you’re not directly at risk for private companies not funding their pensions if covered by PBGC which can generally be assumed (but in real life check it out to make sure it’s not a strange exception). You’re at risk to the plan not having enough money and PBGC not having enough out of its own funding via fees charged to pension plans to make up the difference and Congress refusing to bail out PBGC. That trifecta could happen, but it’s considerably less likely than just the first event.
‘IRA’ doesn’t mean ‘stock market’. You could roll the ~$20k into an IRA and buy US treasuries in it, or even some fund of diversified rich country govt bonds if you don’t believe US credit is solid. But basically anything you want, super risky to non-risky, or any combination, subject to ‘lower risk, lower expected return’.
True, about it not meaning “stock market”. If you invest it in government bonds, your rate of return is likely to be lower overall, quite possibly lower than if you left the money in the plan. I’m not a financial analyst - but to do better than the plan’s returns, you probably need to put at least some into a higher-risk investment like stocks or bonds.
Re PBGC: I was under the impression that it only paid some percentage of the lost pension, e.g. if you got 1,000 a month, they’d pay 600 or something. I can’t find a cite to support that. There are some maximums, but most of us are not going to be anywhere NEAR those maximums.
Oh. In that case it would be absurd not to take the 25K now.
My Dad had a pension that did give cost of living increases, which is what I mistook this for. But he started his pension in the mid-80’s from an employer he had been at since the early 50’s.
I’m surprised there are even private companies left that have regular pensions yet.
As I mentioned above, quick spreadsheet analysis indicates OP’s employer is discounting future pension payments at somewhere around 3.6%, so treasuries would give a lower but even safer return (30 treasury right around 3% now). But a not very risky mix of assets could match or exceed 3.6% as an expected return.
PBGC tops up a pension to 100% of the promised amount up to a $ limit, limits for 2018 in link, $65k/yr for a pension starting at age 65, lower/higher for pensions starting earlier/later, but way above the numbers being discussed here.
But again that’s assuming PBGC itself can fulfill its obligations, or is bailed out by Congress if it can’t with its own funds from fees charged to pension plans. That’s a pretty safe IMO but not 100% safe bet.
I’m surprised the OP’s wife qualified for one. At age 39, let’s say she started there at age 22, so that’s 17 years ago. My employer (another accounting firm) cut off their defined-benefit plan well before that.
Companies are finding more and more ways to cut even the defined contribution plans.
At the job I mentioned, they went from defined benefit to defined contribution: they had a 401(k), but they also put aside their own money to match 5% of your salary. That would grow (and you had investment choices to make) and would be turned into an annuity or lump sum when you were ready to retire. So I have that, plus the 250/month (at age 65) defined benefit plan.
When we were sold to another firm, that firm had a very similar 5% thing, though their 5% was incremented using an interest rate formula which was never terribly high. They also had a 401(k) that would match half of your contributions, up to 6% - i.e. you got 3% from them, so a total of 8%.
Then they changed it to only a 401(k) plan. Longer-term employees get 2% into the 401(k) regardless of what we put, plus 1:1 matching up to 6% - so in total, the same 8% we’d been getting, just all in the 401(k). That had the potential to be better than the interest on the 5%. Newer employees got 1% free and matching up to 5%, so they were maxed at getting 6%.
THEN they pulled the increasingly-popular trick of changing their matching so that if you weren’t there all year, you got screwed out of their part entirely. Yep: quit in November, and you get nothing from them whatsoever (just your own contributions). More and more employers are pulling crap like this. I think if I were to retire mid-year I’d still get their contribution for part of the year - so if they ever decide to lay me off, I may have to threaten them with an age discrimination lawsuit or something to make them let me “retire”.