Pension payment question - lump sum vs. monthly

[redstar_57]

I'm eligible to take early retirement from my corporate employer.  I have a choice of a $5500 per month payment or a $1 million lump sum.  Ordinarily I would taken the annuity payments without a second thought, but the company has a huge amount of debt, its pension plan is only 75% funded. and about 20% of this is funded with its own stock.  In short, I have some doubts about the company's future and it's ability to meet its long term obligations.  How do I decide what option would be best for me? 

[iam4liberty]

Congratulations on banking a seven figure pension.

There is a financial technique called Net Present Value which can provide some perspective.  What it does is discount furture cash payments by an expected "discount rate" to take into account things like inflation and then sums it up in today's value. For example, if you assume $66,000 a year and a discount rate of 3.5% per year (common for inflation estimate) then it would take 20 years for the monthly payments to match the $1M lump sum in terms of today's value, with everything after 20 years.  Everything after 20 years is gravy, for example ten more years would be worth another $280 thousand.

However, there may be tax diferences between the two which would change the outcome.  You really want to use the cash flow net of taxes.  So you need a person familiar with that aspect to help you understand the true cash flows in terms of take home pay.

There is also your own behavior.  Are you the type of person who will put the $1M in relatively safe, diversified investment portfolio or will you be too tempted to spend it? 

Finally, you need to understand inheretance of monthly payouts.  Will it just end if you die, or are there survival benefits for your family?  It is sad when a surviving spouse finds out that the pension that they depend on ends when their partner dies.

These are the main "moving parts" that you will need to understand before making a decision.  If you dont have this info it may be worthwhile to talk to a professional.

[David in MN]

Many financial planners will sit down for free and discuss if they are a good fit for you. You might even have free services through your pension. If you're not sure it's worth getting help. We met with one and he basically told my wife he would hire me (sometimes you need a neutral party). It seems like there are a lot of variables but that's what they do every day. And (from the tone of the question) even if you took the million you probably need help managing it.

Accountants and financial planners can be intimidating. Laying out your net worth is often a squeamish experience. But if you can get over it you'll probably find value. Optimizing a pension, Social Security, retirement funds, and personal savings is often a mess and professional help can be great.

[bigbear]

I'll second the thought of working with an advisor and understanding the pension rules/elections you have.  Interview a few to see how they would handle pensions and what they would look at to determine the wisdom either way.  And like you said, they need to account for the company and industry itself. 

My wife's grandfather worked for Bethlehem Steel back in it's hey day.  He and his wife had a decent pension.  Then the company went bankrupt and his pension payout was cut significantly.  I don't know the exact number, but it changed their lifestyle.  Then he died and the vast majority of what was left was gone.  Granny only had the SS left and had to move in with my in-laws for the last few years of her life.  All because he elected to have a higher pension while he was alive instead of having a lower payment in exchange for survival benefits.

[Smurf Hunter]

Good points.

1) seek professional guidance
2) know thy self

We've all heard "If I had a million dollars...".  If you invested and managed a perpetual 6.6% annual return, you'd get that same monthly payout without touching the principal.
Of course that's not a certainty.

It's possible after talking to professionals, you choose a hybrid approach where you take the lump sum and structure it into some kind of income investment.
IMHO it would be foolish to take the lump sum without a disciplined plan to preserve wealth. Life expectancy is obviously a huge factor.  If you expect to leave 35+ years, that's a different strategy than < 10 years.

[Josh the Aspie]

Another thing to take into account is any debt you have now.

If you have an ongoing mortgage at a higher interest rate than your expected return on low-risk investment, then taking the lump sum in order to pay out the mortgage may affect what makes sense for your situation.

[FreeLancer]

I think that's a really tough question, one that likely depends on a whole bunch of variables you probably don't want to share with us on this forum, but in general, if the company's pension fund had long-term viability, it probably would be better for your sanity to take the monthly payout instead of the lump sum. 

Large windfalls tend to bring a bunch of emotional baggage along for the ride, which can cloud otherwise sound judgement.  Look no further than the average lottery winner, pro athlete, or celebrity for examples of sad outcomes.  If you don't have the confidence to invest the money yourself you have to decide who to trust to invest it for you.  There's stress that comes with watching large dollar denominated numbers fluctuate up and down with the markets in the short term, while still trying to keep a rational eye on the long term goal and deciding how much risk to take to make the nest egg last.  That's one of the benefits of getting rich slowly, you tend to develop the virtues necessary for managing the wealth in the process of generating it in the first place.

[iam4liberty]

This would also be a good one to submit to Jack.  A lot of preppers face this decision.

[racer038]

While pension administrators will say that your benefits are "locked in" once you start receiving them as an annuity, there are many documented cases where that was not true.  "A bird in the hand" governed my decision.  I decided that I did not trust my company, their pension administrator, or the government to protect my pension.  I took the lump sum and placed a portion of it with a financial advisor and the rest I placed into self directed IRA bank POD CDs.  There had been a lot of drama associated with my company pension and there was little trust.  The being "out of control" feeling was most overwhelming as the administrator used every trick in the book to reduce benefits.  Legal resolutions to pension issues take years and lots of attorney fees and seldom come to any satisfactory conclusion.  Before a person agrees to an annuity, they should read the PLAN.  The official "PLAN" not the 10 page recap they give you.  We found out that our recap and other documents giving us examples of how the pension worked were flawed.  Only the Official PLAN is the law.  Read it.  It took us 6 months to obtain a copy of our PLAN from our Administrator.