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.
Should I cash out my pension?
September 27th, 2014 at 10:28 pm
September 27th, 2014 at 11:00 pm 1411855206
September 28th, 2014 at 12:23 am 1411860200
September 28th, 2014 at 01:53 am 1411865621
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).
September 28th, 2014 at 02:02 am 1411866176
September 28th, 2014 at 02:48 am 1411868933
September 28th, 2014 at 03:06 am 1411869974
September 28th, 2014 at 05:09 am 1411877351
September 28th, 2014 at 05:39 am 1411879172
@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.
September 28th, 2014 at 07:35 pm 1411929309
September 29th, 2014 at 06:55 pm 1412013340
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. ;-)