Cash out small pension?

My wife earned a pension working for a major accounting firm that she left this year, we just received her pension information. They’re offering a cash buyout now of about $20k, or we can hold out for pension payments (starting now!) that peak at $250 a month when we’re 65 (we’re 39 now).

My gut tells me it’d be better to cash out and roll the dice in an index fund versus tracking this pension 26 years from now, but the internet says we’ll get more money with the payments. We’re on track for retirement otherwise and I’ll be collecting a military retirement starting at 60, so I kinda just don’t want to deal with this. What would the dope do?

Cash it out. 25 years is a looooonnng time. Buy a CD if you don’t want to spend it, or what ever pays better interest.

It peaks at $250? What does it start at and what/when are the step increases (if any). It’d be easier to give an opinion knowing those 2 extra bits of info.

Not sure how to describe these step increases, we can start it next year (40) at 83/mo, 45 is 103, 50 is 129, 60 is 210, 65 is the mandatory election age and its 274.

My son faced the same decision at age 31 (for about the same payout, as well.)

In 25 years, $274 won’t even pay for your monthly haircuts.

Invest the $20K now and build up a little next egg.

I was faced with a similar conundrum: about $25,000 now (penalty-free if rolled over into another approved retirement account), $108 a month now, or about $250 a month at age 65. Because I was about 50 at the time, I figured everything up and took the account now and rolled it over into a mutual fund I already had.

There’s no guarantee that you’ll live to be 65 or even that the money would be there then.

This is a math problem. Look what an annuity paying what whichever of the payout options you prefer would cost you. Compare, and decide. Having some defined income available in retirement might allow you to be a little more risk tolerant, goosing your returns on your other investments.

Doing a very quickie spreadsheet and assuming 7% return (say, from an index fund), then at the end of age 70 I get a value for **both **the “put the monthly payments into a fund” and the “cash out and put the $20k in an index fund” of about $152k.

Before that point, the cash out option is best, and after that the payments are best. So it really depends on how much you value simplicity, risk, expected return, and the odds of living a long time past 70. I’d probably go for the payments but it would be a tough choice. There’s something to be said about investing the chunk and forgetting about it.

Are there survivor benefits? In other words, if she passes away do you get any of it? My pension would pay my wife about half, but cashing it out meant she would get it all, or whatever was left.
You should also think about the tax implications of getting cash payments when your tax rate is relatively high.
I’m quite surprised that they are offering cash payments now. When I got the opportunity to cash out my pension, which I took at 60 or so, that was not an option.

Did I do the math right? Taking the monthly and putting it under your mattress I came up with $54,980 by age 65. Can you turn $25K into $55K or more in 25 years? I’m thinking most definitely. Even with investing the monthly I still see taking the lump sum as the better. Just invest it wisely and don’t touch it.

Don’t forget taxes. The cash out now is going to be taxed at a decent rate.

The taxes on the extra $250 a month later on may or may not be depending on how much other retirement income you’re expecting. (And don’t forget that due to taxes on SS, the marginal tax rate might be surprisingly high when you retire.)

Yeah, that came up in our discussion last night, the “Arthur Andersen” factor.

Thank you very much for this analysis, I struggle with the math but I figured there was a crossover point. 70 seems forever away.

Yes, the numbers I mentioned above include a 50% survivorship benefit, but they don’t change much if I take myself out of the equation.

The thought of “retiring” and collecting a pension at 40 did seem pretty amusing to me, although it’s pretty standard for military so I guess not that strange.

I need to look into this more but there’s a way to cash out and transfer it directly to an IRA to defer the taxes, I think.

250 a month is 3 grand a year. You usually figure to withdraw 4% of your investment per year in retirement. So, can you turn your 20 grand into 75 grand or more in 26 years? A quick back of the envelope calculation tells me that your investments would have to average a touch over 5% a year to do that (About 5.215%). Soo… if your investment strategy is a CD, then you want the pension since you ain’t getting 5% out of it. An indexed fund usually returns about 7%, but be careful on your fees, so that would give you around a 400$ a month return. Of course, you also have to factor in that if you put it in a mutual fund, you will be subject to 10% tax penalty and taxes on it. On the other hand if you roll it over to an IRA, you can avoid much of that. The logical choice is to roll it over into an IRA. I’m not sure what I would do though, because I love the idea of a pension, even if it’s small just due to the mitigated risk of a market collapse two months before you want to retire (Ask those people born in the late 40s about market risk sometime) and the fact that it will hopefully be a minor part of your portfolio, so you’re really not risking much leaving it where it is. On the other hand, in 25 years, 250 bucks a month is likely going to be such a small pittance that it’s going to basically be a couple of nice meals a month, maybe worth a bit over 100 bucks in today’s money.

My first job after I got out of the Navy had a pension because 401Ks had not been invented yet. When I left, the sheet they gave me said it would be $278 a month. Due to moves I stopped getting statements, but when I was getting ready to retire I inquired and yes, the pension was still waiting. Great, I thought to my self, even at 3% it has to be at least $400 a month now. Nope; $278 – they must have stuck the money in an old sock.

There is and in fact if you don’t do that a lump sum cash out of a pension is subject to an additional penalty tax like an early IRA withdrawal.

To clarify I assume you mean by the ‘steps’ that you’d receive eg $83/mo for life starting now, but $274/mo starting at 65, not that you could 83 now and 274 later.

In that case quick spreadsheet analysis assuming age of death 82 for the primary, and 90 for the survivor, the $20k is discounting the $274/mo payments at around 3.6%. I never agree with people pulling numbers out of the air like 7% for stock funds. That’s what has happened (or even better), what might happen, but if you want a gteed return (as far as any exists) govt bonds pay well less than 3.6%. Here you wouldn’t be talking quite govt risk but it’s not really the risk of the company disappearing, you only lose the pension if the company and the Pension Benefit Gtee Corp disappear (PBGC backstop is limited but to amounts way higher than yours).

Of course I’m not saying to avoid the risk of stocks, I have plenty of stocks. Just quibbling with people stating risky returns as if certain.

Also, for most people and seems you too, this is such a small amount per month that there might be a serious risk of forgetting about it if you decide to wait till 65, and I really see no point in receiving amounts like 83/mo unless somebody was really down to their last .

Once it’s in your IRA, you don’t have to worry about forgetting, or who/how to contact the company decades from now, etc. And you probably (not certainly) can get a higher return.

One other point to consider: in 25 years will this former employer and its pension fund still exist?

If you decide not to take the cash, you’re accepting a contingency that the pension may no longer exist in 25 years.

In the US there’s a federal govt sponsored entity called the Pension Benefit Guarantee Corporation which assumes the pension liabilities of bankrupt companies. PBGC payouts have limits though not relevant in this case. Moreover that entity is not backed by an explicit govt gtee. In theory it makes the payouts from fees charged to all pension plans. And it’s got a cumulative deficit now. But in practical politics it will be hard for Congress to entirely abandon it.

So, assuming PBGC coverage the pension is not like investing in a bond issued by the company. It’s safer than that. Although it’s not quite like investing in a bond carrying the ‘full faith and credit’ of the US federal govt. It’s somewhere in between.

No, the cash out will not be taxed now if it is rolled into a tax deferred retirement fund.

I think it would be 250 if the wife waits to get anything until then, not “get x now and it increases to 250”.

I had a similar situation, years back. My company (also an accounting firm!) had gone from defined benefit to defined contribution. At the time our group was sold to another firm, I was vested in both, and I could have elected to collect a monthly annuity starting right then - this was about 15 years back. The cashout value would have been something like 5K. The annuity starting them would have been about 55 dollars a month. If I’d waited until 65 it would work out to about 250 a month.

5K wasn’t enough to mess with. I don’t recall whether I even had the option to take a lump sum payout. So I left it in place. There is some joint survivorship option available when I do take it. I figure it’ll be almost enough to pay my MediGap coverage when the time comes.

I have another retirement bucket from that same employer - defined contribution. When I retire, I have the choice of having it converted all or in part to an annuity (with some survivor benefits), but that amount depends on how the market performs. If it does well between now and then, the annuity is more. If not… oh well. It’s different from a 401(k) in that I could NOT take a distribution without spousal approval, even to roll it into an IRA. I wound up leaving it in place - I figure it wouldn’t do any better (or worse) than in an IRA.

Re the OP: You’re (almost) guaranteed that 250 a month if you leave it in place. “almost” because of course sometimes pensions are… underfunded. If you take the cashout and invest it in an IRA, anything could happen to the market.

On the other hand, you’re 25+ years away from retirement. As others have said, anything could happen between now and then that would mean that 250 doesn’t show up - it’s part of their underwriting / actuarial process, in that they assume a certain amount will never have to be paid. While I’m normally a big proponent of “blind and crazy” (out of sight, out of mind), in this case I’d agree that taking a distribution makes more sense - ASSUMING IT IS TREATED CORRECTLY FOR TAX PURPOSES.

If the organization reports it to the IRS as a regular payout, vs a rollover, you could get a nasty tax bill. I had a bank once report an inherited IRA as rolled over to a regular account vs an IRA - and had to get them to issue corrected paperwork as the taxes would have wiped out half the balance.

Interesting: was that a private or public employer? I’d bet the sheet they gave you said “if you retire at 65, this is what you’ll get”.

If it was a Federal employer (I assume not, since you mention 401(k)), the pension is calculated as a factor of the number of years you were employed, times your “high-5” average salary (high-3 for some older plans). So if you worked 10 years, and your salary those 5 was 48, 59, 50, 51 and 52K, your average was 50K. And 2% (I think) per year, times number of years, = 20%, so you’d get 10K in pension. That wouldn’t change even 30 years later, if you didn’t have any more years to add to the equation.