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MaryHu
9-27-12, 10:56pm
We’re early retirees. I’m the CFO of our household. My husband retired in 1997 at 44 and I retired in 1999 at 41. We managed this by following the principles set forth in “Your Money or Your Life”. I still work part time mostly just to keep busy. We’ll have about $40k income this year of which we’ve reinvested almost 12 k into My Roth IRA and our other investments. We give a disproportionate (according to the IRS) 12 to 13% per year to charity. We’re very frugal.

We’ve been taking money out of his Traditional IRA for the last 8 years without penalty under the annuity exclusion. Some years we need the money (reroofed last year) most years we don’t and we just reinvest into my Roth IRA or into our regular investment account. (I think of it a slow Roth IRA conversion so we don’t get hit with all the taxes at once) We’re extremely conservative investors who don’t take our money to Vegas or its extension: Wall Street. (How can you beat inflation if you lose your capital?) Our money is all in 30 year Treasuries (some purchased in the 90’s still paying 7.25% with 15 more years to go) Freddie Macs, Ginnie Mae’s and some corporate bonds with very high ratings. This provides us with a good steady flow of interest income and lets us sleep at night.

My husband worked for JC Penney for over 20 years in a mid level management position. He received a packet recently offering to let him take a lump sum versus paying out his retirement over the rest of his life. I guess they’re sending this now because he’ll soon reach 59 ½. I’m having a hard time deciding which option to choose. I’ve explained to him that it would make my decision so much easier if he’d just tell me how much longer he’s going to live but he’s stubborn. Both his parents died in their early 80’s.

JC Penney hasn’t been doing so well in recent years and I’m inclined to take the money and run while we still can. I’ve read some articles about what happens to pensions when companies go belly up and how stressed the PBGC (Pension Benefit Guaranty Corporation) is becoming. I can only imagine that’s going to get worse in coming years. I’m leaning towards taking the money and managing it myself even if it means we may get a bit less (because this is such an awful time to invest) in the long run versus taking the pension. Because we may wind up getting lots less in the event of the company going bust. Or both of us dying in a car accident next week. One in the hand is worth 2 in the bush and all that. Also we do have a son we’d like to leave something to when we die.
What’s your take on this?

PS: These aren’t big amounts we’re talking about due to his retiring early. We’ve never really counted on this money, probably won’t really need it and just thought it would be nice when it started showing up. We’re talking $300 a month (with half that to the remaining spouse in the (probable) event he dies first) versus a 54k lump sum. If we took the lump sum I’d roll it into a Traditional IRA to avoid the tax hit and just invest it and leave it alone until we need it or we’re required to start taking distributions 11 years from now. Or we could take it in little bites like we’ve been doing with his existing Traditional IRA and putting it into a Roth IRA so the income would be tax free. Hmmm... What to do?

Mighty Frugal
9-27-12, 11:01pm
Take the lump sum. That's what I would do. Not sure where to invest though-I'm a Canuck so all those acronyms are a mystery to me!

try2bfrugal
9-28-12, 1:23am
There are many discussions on the pros and cons of lump sum versus annuity payments on the early-retirement.org forum you might find helpful to review. You can also ask question there and might find more forum members with experience in making the same decision.

Your husband's pension would probably be covered by the PBGC, so if you did take the annuity option I think Penney's and the PBGC would both have to go bust and Congress would have to refuse a PBGC bailout for you to not get your money. That is probably not impossible to have happen, but I am not sure how likely that would really be. The PBGC collects premiums from the companies that have pension plans, so I believe it has the option to raise its rates as needed.

If you want to see if the lump sum amount is fair you can compare what kind of annuity you could buy privately with the same amount of money at immediateannuities.com.

One nice thing about taking the payments as an annuity is that it gives you a diversified income stream not dependent on current interest rates or your investing acumen. The downside is most do not have COLAs so the payments are often worth less each year.

Lump sum amounts usually go up when interest rates go down, so if you do decide to take the lump sum now might not be a bad time. If you want to leave an inheritance the lump sum may be the better choice. Good luck on your decision.

eleighj
9-28-12, 7:55am
Take the lump sum and roll it over into his IRA as quickly as possible. I did that a while back from a previous employer; you have control of it not a company that could go bankrupt. I believe that if his pension becomes covered by the PBGC; you are looking $0.40 on the dollar more or less; not good.

eleighj

SteveinMN
9-28-12, 9:13am
Another vote for taking the lump sum. I wouldn't worry so much about the pension not coming; rather, there just is little downside to your managing the money rather than whoever is managing it for JCP. You know they will take their cut to manage it; you can make different lower-cost choices which, statistically, will be just as likely to return money as their choices.

Rogar
9-28-12, 10:01am
I ran some similar numbers for a friend recently. His break even point was about 13 years. After that time, he came out a head by the amount of the monthly payment each month. Sounds like you are on top of things and can do the math with your own estimates, but I would lean towards taking the monthly payments.

You are probably aware that if you take the lump sum you have to pay taxes on it for the year it is taken, which could bump up your tax rate.

BTW, congratulations on your successful earlier retirement! I read YMOYL in the late 90's, too but was not wise enough to invest in long term bonds. I guess I've found my own way around things, but those high interest rates look pretty sweet these days.

Frugalifec
9-28-12, 12:52pm
I'm voting for the lump sum for the following reasons:

You have a proven history of managing your money.

Although I'm no expert on PBGC, I tend not to want to trust somebody else when it comes to pension money. I think there is a lot of pressure on the people in charge to keep the corporate profits high as well as there own personal profits. They probably have teams of competent lawyers with the only task looking for loop-holes.

Life is a risky proposition and gets more so as we age.