What would you do?

[kib]

Ok, I worked for a firm long ago, college years, that had promised me a pension of $469 a month when I hit 65. I'm 51 now. The accumulated benefit at the time I left was slightly over $10K, which meant I couldn't take a lump sum. Now, 30 years later, they're saying they've lifted the cap and I can have the lump sum payout (into a rollover or annuity) if I want it. I'm of two minds.

1. Are they crazy? Investing the payout at 5% in an annuity would pay me the same in a year that they've promised in a month. Even if they were to double the original amount for the years I haven't been able to invest the money, it would be so much less.

v.

2. One in the hand worth two in the bush and at least the money is in my own hands. The economy is crap and who knows what's coming down the pike in 14 years.

I don't need the money, I don't see a great place to invest it, and I'm in good health so I'm inclined to go with attitude #1, but am I missing something important here?

[Teacher Terry]

I would wait for the pension.

[Spartana]

Hmmm tough choice. If you wait to receive the pension until you are 65, and it's at a private company, you run the risk that it may default on it's pension and you lose it all - or have it greatly reduced. Plus the waiting until your 65 thing might not be the way you want to go. If it's in an annuity or IRA rollover you can access that much earlier if needed. Also if you die before 65, or even afterwards if you don't have a spousal death benefit where it goes to your spouse or other beneficiary after your death (my pension dies with me), then you will lose it all. With an IRA or annuity you can name a beneficiary for it to go to. Also you can invest the lump sum as you wish and may earn greater returns in the 14 years you invest it rather than if it stays in the pension fund.

Of course if the value of the pension will be much higher than taking the lump sum even with great investment returns you might earn if you take the lump sum for those 14 years, you think it will be safe (company doesn't default), you think you'll live long enough (or have a death benefit to go to beneficiary) to make it worth it, and won't need the money before 65 then nothing wrong with choosing the pension route.

[SteveinMN]

We just finished a similar exercise.

Background: I worked at five different companies and had two pensions and two IRAs to show for it. One pension came from Company A, which phased out its pension program while I was still working there but after I'd vested. It's a small pension -- the bulk of my retirement savings with them was in a 401(k) we rolled over after I left.

Company A recently asked if they could buy me out of my pension (this deal was offered to many; nothing special about me here). The choices were a lump-sum distribution to roll over (or, presumably, use as income with the usual penalties); a lifetime annuity in the same amount; or doing nothing now and waiting till 62/65.

After speaking with our financial advisor, we chose the annuity. Here's why:
- At barely 55, I have a long time to collect (at least on paper). If I die before the purchase amount is depleted, DW gets the rest as a lump sum.

- It gives us more control. As others have pointed out, even with PBGC and the like, pensions are a bit of a crapshoot. Company A is strong but you can never say never. They've already pretty well gutted retiree medical. There's no saying they might not go after pensions next. One option our FA suggested was to take the lump sum and buy our own annuity with it, effectively providing us with a pension-like income that was not dependent on Company A. Mixed bag: annuities come with admin expenses. But they could do better in the market if structured properly.

- Company A's pension plan, frankly, was not great. Low fixed adjustments in value for waiting (linear, not a logarithmic curve); few choices for spousal support. We should be able to do better "on the outside".

- Frankly, we could use the flexibility. There's an old joke about the difference between a pizza and a photographer in that the pizza can feed a family of four. I will admit to not pushing as hard for photography business as I could have; partly because we haven't needed the kind of income I was making in the corporate world, and partly because retirement has been a powerful draw. :-) But we have some expenses coming: new windows in the house. Some travel as friends and relatives in far-flung places get older -- or places we want to visit before we're no longer able to go. The wedding just past. With the annuity we have money we can use to pay bills, to put in savings, or even to put into another retirement vehicle. it's taxed as ordinary income. And we're not talking tons of $$ here.

- It was a little more diversity along with the rest of our retirement savings (DW has a pension and a deferred-comp plan also).

It's a very individual choice. You need to do some math and make some assumptions based on what you know now. One assumption you may be making now is that a $10,000 annuity will kick almost $500 a month in benefits. You probably should talk with a tax planner/financial advisor. If you don't need the money, it may be best to let it sit. Even if that pension plan does the big firework, you don't seem to be counting on it. But it never hurts to think about it. Hope our story helps....

[iris lilies]

Normally, I'm a "bird in the hand" person, not because I want the cash to go out and blow, but because I don't trust the funding body to continue giving it to me.

In this situation where remarkable differences appear between the cash and the annuity payment, wow. I would take a "conservative" approach and watch the funding body but keep the annuity. Keep my ear to the ground and see if I can suss out any chance of them going down the toilet. I honestly do not know their contractual obligations for pension payout and how that is protected, so this could be a pension at risk or not.

Did they give you a deadline which need to be met to make a decision about taking the cash?

[Rogar]

I'd probably weigh what you would do with a little wind fall now compared with how you might need or spend an annuity at 65. Which do you think might benefit your life more. If it just comes down to numbers there are probably some easy napkin and pencil calculations you could make, but my opinion is that these things are generally to the benefit of the employer to pay out the lump sum and to the employee advantage to wait.

[kib]

Just to be clear: when I worked for this company I accrued an annual pension benefit which the company itself has been managing up to now. When I left the company, they promised me that at age 65, they would pay me $469 a month. I would never see the principal, which was rolled in with everyone else's, but I would receive this payout for life. Now the company is offering to give me my principal (and, I assume, some interest for the 30 years I was unable to invest it in anything). I believe it has to be in another sheltered asset like an annuity, since I am "underage", not 100% sure of that. The company will basically step away from the asset as well as any promise for payment. If I stay with them and the company fails, I will get my share of the reserved pension assets, which will be a percentage of what the balance was the day I quit.

I agree with Rogar, this will vastly benefit the company, which made the promise based on the interest rates of the day. I cringe to imagine promising people a payout with the idea that you could make a solid 15% a year on their money, but that's not my problem.

An interesting aside, the three names in the letter I received are all people I worked with. In other words, they've all held the same middle management jobs for 30+ years. Not that this means the company is doing well, but ... that's amazing.

[sweetana3]

The key here is that you still have assumptions about the money. This closure of defined benefit plans has been going on for many years. IBM was a huge example. They basically figure out, using actuarial tables, how much you are entitled to and give you the cash. You now have the responsibility to manage it and decide how to get the retirement "benefit" in a IRA or such to protect it from immediate taxation.

All decisions about retirement are gambles of some kind. Even when to take Social Security is a gamble on the length of life. You need to decide on your capabilities to manage the money to your benefit and what other retirement assets you might have. In our family, my husband would take the money and I would leave it where it is. And we are polar opposites on this issue, not on the fence.

But we each know where the asset fits into our whole portfolio of assets and retirement income and are making our own decisions based on our gambling on the future.

[eleighj]

Take the funds and roll into your IRA; I have done this twice over the last 10 years with two different companies. I have a third that I will be doing shortly. If the pension craters; you are going to be dealing with the Pension Benfit Guaranty Corp; a government agency like Sallie Mae.:|(

Ed

[Rachel]

Is there anything you could do with that money now that would create a long-lasting benefit to you? Such as using it to re-fi your mortgage from a 30-year to a 15-year? Or paying to help yourself shift into some healthier habits? I invested almost $1000 in private fitness coaching a few years ago and that coaching got me from an extremely weak condition to the ability to take and benefit from fitness classes, which in turn has ended up raising my bone density score and reducing my risk of broken bones---a huge lifetime benefit esp. when you consider the cost of health care for a person who is recovering from a broken hip.

Perhaps none of this will be relevant to you...good luck and enjoy the money whenever and however you use it!