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# Should I cash out my pension?

September 27th, 2014 at 02:28 pm

I realize that pensions are rare like unicorns these days, but I actually have a small one under a previous employer. It's not worth much because I only worked there for three and a half years before being laid off, but the pension is supposed to pay out \$261.88 per month starting in 2049 (when I turn 65).

They are now offering what I presume is a buyout. I can either:

1. Roll over a lump sum to an IRA or another employer's qualified plan (\$6352.78).
2. Take a lump sum cash distribution (\$5082.22).
3. Start monthly payments now (\$24.71).
4. Retain the original pension benefit.

Should I take it? To figure out if this is a good deal, I calculated the present value of this future annuity.

Step one: Calculate the PV of the annuity at age 65. I'm arbitrarily using an interest rate of 6%, and a life expectancy of 100 (so 35 years).

PV(0.06/12,12*35,261.88) = \$45,928.57

Step two: Discount that to today's dollars using the same rate.

PV(0.06,2049-2014,0,45928.57) = \$5975.55

So it looks like the lump sum payment is a reasonable offer. I'm also assuming an extremely long life expectancy, which would bias the value upward. I'm not sure what rate I should use, but 6% is a figure I can hope to beat by investing on my own. I've tried plugging in different interest rates, but that causes the PV to fluctuate wildly.

I am really tempted to take it. If I roll it into an IRA now, I know I'll have control of and access to it before age 65, which is particularly helpful if I'm planning ER. I also avoid the risk of the company underfunding, raiding, or otherwise reneging on their obligation (I'm looking at you, Hostess) anytime in the next 35 years. I have so far been completely ignoring my pension in retirement planning, so this would allow me to take it into account.

I have until month's end to decide. Hmm.

### 10 Responses to “Should I cash out my pension?”

1. rob62521 Says:

Since it is such a small sum each month, I think cashing it out and investing it yourself would make the most sense. If it were a larger sum that you could depend on, then I would say keep it. It's nice you even have it, isn't it?

2. creditcardfree Says:

I think I'd cash out in your situation. Thirty five years is a long time for a company to keep its pension promise.

3. Carol Says:

If you roll it into an IRA, and if ( when) you retire early, and if the tax laws aren't too different ( big If), that can be converted to a Roth without too much tax, making it worth even more.( lots of ifs).
My husband had one of these little orphan retirement rollovers, (very small) that we invested in something a little more daring and it grew very nicely.(thank you bull market).

4. snafu Says:

It's been my experience that defined pensions invest funds so conservatively that you are likely to build much more value by age 65 [2049] taking only a modest amount of risk. Anyway, the capital continues to add income since people don't withdraw all IRA capital on their 65th Birthday. The example offered by Hostess, GM and so many others make us better caretakers of our money...don't you think?

5. Petunia 100 Says:

Do not cash it out or begin monthly payments now. Roll it to an IRA or leave it alone, planning to draw it later.

6. PatientSaver Says:

I agree with Petunia. If you cash it out you won't end up investing it, human nature being what it is. Either leave it alone or roll it into the IRA. It's a small enough amount that you probably don't really need it and it could be much more useful to you later if you let it sit and grow now.

7. Kiki Says:

Why are they offering it to you? Are you aware of how the company is doing? Industry ok? Growing or failing? Chance for a better second offer?

8. amberfocus Says:

@Petunia + @PatientSaver - When I say "cash out", I mean take the lump sum as an IRA rollover. I don't want the cash distribution. I'm trying to jettison my cash holdings right now, not make it bigger. Plus, the IRA gets better tax treatment.

@Kiki - The company is offering buyouts because they are phasing out their pension program. Pensions are no longer offered to new hires, and they're trying to purge their existing pension rolls to reduce their future obligations and expedite the process. The industry, which is big pharma, is not doing too well (hence the layoffs :P). I don't know if there's a chance for a better second offer; I read that the payout offer is dependent on interest rates, and when rates are low (which is the case right now), it actually works in your favor. I am capable of biding my time if the situation warrants it, but I'm not sure if that's the best strategy here.

9. scfr Says:

I vote for rolling into an IRA.

10. LizfromtheBronx Says:

I just received this offer from my former employer as well (also big pharma - the BIGGEST pharma haha), for slightly more than yours. I am unfortunately in not as strong of a financial position as you are, so i am going to take the cash distribution, because even losing what I will to taxes will dramatically help my present cashflow and enable me to pay things off that I wouldn't be able to for quite a while.

In your situation though, I would absolutely take the lump sum rollover, pop it into your IRA, and forget about it, except when calculating your net worth statements. ;-)

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