Lump Sum Pension

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zakkie
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Lump Sum Pension

Postby zakkie » Fri Nov 16, 2012 6:16 pm

Looking for a bit of advice. A company that I worked for and left in 2002 is offering a lump sum payout of pension, an annuity, or can just wait until 2029 to get pension. I am 48 and unfortunately have been very foolish financially. Really no savings/retirement to speak of at this time. We do have debt in the range of 26k and the lump sum offer is 37k. If we do not roll it over to something else the cash after taxes would wipe out our debt (other than the house) but in essence still at ground zero as far as retirement.

1. take the lump sum and pay off debt and use debt payments (over 800 per month) for 401k, invest, etc.
2. Roll over and continue to pay off debt as best we can now.
3. wait for 700/month when turn 65.
4. take annuity now at approx. 180/month now. Use this to pay off debt quicker and then invest when complete.

My wife and I are wrestling with this and any pointers, experience, etc. would be helpful.

Tightwad
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Re: Lump Sum Pension

Postby Tightwad » Fri Nov 16, 2012 6:44 pm

Have you learned your lesson about living outside of your means? Are both of you committed to changing?

If so, I'd take the lump sum , pay off the debt, & learn from it.

If not, then keep it right where it is until you do learn to live within your paycheck. It'll be there when you retire.

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Re: Lump Sum Pension

Postby DoingHomework » Fri Nov 16, 2012 9:57 pm

I don't know. The annuity at 65 offer vs lump sum essentially guarantees that you get 9% return for the next 17 years. That's really hard to beat. I'd take the annuity later and hunker down to pay off the debt and fund the rest of your retirement.

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frugalcoconut
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Re: Lump Sum Pension

Postby frugalcoconut » Sat Nov 17, 2012 11:03 am

I personally don't trust that any particular company will still be around so far into the future that the pension will even be available at that point. If I was offered a lump sum as a guarantee to become my money under my own control ... versus taking the risk that the pension will be solvent down the road ... I would rather take it now *unless* I already had significant retirement funds elsewhere such that the pension would simply represent another way to diversify (which would actually lower my overall risk).

I would choose option # 2.

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Re: Lump Sum Pension

Postby jaiko » Sat Nov 17, 2012 11:44 am

You need to be aware in taking the lump sum that you will be socked by taxes. There is a 10% penalty PLUS the income tax required. Expect to lose in the vicinity of 35-40% of your precious 'lump sum'.

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Re: Lump Sum Pension

Postby peachy » Sat Nov 17, 2012 12:32 pm

Are you contributing to your retirement currently? What about ANY emergency savings?

If you have 800 to spend on debt currently, I would also take Option 2, but I would also be savings a little for emergency as well as putting SOME in my retirement if you aren't doing that yet. Maybe 26k isn't that unreasonable, but you really need to focus on getting rid of that debt. You're not a spring chicken anymore, and you probably want to be able to retire at some point, I'd imagine.

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Re: Lump Sum Pension

Postby emoore » Sat Nov 17, 2012 12:55 pm

Why would there be a 10% penalty for the lump sum? I though you would have to pay taxes on it. It's not a 401k but a pension. I have a good idea what company the OP is talking about. I know there is a chance any company could go under but I would rate the risk as low for this company if my guess is correct. Not sure that really changes anything.

I agree that the OP should pay for the debt as part of their normal expenses. I guess that the easy windfall might not be harsh enough and may lead to acruing more debt.

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Re: Lump Sum Pension

Postby jaiko » Sun Nov 18, 2012 1:18 pm

>>Why would there be a 10% penalty for the lump sum?>>

It's my understanding that ANY retirement funds drawn before age 59 will incur the IRS 10% penalty over and above income taxes due. Only a 72T distribution can avoid the 10% penalty, but that it is not an option for the employer to offer.

I may be wrong, so check with a tax professional.

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Re: Lump Sum Pension

Postby DoingHomework » Sun Nov 18, 2012 3:50 pm

jaiko wrote:>>Why would there be a 10% penalty for the lump sum?>>

It's my understanding that ANY retirement funds drawn before age 59 will incur the IRS 10% penalty over and above income taxes due. Only a 72T distribution can avoid the 10% penalty, but that it is not an option for the employer to offer.

I may be wrong, so check with a tax professional.


Usually a lump sum distribution can be rolled into an IRA to avoid taxes and penalties but it is certainly something to look into before making the decision.

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Re: Lump Sum Pension

Postby zakkie » Sun Nov 18, 2012 4:10 pm

Thanks all for the input.

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Re: Lump Sum Pension

Postby TripleE » Mon Nov 19, 2012 8:18 am

I'm pretty sure I know the company, because I just got one of those letters, and I left last year. I doubt they're going under anytime soon, since they're the sort of company that falls in the category of those that get bailouts from time to time. That said, I could see the pension buyout being a precursor to cancelling it altogether or rolling it into 401k type funds.

There was no mention of a penalty in the paperwork I got (although everyone knows you'll get hit with taxes), but there is an option to roll it into an existing 401k.

Personally, I'm leaning towards taking the lump sum and dumping into a 401k since I don't trust that fund to be around forever. In my case (since this may not be the same company), I know they've been putting a ton of money to keep the pensions afloat, at the risk of profit, for a couple years now. That's why I'm nervous about mine.

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Re: Lump Sum Pension

Postby DoingHomework » Mon Nov 19, 2012 8:52 am

While I can understand not naming the company, it could make a huge difference!

They are paying you 9+% NOT to take the lump sum. That is pretty good and suggests they don't want a lot of people to take the early distribution. But much depends on the specific situation.

I know a little about how pension accounting works so this could be as much about strengthening the long term balance sheet as anything.

Also, no one has mentioned PBGC. They are a government agency that guarantees pensions. In most cases they would cover those future payments in the event of a bankruptcy or default. The amounts we are talking about here are well within the PBGC limits. That should be an extremely important factor in the decision. You are essentially trading a government guaranteed 9+% return for rolling the dice yourself. Unless you expect the end of the world, that should be a very easy decision. You should not take the lump sum.

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Re: Lump Sum Pension

Postby Tightwad » Mon Nov 19, 2012 12:24 pm

DoingHomework wrote:Also, no one has mentioned PBGC. They are a government agency that guarantees pensions. In most cases they would cover those future payments in the event of a bankruptcy or default. The amounts we are talking about here are well within the PBGC limits. That should be an extremely important factor in the decision. You are essentially trading a government guaranteed 9+% return for rolling the dice yourself. Unless you expect the end of the world, that should be a very easy decision. You should not take the lump sum.

You're assuming that the PBGC won't be a broke & defunct Gov't entity when retirement rolls around. The US Gubniment can't manage a wooden nickel...why should this be any different?

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Re: Lump Sum Pension

Postby DoingHomework » Mon Nov 19, 2012 2:28 pm

Tightwad wrote:You're assuming that the PBGC won't be a broke & defunct Gov't entity when retirement rolls around. The US Gubniment can't manage a wooden nickel...why should this be any different?


That is true. That's why I said the choice is easy unless you believe the world is coming to an end. PBGC is independent and funded by fees on all pensions plans in the US. It also carries a government guarantee. The government COULD default but then you'd have to push that risk out into every other type of investment. There are also some constitutional arguments that could be made that Congress is not authorized to default. But that's a separate issue.

It's like the people who talk about Social Security running out of money - it can't. We have a unified federal budget. Congress can vote to change SS any time it wants. But if money truly gets short, entitlements and financial obligations rank higher than appropriations like defense spending. So basically, Congress is powerless to default without crippling the country and losing the support of all their lobbyists (I mean constituents). Congress could vote to discontinue PBGC but would have to figure out a way around the "taking" prohibitions of the constitution. It could happen but it's not something that is very likely.

In any event, the trade is a 9+% government guaranteed return through age 65 against a risky return. Seems like a no-brainer.


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