Dockside Chat - Just another retirement question

I need some advice, I'm going to retire shortly with a defined benefit (pension) However the company is trying to unload future obligations and has opted to offer a lump sum cash out in lieu of a monthly check (there is no cola). The value of the cash out is about 15% less than the cost of an immediate annuity that would pay the same monthly benefit as the pension. The cash out would be transferred to an IRA account that could be passed on to my estate. Without taking any cash from the IRAs we still have a guaranteed monthly income that we would allow us to pay our bills.

For those of you that have been have been offered this option, what did you do and what would you do differently? Thanks

There are a lot of experts on this forum that might give you much better advice than what I'm going to suggest...so take everything with proper moderation.


IF a company is trying to offer alternatives to a financial obligation, then it's CFO has projected a negative cash flow for the company, given current trends.

That guy knows more about the company's finances than anybody, and he says that a situation exists when obligations won't meet income levels.

Bail now while you have the chance.

I did when I was with Kodak. Glad they gave me the option way back when little yellow boxes were seen everywhere....

With current interest rates this low, the immediate annuity is very expensive for the company. You can have someone run the numbers but I suspect you would not need much of a return for the 15% discounted amount to outperform. In addition, rolling it to your IRA means you only have to take minimum distributions. If you died early, there will still be assets available for your spouse or kids. If you take the annuity, your options will be limited.

I know a fee-only advisor north of Seattle if you need a referral. PM me if you'd like.

Find a 'per hour' financial planner and have him run both scenarios based on your current age, health, and expected lifespan. Since the cost to the company only differs by 15% (and it matters not what happens to the company after the fact), company motivation is irrelevant. Your situation and needs is what counts, but you really need a side-by-side comparison to get a realistic evaluation ... ;)

Listen to Sprokets.

Also check on your pension plans funding status. This may help make your decision easier if the plan is in danger.


http://www.pbgc.gov/wr/trusteed/plans.html

Reading comprehension check! His company is not offering him an annuity, he is simply comparing the proposed lump sum to his cost of buying a comparable annuity.
He would put the lump in an IRA.
FWIW I agree with the above people who say the safety of your defined benefit plan is probably in question. Take the lump and run.

Take the cash and call a Northwester Mutual Rep. Get the money to work for you.

I would almost always go the route of the lump sum, but you do need to consider a few important things

How healthy is the plan, how comfortable are you managing the money yourself or through a FS planner, what is your current health?

IMO, there are few downsides to a lump sum assuming the npv makes sense. With a lump sum you are guaranteed the cash regardless of whether or not you die the next day or the plan the funds were in goes belly up. From an estate planning perspective, annuities are generally not well viewed except for the planner selling the annuity. And based on recent trends, anyone can see that nothing is risk free, even a currently healthy pension.

Comments regarding a company wanting to cash out because it is a better deal for the company are not really correct. The issue with pensions and the related accounting is that changes in discount rate/market conditions subject a company to significant volatility on their financial statements. One small client of mine has a pension for its employees that has been well funded, but the recent fluctuations in the market have caused significant swings in their earnings both operating and in other comprehensive income. They are in business to make "widgets", not in investing on the behalf of employees. This is one of the major reasons few companies now offer conventional pensions. Transfer the risk and reward to the employee and remove the volatility from earnings.

Besides talking to a planner, spend some time with google. Do searches on pros and cons, investment vehicles available, etc. just keep in mind the source of the information as ther will often be bias depending on the source. Much of what is out there is advertising disguised as third party advice. At least you will be armed with some knowledge when seeking advice.

Good luck and enjoy you nearing retirement.

You run a counter-party risk if you keep the defined benefit promises from your former employer.

Thanks everyone, I am looking for real life experience on this. about ten years ago the company ceased offering the defined benefit retirement to new employees and went to defined contribution. Because of the lower returns on investments they have had to fund the pension pool at amounts higher than budgeted. The feeling is that they will freeze the existing plan and convert everyone to defined contribution within a year or two. My inclination was to go with the pay out. It is just because of the amount of collective knowledge here is so vast, it is a great place to ask a question like this... Thanks everyone

I need some advice, I'm going to retire shortly with a defined benefit (pension) However the company is trying to unload future obligations and has opted to offer a lump sum cash out in lieu of a monthly check (there is no cola). The value of the cash out is about 15% less than the cost of an immediate annuity that would pay the same monthly benefit as the pension. The cash out would be transferred to an IRA account that could be passed on to my estate. Without taking any cash from the IRAs we still have a guaranteed monthly income that we would allow us to pay our bills.

For those of you that have been have been offered this option, what did you do and what would you do differently? Thanks

I have not had to make this choice but I have worked with people who have. The answer is not always the same so I'm not sure first hand experience is the best source for this decision. The facts and circumstances of each situation should be considered so that you can make an "educated guess" as to which choice is best for you. It sounds like you have determined that the defined benefit plan would be a "good buy" if you wanted/needed an annuity but maybe also consider:


Are you healthy? (This is the BIG one....i.e. do you expect to live a longer or shorter life than the average?) Tell me how long you will live and the question is much easier to answer. Also, don't forget that you could invest the income from the annuity that you "don't need" and that money would also end up in your estate and if you beat the odds it could be more than the IRA (not to mention being after tax money).

Are you married? If so, what will you spouse do if you die and he/she loses the income? Maybe a joint life annuity is better.

What is your risk tolerance? Will you invest the cash aggressively or conservatively?

What is the stability of the company guaranteeing the annuity? Annuities are NOT risk free.

What is your income tax situation? How much of the monthly payments go to Uncle Sam? The IRA is not taxed until you distribute it.

Etc.

So...and sorry I got carried away but...I think the suggestion to seek out a fee based planner and/or a CPA is a good one.

Disclaimer: The above advice is worth exactly what you paid for it. :)


Good luck and enjoy your retirement!

FWIW - Long story short... My grandfather had a pension annuity his employer purchased through an insurance company that specialised in annuities. It went belly-up in '09. He never knew because my aunt was maintaining his finances and the family made up the short-fall.

We learned that annuity programs are usually not insured. The ones that are, usually operate under government over-sight. There have been rumblings that some of those might be force-converted to Social Security. If you have the chance to be master of your own fate I'd think that could be a good thing.

Good luck!