Lump sum buyout or?

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sloinker

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Was contacted a week ago about a pension from a previous employer. They are basically wanting to give me a lump sum in lieu of monthly payments. I can draw now at 58 years old slightly less than $500 a month, or wait until whenever I want to take it and that $500 would become $1000 when I turn 67. That sum varies for the intervening years and those numbers are based on a single annuity. The lump sum is $100k which I can roll into my present 401k, a qualifying IRA, Roth IRA or in cash with taxes and penalties.
I was going to just let it sit until my brother mentioned that some pensions will disburse until they go broke and then become insolvent leaving ma at the whim of the federal pension guarantee folks and pennies on the dollar. Anyone have any real experience with this and any tips? I am hesitant to confer with an investment adviser as they tend to want to take charge of your money and the inherent fees provided to them.

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Typically, reinvesting the lump sum will produce greater returns than an annuity. Annuities usually have high overhead.

Look into reinvesting it in safe fixed income investments, like Treasury notes, and compare returns.

Suggest talking to a financial advisor on this.
 
They might be contacting you because your pension might be an unfunded liability for them and they are hoping that folks take the lump sum so they can reduce their costs. If the $100K is properly invested I see no reason why it can't double in the time that your pension would double if you waited. So by taking the $100K you for sure have this instead of depending on them in future in case something goes wrong with the company etc. Not trying to scare you, just something to consider.

That said I would talk to a financial adviser that specializes in investments and only makes money if you do. This is the type of adviser I have and he has made me excellent returns.

Good luck.
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When I had the opportunity some years ago to do this same thing, I took the lump sum. It's in your name and in your control. Use a rollover IRA.

What to put the money into will depend on your financial and investing knowledge, risk tolerance and your outlook for the future. Does your family generally live longer than normal or is your health questionable?

Check out low cost mutual funds for a place to park the money. Again your risk tolerance and the rest will determine what is your best option. There are all in one funds that are labeled conservative, moderate or aggressive. In your latter years you may want to stay more conservative or moderate. This is your choice. Lots of opinions will be told on what you should do but only you can determine for yourself what is best.

Some places to consider; Vanguard, Fidelity, and Charles Schwab. Look for no load funds with low expense ratios. Index funds generally win here as you are investing in many stocks within a index.
 
I would take the 100k and roll into an rollover investment account. I use vanguard and have been happy with them.


Now if you lived to 100 then the pension could pay better but that takes into account your life expectancy and the company staying afloat to pay.
 
I think the fact they want to buy you out tells you that you probably should take the monthly payments. 6% guaranteed now seems pretty good, or jumping to 12% in 9 years. But you should do some research into the pensions financials. They will know if they are underfunded or not.
 
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As an example, I have just over $100k in a income fund that spits out between $450-500 each month that goes into my bank. The principle is still there.
 
Does the pension end with spouse or designated only? For example I will have the same choice … but if my wife and I die early the residual money would not reach the kids whereas with a lump sum there are options there …
 
Talk to a financial advisor. There are risks both ways as mine has told me.

1. The company (your previous employer) could go bankrupt and they'll take all pension to pay off creditors, leaving you with nothing.
2. You could take to lump sum and roll it into a 401K or IRA but when you draw from it, it may be less than $1000.

I selected #2 when I left my company and rolled it into my Roth IRA. If I got less than the $1000, something is better than nothing. The company I had the pension with did go bankrupt.
 
Call Charles Schwab. They will analyze your current annuity and give you sound advice.
I have a sizeable annuity at Fidelity. There are all kinds of annuities, some are good; others horrible.

Call Schwab and make an appointment.
If you take it over, the biggest question is Roth or regular IRA.

Good luck; that's a great problem to have.
 
The rule of thumb retirement fund drawdown initial rate of 4% plus inflation for following years doesn't apply here since there is no inflation protection on the payment. The $500 monthly payment on $100k would equate to a 6% return on investment, with no withdrawal of principal. So, if you can get a 6% return (index funds have averaged a bit over 8% over good times and bad), you would get the entire amount they are offering in payments for your lifetime, plus have $100k in the "bank" (brokerage account in mutual funds) after you pass, for your spouse or other heirs. Or, you could drawdown at a higher rate, and spend it if you elect.

Of course there is no guarantee you will get a 6% return, but IMO that is at the bottom end of the range you could expect over time. Plus, as has been mentioned, you could lose part of it if you didn't take the payout and the company went broke.

I'd take the cash. If you won't need any of it for some time, the advice above of rolling it into a Roth IRA (you will have to pay the tax on the rollover amount, so you may want to do it over a few years) is a good idea. In that case you would roll it into a regular IRA, then transfer to a Roth the amount you want to convert each year. All of your gains from the time you deposit it until when you take it out are tax free in a Roth.
 
Originally Posted by JeffKeryk
Call Charles Schwab. They will analyze your current annuity and give you sound advice.
I have a sizeable annuity at Fidelity. There are all kinds of annuities, some are good; others horrible.

Call Schwab and make an appointment.
If you take it over, the biggest question is Roth or regular IRA.

Good luck; that's a great problem to have.

Dittos on Charles Schwab. I have had an account with them for several years now. Excellent service. You talk to a real person.

They have some of the least expensive investment vehicles in the industry.
 
get a financial adviser...but I would roll it now.
My dad retired early, took his pension and a few years in, company sold and the pension with it.
That was 40 years ago, but it happened.
 
Roll that money ASAP into an IRA.

Buy the following low cost ETFs:
S&P 500, Total Stock Market, Large Cap growth, Mega Cap growth, NASDAQ 100..... and definitely buy some AMZN for your IRA. Maybe a bunch of good paying dividend stocks ?

Be very careful with some financial advisors wanting to steer you into investments with high fees and commissions. Some advisors are crooks and only see $$$$.

I also have a pension and will also roll it over the very first day I am eligible to do so.
 
In addition to some of the issues already mentioned, an employer's old-style defined benefit plan with a payout of $500/mo has the yearly problem of inflation eating away at the monthly payment. With just 10 years of relatively tame inflation that monthly check will take a hit. According to the US Inflation Calculator, a retiree in 1980 at age 65 who received a typical non-COLA annuity from a DBP of $500, their purchasing power dropped to $239 by the year 2000, a roughly 52% drop.

I agree with the suggestions above. Take the lump sum. Definitely get in touch with a retirement specialist at Charles Schwab, Fidelity or Vanguard. (Better yet, two of them; compare their advice.)
 
How financially sound is the business? $100K cash in the hand now, sure beats nothing later if the company folds.

If you put 100K in fund today and it got 5% returns for 10 years, you would have like $160K in your account in ten years.

If you started taking the pension distributions today at $500 per month, it would take 16 years before you got to that $100,000. Are you going to live another 16 years? Perhaps a 50/50 shot at this point if you outlive 16 years, considering your current age.

Taking the buyout now looks like a solid, gauranteed option, to me. A bird in the hand and all.
 
If they are buying out, it means they can smell trouble down the road ...

Or, they are really good money managers, and they are looking for cheap ways out so there's more for them ...

Ask them what gives and see if they're fully funded?
 
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