Looking for a little financial advice (1 Viewer)

[yak651]

A company I used to work for had a pension program. Received a letter stating I can get a "buyout" of approximately $13k that I would then roll over into an IRA to avoid tax penalties. If I don't take the buy out I will receive approx $300/month at retirement age (I believe at 62 but it may be 65 or 67). I'm 42 right now, what do you think the best move is?

 

[BobbyLayne]

http://www.lumpsumanalysis.com/calculator-lum-sum-married.php

 

[ghostguy123]

The numbers clearly say wait and take the 300 per month. But the way health care is and will be they will just take all your money when you are older anyway.

If you dont need the money then wait for it.

 

[Psychopav]

I would expect both options to be actuarialy equivalent but just to get a rough idea, I'd look at what the $13k will turn into assuming say 6% ann compounded growth rate for 23 years, then see how far the $300 a month would go on that. I'm not sure 6% is the right rate to use so you might want to play around with those numbers.

Assuming it works out about right (that is, the adjusted buy-out money lasts until somewhwere into your mid- upper-70s at $300/mo), I'd probably take the IRA just because it will give you more options for investment and withdrawal.

I've never been involved in something like this - kind of surprised they don't just give you an annuity and be done with it. It's nice that they give you the option imo (unless I'm missing something).

 

[ghostguy123]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

 

[Fat Nick]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

Can you explain your logic here?

I'm financially saavy (former financial advisor) but I'm just curious what your thought process is. (Not saying it's wrong...just not seeing it)

 

[RUSF18]

Is there any chance you could see yourself ending up back with this company before you retire, which would then cause your pension to grow further?

 

[johnnycakes]

Roll over to an IRA so you have full control over where and how funds are invested and not limited by the plan's selection. This is a no-brainer for a defined contribution plan. If you're talking a defined benefit plan, you should do some quick present value computations, but a DB plan's return assumptions are usually quite conservative and most people feel they can beat what the DB plan guarantees, so I think I'd take the rollover no matter what.

 

[Fat Nick]

Is there any chance you could see yourself ending up back with this company before you retire, which would then cause your pension to grow further?

My guess is that if they're offering buy-outs, they've discontinued their pension plan going forward and since he's gone now, he wouldn't be able to be grandfathered in. Not 100% sure on that, but most of the time, they don't offer buy-outs on existing plans that you can still contribute to.

 

[johnnycakes]

A company I used to work for had a pension program. Received a letter stating I can get a "buyout" of approximately $13k that I would then roll over into an IRA to avoid tax penalties. If I don't take the buy out I will receive approx $300/month at retirement age (I believe at 62 but it may be 65 or 67). I'm 42 right now, what do you think the best move is?

Just did a quickie PV...

FV of $13,000 now at 5% per annum compounded monthly for 25 years is $45,256.78. Assuming single-life expectancy at age 67, that's 19.4 years... I rounded up to 20 years to make it easier... gives a monthly payout almost exactly equal to $300 per month... $298.67, to be exact.

So I think it's fair to say your plan is probably assuming about a 5% return on that $13,000 for the next 45 years. If you think you can beat that 5% in the long run, take the rollover to the IRA.

 

[rick6668]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

 

[RUSF18]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

Good point.

 

[johnnycakes]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

That, of course, applies to a defined benefit plan, which is what we assume the OP means by "pension". PBGC's monthly limits, for ages 45-75, are here.

And PBGC has a handy-dandy top-level overview for lump-sum vs. annuity.

 

[Psychopav]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

:greatposting:Also, johnnycakes' PV calc did not take into account interest/returns earned as the monthly money pays out beginning at retirement. Since you don't get all the money at once, you'll still be earning on the undisbursed money.

I'm sure you're going to pay more in fees which was also not accounted for in the rough and dirty numbers, but it sounds like the IRA is pretty much a no brainer here.

 

[yak651]

Thanks for the input, that's what I was thinking. No I would never go back to that company, and I was wondering about the possibility of the pension becoming "un-funded". Not sure if that is possible, but figured taking the money now and investing it would eliminate that risk. Just was asking for opinions because I figured if the were offering the lump sum there must be a reason for it, i.e. them saving money so was making sure i wasn't overlooking something.

 

[johnnycakes]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

:greatposting:Also, johnnycakes' PV calc did not take into account interest/returns earned as the monthly money pays out beginning at retirement. Since you don't get all the money at once, you'll still be earning on the undisbursed money.

I'm sure you're going to pay more in fees which was also not accounted for in the rough and dirty numbers, but it sounds like the IRA is pretty much a no brainer here.

Did you double-check the computation?

 

[George Jefferson Airplane]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

Yeah also the fact that it's much more controllable in the event of your untimely death for your beneficiaries. Wrestling with companies over defined benefit programs after death is an unnecessary hassle in this case since the numbers seem to be a wash.

 

[ghostguy123]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

Can you explain your logic here?

I'm financially saavy (former financial advisor) but I'm just curious what your thought process is. (Not saying it's wrong...just not seeing it)

I will later after some sleep. In short, if you have money when you are older you will get to enjoy and use that entire 300 per month.

If you are broke 300 a month isnt going to help. You will still get the same health care but if you are getting that 300 they will make you pay that 300.

It sounds like a good idea to just take that money now though anyway. If you live to 80+ then you dont make out on it. Win win in a way

 

[Psychopav]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

:greatposting:Also, johnnycakes' PV calc did not take into account interest/returns earned as the monthly money pays out beginning at retirement. Since you don't get all the money at once, you'll still be earning on the undisbursed money.

I'm sure you're going to pay more in fees which was also not accounted for in the rough and dirty numbers, but it sounds like the IRA is pretty much a no brainer here.

Did you double-check the computation?

Just spitballing on the mobile device so I apoligize if I misunderstood you. I did not double check anything but above you said you had calculated $13k invested for 25 years, which would get the OP to age 67. I didn't see where you did any calculation of balance reduction after that over the subsequent 20 (19.5) years or an offsetting int/inv credit.Eta: my mistake. I see now that you must have accounted for that in determining the 19.5 year annuitization of the payout.

 

[johnnycakes]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

:greatposting:Also, johnnycakes' PV calc did not take into account interest/returns earned as the monthly money pays out beginning at retirement. Since you don't get all the money at once, you'll still be earning on the undisbursed money.

I'm sure you're going to pay more in fees which was also not accounted for in the rough and dirty numbers, but it sounds like the IRA is pretty much a no brainer here.

Did you double-check the computation?

Just spitballing on the mobile device so I apoligize if I misunderstood you. I did not double check anything but above you said you had calculated $13k invested for 25 years, which would get the OP to age 67. I didn't see where you did any calculation of balance reduction after that over the subsequent 20 (19.5) years or an offsetting int/inv credit.

Yeah, the 5% was extended throughout the payout period as well. The tip-off would be to take $300 per month times 240 months, equal to about $72,000 paid out in all.

 

[Pipes]

Also take into consideration that taking the buyout, that money is now yours/ Waiting on the pension, you also have the chance that the company could have future problems, i.e. bankruptcy, it is possible to have this pension reduced if it isn't fully funded and gets taken over by the PBGC.

Interesting Article (From 2009 though):

http://www.kiplinger.com/article/retirement/T047-C000-S002-is-your-pension-still-safe.html

 

[IC FBGCav]

You are taking their 300.00 number as set in stone which I doubt it is. This is probably a low estimate. They are offering a buy out because it is in their best interest to do so. When they market crashed they tried to buy my wife her out of her retirement(it was a larger amount but both situations deal with the same principals). Every advisor I talked to said it was a bad move to take money now.

 

[Brony]

I always worry that I'll forget about this $ or I'll have tough time finding the company to get my money at that point. I usually side with taking the lump sum now and have it in a place that you can control just for the piece of mind.

 

[Fat Nick]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

Can you explain your logic here?

I'm financially saavy (former financial advisor) but I'm just curious what your thought process is. (Not saying it's wrong...just not seeing it)

I will later after some sleep. In short, if you have money when you are older you will get to enjoy and use that entire 300 per month.

If you are broke 300 a month isnt going to help. You will still get the same health care but if you are getting that 300 they will make you pay that 300.

It sounds like a good idea to just take that money now though anyway. If you live to 80+ then you dont make out on it. Win win in a way

OK...so sort of the "Why take a job that makes minimum wage when I can collect unemployment that gets me 80% of that for doing nothing aka live now and rely on social programs to support me later" mentality...OK. I get it...as an explaination to your statement (never a fan of that mentality personally, but I get it...). Thanks.

I guess I'd argue that if you have the foresight to realize you're going to be broke upon retirement, I'd hope you'd start planning to avoid that rather than just saying f it and spending everything now, but that's just me.

 

[ghostguy123]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

Can you explain your logic here?

I'm financially saavy (former financial advisor) but I'm just curious what your thought process is. (Not saying it's wrong...just not seeing it)

I will later after some sleep. In short, if you have money when you are older you will get to enjoy and use that entire 300 per month.

If you are broke 300 a month isnt going to help. You will still get the same health care but if you are getting that 300 they will make you pay that 300.

It sounds like a good idea to just take that money now though anyway. If you live to 80+ then you dont make out on it. Win win in a way

OK...so sort of the "Why take a job that makes minimum wage when I can collect unemployment that gets me 80% of that for doing nothing aka live now and rely on social programs to support me later" mentality...OK. I get it...as an explaination to your statement (never a fan of that mentality personally, but I get it...). Thanks.

I guess I'd argue that if you have the foresight to realize you're going to be broke upon retirement, I'd hope you'd start planning to avoid that rather than just saying f it and spending everything now, but that's just me.

well yeah, lol.

I was sort of just implying that things are gonna be really tough for even way more people than it already is. Things are getting worse and worse as far as people being able to afford normal living expenses.

Nobody PLANS to be broke, but a hell of a lot more people are going to be broke in 25 years than now, and a lot of those people sure arent thinking at this moment they will be broke in 25 years.

I would lean towards taking the money now due to the the numbers saying you need to live till about 80 to make it worth it to wait, and damn, I may not live that long, lol.

 

[ghostguy123]

You are taking their 300.00 number as set in stone which I doubt it is. This is probably a low estimate. They are offering a buy out because it is in their best interest to do so. When they market crashed they tried to buy my wife her out of her retirement(it was a larger amount but both situations deal with the same principals). Every advisor I talked to said it was a bad move to take money now.

They do make out if you die though, so there is always that.

 

[ghostguy123]

My dad did something similar with my mom when the divorced. He has to pay her some amount from his pension for the rest of his life..........but they negotiated a one-time lump sum payment. My mom used the money to pay off her condo, and my dad celebrated his "break even day" with a party.

I was 19 at the time, and negotiated the deal for them

Was fun times.

 

[Johnnymac]

I just received a letter from a company that I used to work for also. Basically the same thing the op describes. I can take a lump sum now, roll it over to an IRA, take an annuity, or do nothing and it stays with the company until my retirement age. My lump sum would be 26K. I could really use the money now but I know the tax implications of doing that. I will definitely not leave it with the company as I would like to have control of it at the very least. What to do?

 

[IC FBGCav]

You are taking their 300.00 number as set in stone which I doubt it is. This is probably a low estimate. They are offering a buy out because it is in their best interest to do so. When they market crashed they tried to buy my wife her out of her retirement(it was a larger amount but both situations deal with the same principals). Every advisor I talked to said it was a bad move to take money now.

They do make out if you die though, so there is always that.

Why? You can have beneficiary for pensions.

 

[ghostguy123]

You are taking their 300.00 number as set in stone which I doubt it is. This is probably a low estimate. They are offering a buy out because it is in their best interest to do so. When they market crashed they tried to buy my wife her out of her retirement(it was a larger amount but both situations deal with the same principals). Every advisor I talked to said it was a bad move to take money now.

They do make out if you die though, so there is always that.

Why? You can have beneficiary for pensions.

Dont care if I am dead..............

 

[Binky The Doormat]

You are taking their 300.00 number as set in stone which I doubt it is. This is probably a low estimate. They are offering a buy out because it is in their best interest to do so. When they market crashed they tried to buy my wife her out of her retirement(it was a larger amount but both situations deal with the same principals). Every advisor I talked to said it was a bad move to take money now.

They do make out if you die though, so there is always that.

Why? You can have beneficiary for pensions.

Dont care if I am dead..............

If I could find a guaranteed 5% right now, I would put some money there.

 

[humpback]

I just received a letter from a company that I used to work for also. Basically the same thing the op describes. I can take a lump sum now, roll it over to an IRA, take an annuity, or do nothing and it stays with the company until my retirement age. My lump sum would be 26K. I could really use the money now but I know the tax implications of doing that. I will definitely not leave it with the company as I would like to have control of it at the very least. What to do?

It's the typical "now vs. later" decision. Most people pick now then complain when they don't have much later, but it's a personal decision that only you can make. If you have some very high interest debt or something that you'd use this money to pay down, then it could make sense to take it now, but if it's to go on vacation or buy a new car, financially you'd be a lot better off rolling it over (in the long run, of course).

 

[humpback]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

Can you explain your logic here? I'm financially saavy (former financial advisor) but I'm just curious what your thought process is. (Not saying it's wrong...just not seeing it)

I will later after some sleep. In short, if you have money when you are older you will get to enjoy and use that entire 300 per month.If you are broke 300 a month isnt going to help. You will still get the same health care but if you are getting that 300 they will make you pay that 300.

It sounds like a good idea to just take that money now though anyway. If you live to 80+ then you dont make out on it. Win win in a way

This all depends on the particulars- if you're really well off when you are older, the extra $300/mo. isn't going to change anything in your life. If you're just treading water, that $300/mo. could be your entire entertainment budget. Etc.

 

[Bucks]

I just received a letter from a company that I used to work for also. Basically the same thing the op describes. I can take a lump sum now, roll it over to an IRA, take an annuity, or do nothing and it stays with the company until my retirement age. My lump sum would be 26K. I could really use the money now but I know the tax implications of doing that. I will definitely not leave it with the company as I would like to have control of it at the very least. What to do?

I got a letter too a few days ago. It must be the season. Right now I'm leaning towards rolling it to a traditional IRA.

 

[RUSF18]

$300 would probably cover whatever the equivalent of a cell phone bill would be 25 years from now. I'd roll it into an IRA.

 

[ghostguy123]

Either option works really. Just depends on your situation. Sounds counterintuitive but if you dont think you will be financially well off in your 70s then take the money now.

Can you explain your logic here? I'm financially saavy (former financial advisor) but I'm just curious what your thought process is. (Not saying it's wrong...just not seeing it)

I will later after some sleep. In short, if you have money when you are older you will get to enjoy and use that entire 300 per month.If you are broke 300 a month isnt going to help. You will still get the same health care but if you are getting that 300 they will make you pay that 300.

It sounds like a good idea to just take that money now though anyway. If you live to 80+ then you dont make out on it. Win win in a way

This all depends on the particulars- if you're really well off when you are older, the extra $300/mo. isn't going to change anything in your life. If you're just treading water, that $300/mo. could be your entire entertainment budget. Etc.

Entertainment budget is definitely a factor.

Who knows. Maybe housing will tank way more and 300 is a house payment.

Definitely agree with whoever said to not take the money now if it will be used on stuff like cars and vacations. If you have the slightest spending issue take the 300 later

 

[Johnnymac]

I just received a letter from a company that I used to work for also. Basically the same thing the op describes. I can take a lump sum now, roll it over to an IRA, take an annuity, or do nothing and it stays with the company until my retirement age. My lump sum would be 26K. I could really use the money now but I know the tax implications of doing that. I will definitely not leave it with the company as I would like to have control of it at the very least. What to do?

It's the typical "now vs. later" decision. Most people pick now then complain when they don't have much later, but it's a personal decision that only you can make. If you have some very high interest debt or something that you'd use this money to pay down, then it could make sense to take it now, but if it's to go on vacation or buy a new car, financially you'd be a lot better off rolling it over (in the long run, of course).

Yup I get it. I just keep thinking I could take the money now and pay off all my cc debt and probably have 12K left over. The thought of not having that debt hanging over me is nice. On the other hand I dont like the thought of giving probably 30% of it to the government.