as other actuarial considerations, but still - just because it may be cheaper from the company's standpoint for them to pay now than later, how does that prove that it's the best option for the employee and answers the OP's question? Maybe case-by-case hard numbers are required for a true answer?

 

[Vega$ NSX]

I don't agree 100% but wouldn't mind at all being corrected since I'm making a similar decision.

Philosophically, just because it may be cheaper for a company to pay out now than later, how does that necessarily mean that the better option is for the employee to stick with the pension? I.e., doesn't that overlook that the employee may be able to get a better payback by putting the lump sum to use elsewhere? Such as a traditional IRA, for example.

Further, my numbers say - for my case at least - that it'd take a lower average interest rate for the company to keep the lump sum, grow it for the next 20 years and then start disbursements @65 rather than stay the course and try to have grown my 7.5 years of contributions from age 25 to 32 (which were 1.5% of salary over 7.5 years) to support the same monthly benefit starting @65!

I'm sure I'm missing tax considerations on their end as well as other actuarial considerations, but still - just because it may be cheaper from the company's standpoint for them to pay now than later, how does that prove that it's the best option for the employee and answers the OP's question? Maybe case-by-case hard numbers are required for a true answer?

No I'm not saying definitely the right choice is to take the lump sum. The key is without any actual numbers/values/calculations it is basically an impossible discussion. The answer would vary wildly depending on if the payout was $1M or $10,000 or if the pension was $1,000/year to $100,000/year. Without those numbers you can't really justify any answer.

That is why I gave a philosophical answer. It's like if the OP asked me how much his car worth? And without telling what kind of car it is, what year, condition, type, miles, or anything else, other than that it is a car. I would say, I can't answer that questions without any values, so the philosophical answer would be: how much is that car worth to you? Then if the OP said, I have a guy and he saw my car is for sale and he really, really wants it very badly but wants to offer me less. I would say again, I can't tell you what to do because I don't even know the asking price or the offer. However, I would say philosophically, if the guy really, really wants the car, then you are in the position of power and you shouldn't negotiate and reject his offer. Without any actual numbers or details, who knows if that is the right answer or not, but at least philosophically I see the one guy wants something you have because it has value to him. It wouldn't make sense to give it to them for the offer they are asking because the chances are they are looking to come out ahead in that transaction.

With the case of the company, they want to buy out that pension because it has value to them. Without knowing the actual values and details of the plan, all I can really say is that they wouldn't offer it unless they wanted it and/or they feel they will benefit from it. Now it could be the case where both parties could equally benefit from that transaction. But the vast majority of the time one party benefits at the expense of the other.

Having said that, a company's calculation of the cost benefit for buying out a pension is going to differ drastically from the employee's calculation because the company is going to look at that money as capital. Capital it can invest in equipment, employees, R&D etc. where it can get a very high rate of return for their investment. An employee is going to calculate long term investment vehicles like stocks, bonds, or in the case of the OP's question: an annuity. It is possible that the lump sum buyout is beneficial for both the company, and employee, but it could also be possible that the lump sum buyout is very much at the advantage of the company and I can say with some statistical certainty it's not at the benefit of the employee at cost to the company. But again, without any actual values, it's impossible to say for sure one way or another.

 

[nsxtasy]

First of all, a lot of DIFFERENT (and basically unrelated) questions are being thrown around here. For example:

1. Should you take the pension as a fixed payout every month, or a lump sum?

2. If you take the pension as a lump sum, should you invest it in a fixed annuity or in a variable annuity? (Or something else?)

3. Should you retire now? (You don't seem to be asking that question, but Blackbird is providing his answer for it.)

I'm sure you're aware of the tax implications - that if you take the payout as a lump sum, you can transfer it to an IRA within sixty days and not pay tax on it. Otherwise you will likely get hit with a high tax rate, you'll have to pay a penalty too, and you'll lose the advantage of earning anything on more money because some of it will eventually be paid in taxes. So I'll assume that if you take it as a lump sum, you'll transfer it to an IRA. It's then up to you to invest it however you like - either type of annuity, mutual funds, stocks, bonds, whatever.

I don't think buyout calculations necessarily favor the pension fund rather than the employee; it depends. Plus, of course, you'll have control over your investments. And you won't have to worry about the financial health of the pension fund.

So all of this is stuff to consider. I don't think the answers to your questions are clear cut.

One other note. If you decide to take a lump sum distribution and put it into an IRA, you can turn that IRA into an annuity; what I mean by that is, whatever it's invested in (an annuity, or a mutual fund, or whatever), you can take a distribution of the same amount every year, just like a traditional pension or annuity would pay out. The amount you would calculate as your annual distribution depends on your expectations for annual percentage earnings on the IRA, and your life expectancy.

Furthermore, if you wanted to start taking those distributions before age 59 1/2, without incurring the normal 10 percent penalty for early withdrawals, there's a way you can do so - by doing exactly this, with annual distributions of the same amount every year. You can find out information about doing so by googling Internal Revenue Code Section 72(t). Note, the downside of doing this is that you MUST take out this amount every year in the future, in order to avoid that 10 percent penalty. And the IRS has strict rules for calculating the annual earnings percentage and life expectancy for determining your annual distribution.

 

[Vega$ NSX]

Vegas, does it again. Nnnaiiiled it:smile:,once again what this guy said^^^^
Un les you are on Hospice or need the money now for some reason.

Lol! I feel like someone's got my back! :biggrin:

 

[nsxtasy]

Having said that, a company's calculation of the cost benefit for buying out a pension is going to differ drastically from the employee's calculation because the company is going to look at that money as capital. Capital it can invest in equipment, employees, R&D etc. where it can get a very high rate of return for their investment.

Correct me if I'm wrong, but aren't companies required to invest their employee pension funds in financial assets that remain separate from their operating accounts, to prevent them from "raiding" their pension funds (and to prevent those pensions from being unfunded in the event of a company bankruptcy)? So that pension funds can't be invested in company assets the way you describe?

 

[docjohn]

Right off the bat having a pension system in place is like a defined benefit plan where by the money payed out to the retirees is guaranteed ...this can be a liability because if the investment vehicles responsible for the cash in the fund underperform the company has to subsidize the plan to meet its employees needs..thats a potential big risk.

 

[Vega$ NSX]

Correct me if I'm wrong, but aren't companies required to invest their employee pension funds in financial assets that remain separate from their operating accounts, to prevent them from "raiding" their pension funds (and to prevent those pensions from being unfunded in the event of a company bankruptcy)? So that pension funds can't be invested in company assets the way you describe?

That is correct but that is not what I'm describing. I'm talking about the company analysis of free capital it can use for either the choice in paying out a pension plan in lump sum (which it is not obligated to do) or paying out the pension as already prescribed (which it is). In other words, if a company had excess profits, would it be worth it for them to buy out the existing pension plans today or spend that capital elsewhere where there would be a greater rate of return to exceed the costs associated with that pension program. Clearly in the OPs case his company felt it was worth spending today's dollars to pay off the pension plan to free up future capital. Now whether the OP benefits from this business decision is the real question...

 

[pjr300]

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.

 

[nsxtasy]

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.

I'd take the money today. Remember, you're comparing amounts 6 or 9 years from now with an amount in today's dollars. If you invest it in something fairly conservative, its value should be much higher than $400K by the time the pension would be kicking in.

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.

There are risks involved in just about ANY investment. One risk of annuities is that they become worthless when you pass away if you don't have the spousal provision, and they pay less if you do. A stock portfolio is by its very nature risky, which is why in the long term, on average, it usually provides a greater return. If a possible drop in the market value of your IRA portfolio is a concern, then you may prefer to put it into more conservative investments, such as bonds, or a mutual fund in which much of its investments are in bonds or corporate paper. There are lots and lots of possible investments out there. If your advisers are only telling you to buy annuities and they're not talking to you about other alternatives (including ones that are conservative and have a higher chance of maintaining their market value), they're not doing a very good job, IMHO.

 

[cmthomson]

"10% premium". I can well believe this given Ford's balance sheet. Their most recently reported pension liability minus assets is over half their market cap. So this cash-out may very well be a win-win. [BTW, their reported assets vs liability has built-in return assumptions that are at the far edge of barely credible, so are likely to continue to deteriorate]

Also consider the "B" word: bankruptcy. Ford seems vibrant now, but it has massive debt, and 30 years is a long time. In recent years, when companies with pensions enter bankruptcy/reorganization/privatization they typically dump the pension onto the government, which often cuts benefits way back. So the pension might not be as safe as many would assume.

Regarding annuities: bear in mind that we currently have historically low interest and inflation rates, both of which are almost certain to increase. So while the annuity monthly payment amount is certain, its value is not. Buying an annuity now is IMHO not a good idea, because it would have a relatively low payout (due to interest rates) which would erode over time (due to inflation). But there's no hurry: as long as you park your assets where they don't actually lose value, you can buy an annuity anytime.

Your comments above tell my you don't want to actively manage your IRA. That's cool; most people don't. Just try to avoid some high-cost low-performance product.

Bottom line: My advice would be to take the cash, roll it into an IRA, and put the money in a low-fee diversified fund. There are lots of these: a good starting point is Vanguard. Take another look at annuities when interest and inflation are more normal. And also: at your next job, max out your 401(k).

 

[docjohn]

...................take the cash............"its your money":wink: