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Pension payment question - lump sum vs. monthly

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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.

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