Early pension buyout questions

**MonkeyMama** · 10-24-2010, 05:15 AM

#1 - Lord knows - my experience is that the amount in the pension plan depends on a wide variety of assumptions that the actuaries can make. I suppose you could get a rough estimate, but it would probably be a wide range.

#2 - In general, a lump sum is better. Especially if you are younger.

#3 - I do not know for sure - but logically the lump sum should not be taxed as ordinary income. IT's retirement money. However, if the only option is to write you a check for it (& not tranfer it into some some of tax-deferred account), then it would be taxed. If it is possible to roll it into an IRA (not sure?) it wouldn't be taxed. I googled a bit and didn't see a definitive answer on your options.

Sorry I don't have more answers for you. Best to ask your employer these questions before you decide anything.

**disneysteve** · 10-24-2010, 07:56 AM

I've been through one episode of a pension plan being dissolved and the assets distributed. In my case, I got a lump sum payment which I rolled over into an IRA. I honestly don't recall if there were any other options but I don't think there were. I am positive there was no current tax implication since I rolled the money over into the IRA.

**jIM_Ohio** · 10-24-2010, 08:54 AM

Originally posted by Fizgig View Post

Hi guys, just wondering if anyone has gone through an early pension buyout process and can answer some questions. My company announced a few days ago that they are dissolving the program but there are few details out yet. We will have the option of a lump sum or an annuity.

1) Does anyone know how to estimate the lump sum value? My pension is currently worth $713/mo for retirement at age 62. That would be in the year 2039, since I'm 33 now. I'm also female, which plays into the actuarial tables.

(I've played with some calculators but am not sure with my results. Am concerned about garbage in-garbage out.)

2) Thoughts on an annuity v. a lump sum? I'm strongly leaning towards the lump sum if only to have more control over the investments.

3) Is the buyout subject to ordinary income tax?

Thanks in advance for any help.

The company I work for now was owned by EDS for a short period of time. EDS had a pension, and when they sold us we were informed of 3 options:

1) receive cash (subject to taxes and 10% penalty)
2) receive a check (subject to 20% withholdings)
3) roll it into an IRA

Most pensions a person has "no basis" in (basis is a tax term). Make sure you know if you have basis in the pension (most people do not), then roll it into a rollover IRA and no tax is due until there is a distribution made (distribution is another tax term).

Lump sum is better than an annuity with most factors being equal- you may know things I don't about your situation which changes this rule of thumb. Here are pros/cons of each:

Pension
1) you never run out of money (check for life/income for life)
2) might have a lower benefit if you opt for a spousal benefit (for example $1000/mo if payments end when you die, $800/mo if payments end when spouse dies- assuming spouse dies second)
3) has a "guarantee" at federal level to a minor degree if the pension company goes under.

Rollover/lump sum
1) You have control over investments and the payout- if you need more money early in retirement and less late, you have that benefit (this is biggest upside to this case IMO)
2) money can be inherited by spouse without lowering benefit at any time
3) money is consumed until it is gone- if both spouses die and money is left, kids or other beneficiaries can use the money until it is gone.
4) money can run out before you die (this is biggest risk of either case)
5) you have more control over taxation (can do Roth conversions and similar)

Some items listed are a pro/con at the same time (like #3 for lump sum- that is a double edged sword).

If you are willing to plan, the risks with lump sum can be removed (for example with proper planning, the biggest risk- #4- can be removed but not guaranteed to be removed).

If you present facts to the contrary, then I might change my mind, I would error on side of taking a direct rollover/lump sum when you sever employment.

**tripods68** · 10-25-2010, 09:28 AM

If you were to receive $713.00 every time period (e.g. every month, six months, or every year) for the next 360 periods (or 30 years), and you continually reinvested this amount at a rate of 3%, the total series of cash flows at the end of the annuity's life would be worth $23,766.10 today.

@1% worth $69,316.67
@2% worth $35,621.42

and so on...

What does this mean to you? This helps you determine what a series of reinvested cash flows is worth today. So, if, for example, you buy a fixed-income investment and you know exactly how much you will be receiving every time period for a set number of time periods, you can find out exactly how much your future accumulated cash flows are worth today.

The key is finding what RATE of return is your ANNUITY is based on.

**Like2Plan** · 10-26-2010, 05:16 AM

Originally posted by Fizgig View Post

1) Does anyone know how to estimate the lump sum value? My pension is currently worth $713/mo for retirement at age 62. That would be in the year 2039, since I'm 33 now. I'm also female, which plays into the actuarial tables.

(I've played with some calculators but am not sure with my results. Am concerned about garbage in-garbage out.) 2) Thoughts on an annuity v. a lump sum? I'm strongly leaning towards the lump sum if only to have more control over the investments.

It would be difficult to make an assesment without having the actual values to compare. (I can understand why you might want not want to get into specifics) If your annuity is frozen in time, the value of the annuity will continue to erode each year with inflation. You have so many years to go before you retire it would be hard to imagine that this option would compare favoraby to the lump sum option. But, on the other hand--it depends on the buyout amount (and what the buyout will include).

3) Is the buyout subject to ordinary income tax?
Thanks in advance for any help.

I believe there are several aspects to this question. Will you be getting more than what you actually contributed (ie employer contribution, interest/earnings)? Were your contributions taxed or are they pre-tax?

Early pension buyout questions