Pension - any ideas on which option to choose?

[minnie1928]

My mom is going to retire at the end of November. Her pension has 8 choices for disbursement, and we've narrowed them down to 2.

1. Option #1 - receive about $1200/mth for the rest of her life
2. Option #2 - cash out about $33,000 to roll into self directed IRA and then receive about $925/mth for the rest of her life

What would you do? Are there any websites that help with pension analysis?

[kork13]

By the numbers, your option 1 is better for her. Averaging a reasonable, conservative return, she wouldn't be able to make up the $275 that she would otherwise be making. More likely, she could produce maybe $125-$150/mo off of that $33k.

The real answer depends on how reliable that $1200/mo would be. What sort of company is it? Is she able to entrust her retirement to this company's financial stability? If it's questionable, I would strongly consider the cash out option, just for the added flexibility. If the company is stable, long-standing, with sound business practices, I would go for the larger pension payment. Hopefully, of course, she also has assets beyond this pension, which would provide for her even in the event the company does go under....

Another question to ask.... is the pension plan inflation-adjusted? If not, either option will suit her poorly as the years go by -- the fixed pension payment will buy less and less each year.

[minnie1928]

The real answer depends on how reliable that $1200/mo would be. What sort of company is it? Is she able to entrust her retirement to this company's financial stability?

Another question to ask.... is the pension plan inflation-adjusted? If not, either option will suit her poorly as the years go by -- the fixed pension payment will buy less and less each year.

The pension is from the county in which she lives in (she works in the courthouse).

I need to find out if it's inflation adjusted. Unfortunately, I have to ask questions through my mom and sometimes things get lost in the translation.

[sandrark]

Minnie:

ALERT! For my pension plan (I'm a state employee) - If I take the lump-sum option, I am FORFEITING medical coverage as a retiree.

Check to make sure that Option #2 still includes medical benefits if she takes the lump sum. that could be a VERY expensive oversight.

Sandi

[minnie1928]

Sandi,

Thanks for the heads up. I don't think mom qualifies to continue her medical insurance at her current prices (dirt, dirt cheap prices) after retirement. I sent mom an email this morning with questions to ask her HR department. I'm hoping that she'll just forward the email to them so we can get a straight answer.

Anyway, one of the questions asked whether or not future payments will be inflation adjusted and the other one asks about her eligibility for insurance and the cost.

Thanks! I'll post back once I hear back from mom...

[am_vanquish]

I personally would love to have a DB (pension) benefit that is set in stone regardless of market performance. This is equivalent to option #1. By going with Option #2, you're basically converting it to a DC (IRA / 401k) balance, which is (to some extent) subject to market performance.

I would not be concerned about losing the pension as the result of company performance, as she is well within the limits of the PBGC, which insures the pension benefit should the plan run out of money, go bankrupt, and terminate.

In the end, there are several personal factors that should play into this decision. Perhaps the largest should be her level of risk tolerance. There is a lot to be said about having a guaranteed benefit that can't be affected by market turmoil. Also, does she have other sources of retirement income other than Social Security? Even though I'm a big fan of DB/pension benefits, I will agree that the inflation-adjustment will become a much larger factor in the decision. However, if she has a separate IRA/401k/403b source of income, these should be invested so that they offset the effects of inflation, making option #1 more appealing.

[minnie1928]

The only income she will have is her pension and SS. Her cash savings is only about $10k.

[jIM_Ohio]

My mom is going to retire at the end of November. Her pension has 8 choices for disbursement, and we've narrowed them down to 2.

1. Option #1 - receive about $1200/mth for the rest of her life
2. Option #2 - cash out about $33,000 to roll into self directed IRA and then receive about $925/mth for the rest of her life

What would you do? Are there any websites that help with pension analysis?

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How did you get $925/month from 33k lump sum?

I have 33k as being $1320 per YEAR withdrawn from the IRA

did I miss a zero? If you take out $925/mo=$11k per year, the money will be lucky to last 4 years.

Check your math on option #2. In general you can withdraw 4% per year, a 5% withdraw is living on the edge and a 3% withdraw is conservative and a 2% withdraw is really conservative.

Check the math
I would side with option B if the options are close- control your own money. You can also keep money in family if you do this right.

[minnie1928]

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How did you get $925/month from 33k lump sum?

I'm sorry, I think I may have presented it in a way that was less than clear. The $925/month is what the remaining portion of her pension would be per month if she withdraws the $33,000 that she earned/contributed herself. The $925/month represents the portion of her total pension that was contributed by the employer.

Does that make sense?

[jIM_Ohio]

I'm sorry, I think I may have presented it in a way that was less than clear. The $925/month is what the remaining portion of her pension would be per month if she withdraws the $33,000 that she earned/contributed herself. The $925/month represents the portion of her total pension that was contributed by the employer.

Does that make sense?

The $33,000 is worth $1320 annually in withdraws ($1320 is 4% of 33k). That is about $110 per month.

I say take out the 33k. She would be "losing" about $100/mo income. However because my guess is the pension is NOT COLA (cost of living adjusted), she will like having the 33k under her control.

Here is what I see:
Pension is $1200/mo for life. Probably not COLA (but check). This is not very much ($14k per year). Will she be able to live on pension+ SS?

or

Reduced pension of $925/month for life. Probably not COLA but check. This is $11k per year. "Only" 3k less per year.
plus 33k in the bank.

Then take the 33k and invest it in a 40-60 allocation (which usually returns close to 4-4.5% annually in yield alone, overall return is in 6% range with mild volatility.

4% of 33k is $1320, she gains $1300 of the $3000 she "lost".

BUT the advantage is that as cost of things go up, so does the 4%- each year she can increase the $1320 by about 3% to account for inflation (so year 1 take out $1320, year 2 take out $1320+3%=$1360, year 3 take out $1360+3%=$1400 and so on). Increase withdraws 3% each year. That 33k should be there close to your mother's remaining life.

In addition if she ever needs a lump sum, the money is there for her. The pension does not offer that. In addition if the pension goes under, your mother still has some assets- the 33k.

The biggest question for your mother- is $2000 extra income per year worth the risk of the pension going under and having complete control over her financial income during retirement?

Only she can answer that.

There is more discussion needed on the 33k, 40-60 allocation, 4% withdraw and my definition of "mild volatility". None of the above was discussed prior to me suggesting it. That needs to be factored in (if she was going to put the 33k into CDs or 100% bonds, the return will be much less than the 6% and interest paid much less than the 4% I suggested.

[minnie1928]

After discussing with mom, it looks like she'll be going with the first option for the larger monthly check. She has zero risk tolerance, so if she were to pull her cash portion out of the pension it would only go into some form of a CD ladder anyway. Certainly not the most lucrative of options. Also, since it is provided by the local county government she feels that the pension is fairly secure.

Thanks to everyone for their advice!