An employer of mine from 20+ years ago has sent me a letter stating that I can cash out my pension plan for $X.XX.
I can roll the money into a 401k or IRA or if I don’t respond, the money will be paid as a monthly benefit after the age of 55 or 65.
I know nothing about pensions or retirement plans. What benefit is it to a company to distribute this money now? It’s unlikely that they’re doing it for my best interests.
Also, where does a person go to get advice on rolling this money into another account or starting a new one? My bank? A financial advisor? Where do you find one of those?
The amount of cash you’ll get with a buyout is less than the total amount of cash you’ll probably get spread out of the years you’d receive a monthly pension. Obviously, this depends on how long you live. And you’d have to wait for several decades to collect that larger total.
There are new IRS rules that have encouraged a lot of companies to do this. The lump sum amount is determined by these rules. GM, Ford, and Lucent have, at least, and I suspect a lot more. The companies have decided to get the pensions off their books.
I got this offer from Lucent and took it. The rules of my pension would have been that I paid a bit each month for a kind of insurance that meant that my wife would have gotten 50% of the pension if I predeceased her. My kids would get nothing. I was able to move the money into an annuity where our kids would inherit any balance. There are ones which pay a bit more if you don’t have this feature which might work better for you. We spend considerable time with our financial planner on this. I might have done something different if this were a major part of my retirement money. I was assuming my pension would pay for a cup of coffee a week or so (it was also 16 years old) so I was very pleased to see what the lump sum was. Found money!
I’d suggest you start interviewing financial advisers and find one you like. When my first kid was little I started with one to set up a college fund, and having a relationship with him already was helpful when I got a big buyout. Check fees, check how responsive they are (depends on home much money you have in) and mostly check to see if their suggestions make you comfortable.
BTW, he considered the pension a pretty good deal, and I might have stayed with it if it were not for the inheritance issue.
The benifit to the company is it cost them a lot less over time.
If the company has a defined benifite plan every year they have to do the calculations to see if they are putting enough money. They have to look at the age of the employees in the plan guess how long they will live. Guess when they will retire. Figure what their monthly retirement will be. Will there be a survivor benifit. And if there is not enough money in the fund put more into it. Then send all the paper work to the feds. Many company retirement funds turn out to be only 50% funded.
With a defind contribution account it is a lot simpler. Just put in so much per employee every month. Then caculate the interest that the employee has earned and add that. No complex caculations.
A side benifit is the company has to put less into the defind contribution fund to impress the employee more, so it sounds like a better deal than it is. Which would you rather get $7.00 an hour put in our fund or and inrease of retirement by $246 per month for every year you work at a company?
For me I prefer the defined benifite. I can calculate how much income I can spend every month for the rest of my life. With a defind amount how much canI spend/ Will I out live my account or the other way around. If my wife out lives me she will get survivor benifits of 50 to 75% for the rest of her life. Now the disadvantage is if we do not live long the kids do not get any inhertance.
Let me give you and example of converting a retirement fund to a cash account. Define benifite VS defined contribution.
I worked for a department store chain that was purchased by another department store chain. If I had not worked for the new department store my retirement at 65 from the old company would have been $607 a month. But because I went to the new company they converted all the retirement accounts to cash accounts. My account was $50,000. $607 yeilds $7284 per year. In 6.8 years I would have recieved $50,000 in retirement. So if I live to 72 I would recieve more from the retirement fund.
Some companies do this simply to save money when they don’t really have to. They are greedy bastards.
Some companies do this because they’re running out of money and are desperate to avoid bankruptcy that would come from trying to keep the pension plan solvent. In this case, it’s wise to take the buy-out, because unless the pension plan was put into an airtight trust fund, the failure of the company means the failure of the pension plan and you’ll wind up with nothing.
I did a net present value calc for you in Excel using different IRRs (internal rates of return) - that’s just the rate you use to discount future cash flows back to the present. The higher the IRR, the lower the NPV - as you’ll see from the chart.
Every spreadsheet program will have an NPV function, so you should be able to reproduce this or I’ll be happy to email it to you. I’m not guaranteeing correctness though. I haven’t worked with this stuff in a very, very long time.
Anyway, I assumed that you would retire at 65. 2007 actuarial tables gave your life expectancy as 80. So I put in 12 years of 0 cash flow and 18 years of $1200 per year or $100 per month (annual compounding only - I think). If I did it correctly, the table is the result.
Note: found one mistake already. With my godlike powers, I granted you an extra 3 years of life and calculated the values based on 18 years of payments and not the 15 that the actuaries say you’re only entitled to. I’ll be expecting my cut.
Thank you all for your help. The concept makes more sense to me now. I will contact a financial adviser asap. deltasigma, I’ll send you a PM with my email addy so I can take a look at the spreadsheet. (am I the only one that wants to pronounce it “rectal table”?)
As for the financial stability of my former company, I’m surprised it hasn’t been bought out by a larger one before now. With the major losses insurance companies have taken in the last few years, it wouldn’t surprise me if they were looking for ways to cut expenses to keep themselves afloat.
Again, I can’t express my gratitude enough for the generosity of my fellow Dopers. Your knowledge never ceases to amaze me.
No problem. It was fun, plus there’s the old saying, ‘use it or lose’ and I’ve lost sooo much. Seriously. I used to be a programmer, consultant mostly doing COBOL/CICS. It’s only been about 10 years and I couldn’t crank out a COBOL program now to save Princess Leia or Alderan (not that I’m really into Star Wars or anything coughbullshitcough. Was always more a Babylon 5 groupie ).
Anyway, it’s pretty simple, even conceptually. Basically what’s happening is that for each payment in the payment stream, the program is taking 1 plus the decimal form of the rate (5%/100). It then raises that to the same exponent of whatever year the payment is made in.
Once that’s calculated for a given payment, that’s what becomes the discounting factor. IOW, when you divide that into the payment, it will tell you how much would you have to put into the bank today a that interest rate, compounded annually (I think, not sure about the compounding) in order to have an amount equal to the payment in year n - whatever year you’re looking at.
After discounting each of the payments, it just adds them all together to get the total or present value.
One thing to note about using the NPV function. You’re going to have to put all of the values in cells in the worksheet. I had to anyway. There might be a way around this, but it wasn’t worth looking for. So I picked a column and put in 12 zero’s and then 18 '1200’s. and referenced them as x1:x30 - so npv=(a5/100,x1:x30) where a5 will be something like 5, 4.25, etc.
Also, NPV usually has a negative value as the starting cash flow but it looks like Excel lets you ignore that.
As I mentioned the amount of the buyout (and thus assumptions on life expectancy and returns) is set by the government, so knowing it is interesting but unless you have some special knowledge about your case, it won’t make a difference.
In several cases the pensions are being sold to a third party. You might look at the fine print in your buyout package. If so, the health of your company won’t matter. However you might be concerned with the health of the company buying the pension. I moved mine to a very stable and large company, but that wasn’t the major reason.
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