My Megacorp offered a pension lump sum option today...

[supernova72]

Bit of a newbie here so feel free to throw stones my way.

A new lump sum option is available for employees to see today and there is a "haircut" of sorts yes.

My pension would be $3,077 based on an April 1st 2016 retirement date (non-COLA). The pension lump sum option offered is $472K Based on a lifetime annuity value of $630K (immediateannuity.com) this looks to be a 25% haircut. So even though they need to use IRS actuarial tables and IRS "417E" pension buyout interest rates it appears the Megacorp can then discount it even further.

Me:
*55 yrs old (male). Not married.
*31 yrs. with company
*ER age is 55
*Pension fund is healthy (~$60B in liabilities and properly funded)
*Megacorp is doing well financially (2015 YE $96B revenues, $9B net earnings, $5B operating cash flow).
*Health is good (fitness nut) with the exception of taking BP meds (family history).
*No children, have a GF.
*401K is ~ $700K. (not much else at all in savings )
*House value $520K (owe $155K... ). Mortgage, big elephant in the room.

Based on the above info I'm sticking to my plan of NOT taking the lump sum. Feel free to chime in on other things to consider. I've read the thread here on BH titled "10 reasons to take the pension annuity vs. pension lump sum". Good read. viewtopic.php?f=1&t=129811

[psteinx]

Your position (of NOT taking the buyout with a ~25% haircut to SPIA value), seems quite reasonable to me.

This is particularly true if you'd otherwise like to stay on at the company for several more years. But even if you were planning to retire on April 1, the pension plan sounds better.

[jhfenton]

I agree that it does not seem like an attractive offer. I wouldn't consider a pension buyout unless it was at least on par with the SPIA value, in which case I would probably lean toward taking the buyout.

[ubermax]

My pension would be $3,077 based on an April 1st 2016 retirement date (non-COLA). The pension lump sum option offered is $472K Based on a lifetime annuity value of $630K (immediateannuity.com) this looks to be a 25% haircut. So even though they need to use IRS actuarial tables and IRS "417E" pension buyout interest rates it appears the Megacorp can then discount it even further.

What makes you think they are discounting even further ? what lump sum do you think they should be offering you ? also could you provide your accrued benefit payable as a life annuity at the plan's normal retirement age .

[supernova72]

My pension would be $3,077 based on an April 1st 2016 retirement date (non-COLA). The pension lump sum option offered is $472K Based on a lifetime annuity value of $630K (immediateannuity.com) this looks to be a 25% haircut. So even though they need to use IRS actuarial tables and IRS "417E" pension buyout interest rates it appears the Megacorp can then discount it even further.

What makes you think they are discounting even further ? what lump sum do you think they should be offering you ? also could you provide your accrued benefit payable as a life annuity at the plan's normal retirement age .

I'm basing this strictly on the math and the $$ it would take to go out on the market and buy an annuity to get the same income stream. Our pension is now frozen (end of 2015) so normal retirement age (60) would be ~ $3545 a month and a lump sum of $526K. so our age based credits have stopped accruing but the interest credits will still accrue (at 5%). I should have put that in the original post. My bad.

[supernova72]

Your position (of NOT taking the buyout with a ~25% haircut to SPIA value), seems quite reasonable to me.

This is particularly true if you'd otherwise like to stay on at the company for several more years. But even if you were planning to retire on April 1, the pension plan sounds better.

Thanks for the feedback. I appreciate it.

[supernova72]

I agree that it does not seem like an attractive offer. I wouldn't consider a pension buyout unless it was at least on par with the SPIA value, in which case I would probably lean toward taking the buyout.

Yea, I guess I was expecting less of a haircut given the emphasis on reducing the pension liabilities here. Then again I read in a few spots that history says that 58% of the folks take the lump sum (not all base it on math, $$ for heirs, poor health however).

[psteinx]

Keep in mind that SPIA annuity premiums are probably based, in part, on the expectation that those who buy them have longer longevity expectations than the population as a whole. A 68 year old with cancer or other life-threatening health issues is less likely to buy a SPIA.

In your situation, by offering to convert a pension to a lump sum, the company is basically offering the reverse deal of what an SPIA insurer is offering. Consequently, the company should reasonably expect that those accepting the deal will probably have somewhat worse health than the average of all future pensioners. And therefore, the company should rationally offer a lower lumpsum than would be otherwise be the case.

[supernova72]

Keep in mind that SPIA annuity premiums are probably based, in part, on the expectation that those who buy them have longer longevity expectations than the population as a whole. A 68 year old with cancer or other serious health issues is unlikely to buy a SPIA.

In your situation, by offering to convert a pension to a lump sum, the company is basically offering the reverse deal of what an SPIA insurer is offering. Consequently, the company should reasonably expect that those accepting the deal will probably have somewhat worse health than the average of all future pensioners. And therefore, the company should rationally offer a lower lumpsum than would be otherwise be the case.

That's a good point and I keep forgetting about that part (health factor) and those who would be more like to buy one (healthy folks)!

[ubermax]

I'm basing this strictly on the math and the $$ it would take to go out on the market and buy an annuity to get the same income stream. Our pension is now frozen (end of 2015) so normal retirement age (60) would be ~ $3545 a month and a lump sum of $526K. so our age based credits have stopped accruing but the interest credits will still accrue (at 5%). I should have put that in the original post. My bad.

If the freeze date was end of last year and your decision date is April , interest credits are negligible ; so I'm assuming your accrued benefit on the freeze date was $3,545/month payable as a life annuity at age 60 ( low, are you in the public sector?) - is that correct ?

Annuities.com is always much higher than the IRS lump sum would be , everyone knows that - so you contend that based on your math the $472 grand is low , real low - could you share your math with us ?

[randomguy]

I'm basing this strictly on the math and the $$ it would take to go out on the market and buy an annuity to get the same income stream. Our pension is now frozen (end of 2015) so normal retirement age (60) would be ~ $3545 a month and a lump sum of $526K. so our age based credits have stopped accruing but the interest credits will still accrue (at 5%). I should have put that in the original post. My bad.

What is the insurance like on the pension? The company might be doing well know but 30+ years is a long time for stuff to happen. It sounds like your numbers are right around the PBGC maxes so if they cover you the risk is pretty low.

Unless you are very aggressive (i.e. the 70/30+ type guy), I would keep the pension and use it as a chunk of my bond allocation.

[Boglegrappler]

You'll never get the regulated mandated lump sum calculation to come out to what it would cost to buy the annuity that replaces your projected monthly benefit. The government approved changes some time ago to that calculation and the effect was to raise the interest rates that are used to discount the projected stream of monthly benefits over your projected lifetime. That lowered the lumpsum numbers.

I think that if you fall into the category that your benefit is protected by the PBGC in full, then you should consider just waiting to take your pension at the normal time. We went through such a calculation not long ago and chose the annuity stream rather than the lump sum based on having government insurance backing it up, and not being able to replicate the payment stream on our own.

[supernova72]

I'm basing this strictly on the math and the $$ it would take to go out on the market and buy an annuity to get the same income stream. Our pension is now frozen (end of 2015) so normal retirement age (60) would be ~ $3545 a month and a lump sum of $526K. so our age based credits have stopped accruing but the interest credits will still accrue (at 5%). I should have put that in the original post. My bad.

What is the insurance like on the pension? The company might be doing well know but 30+ years is a long time for stuff to happen. It sounds like your numbers are right around the PBGC maxes so if they cover you the risk is pretty low.

Unless you are very aggressive (i.e. the 70/30+ type guy), I would keep the pension and use it as a chunk of my bond allocation.

Oh shoot. I better go back and check out the PBGC site just to make sure. Last time I clicked around for 10 minutes and never found the link to what I would be covered for. FYI:

[ubermax]

Supernova , I won't even attempt to advise you on whether to take a lump sum or an annuity ; that question has been opined on this site quite often .

What I find more interesting and very curious about is your statement contending that the 172 grand is an even bigger discount from the prescribed IRS minimum lump sum ; you go on to say that it's based on your math but won't provide that math .

[dm200]

One factor I would place a high priority on (towards keeping the pension) is "asset protection". It is my opinion that the rights to and receipt of a pension have greater protection against lawsuits, judgments, etc. With a pension, you also have "protection" from making a bad judgment about investing in some unwise place. It is a lifetime guarantee, backed to a degree at least, by a federal government agency.

[ubermax]

I don't know which lump sum rates were used to calculate the lump sum but using the December 2015 rates I get very close to the $172,000 ; this is the IRS mandated amount , no "haircut" at all .

To my mind your post has 2 questions by you :

(1) lump or annuity and

(2) Is the lump sum fair ?

#1 is a grey area but #2 is black or white ; you should be able to show us you math ??

[Bill M]

As I recall the 417E stuff is based on monthly pension payments starting at age 65, which it then converts to a lump sum value at age 65, and then discounts for those years between not and your age 65. So if you were 65, the difference between the lump sum amount and the immediateannuity.com SPIA premium would be small. But it sounds like you are comparing a pension payment starting at age 55 with a lump sum equivalent for a payment starting at age 65. MegaCo may be giving you a big gift with the pension payment at age 55 (maybe like calculating the benefit for >30 years service independent of age).

[supernova72]

Supernova , I won't even attempt to advise you on whether to take a lump sum or an annuity ; that question has been opined on this site quite often .

What I find more interesting and very curious about is your statement contending that the 172 grand is an even bigger discount from the prescribed IRS minimum lump sum ; you go on to say that it's based on your math but won't provide that math .

From previous posters the math I used is the difference between what it would take to "buy" an annuity on the open market to generate the same income as my pension income stream ($3,077 a month). Immediateannuities.com says ~ $630,000 to generate that income. BUT, I'm being offered $472,000 for a lump sum "option". That's the math I used. So that is actually $158K lower. Not sure where that figure of $172K came from you reference?

[fourkids]

Your well-run company would only offer you the early buyout if it was in THEIR financial best interest. This is a bad deal for you.

[dpc]

Your well-run company would only offer you the early buyout if it was in THEIR financial best interest. This is a bad deal for you.

I don't think the fact the company feels this is in their interest proves that it is a bad deal for the OP. There are a lot of factors. Also, there is no guarantee of employment if the OP decides to continue working.

I have no idea of the right decision, but i think I could argue on both sides.

[nodenuff2]

Your calculation as to the value of the 3077 monthly pension is spot on from when I retired 2 years ago. Each 1000. Of pension was worth 220k in a lump sum . We could take any percentage as lump or monthly income. I took a combo after figuring what my monthly expenses would be less SS very happy with my decision.

[inbox788]

My pension would be $3,077 based on an April 1st 2016 retirement date (non-COLA). The pension lump sum option offered is $472K Based on a lifetime annuity value of $630K (immediateannuity.com) this looks to be a 25% haircut.

I'd keep the pension too. Maybe the 25% haircut is the difference between retail and wholesale, though I recall seeing somewhere that margins on SPIA are single digits, so you may be able to do better if you shopped more. Still, keeping seems to make most sense.

[Soon2BXProgrammer]

Your well-run company would only offer you the early buyout if it was in THEIR financial best interest. This is a bad deal for you.

The are trying to de-risk their balance sheet obligations. (which is in their best interest)

[ubermax]

From previous posters the math I used is the difference between what it would take to "buy" an annuity on the open market to generate the same income as my pension income stream ($3,077 a month). Immediateannuities.com says ~ $630,000 to generate that income. BUT, I'm being offered $472,000 for a lump sum "option". That's the math I used. So that is actually $158K lower. Not sure where that figure of $172K came from you reference?

Good catch , it was a typo , I meant $472,000 ; and as I said above , using the December IRS lump sum rates and the most recent mortality table , I get very close to that amount ; and by IRS regulation that is the minimum lump sum that you are entitled to ;but take a look at your opening post ,
you seem to think that they are discounting below what is mandated by IRS - they're not ; and by the way the $472,000 is the lump sum based on that $3,545 which is valued as a life annuity at age 60 discounted back to age 55.

The annuities.com number is the amount at age 55 needed to generate that $3,077 amount ; it's pricey for several reasons but one of those reasons is the fact that you're receiving the money 5 years earlier than that $3,545 .

And again whether you should take the lump sum or annuity is grey but to my mind , given what you provided , the lump sum of $472,000 is spot on regards what you're entitled to per the IRS , not a "haircut" and your employer isn't guilty of pushing it down below the IRS mandate .

[supernova72]

From previous posters the math I used is the difference between what it would take to "buy" an annuity on the open market to generate the same income as my pension income stream ($3,077 a month). Immediateannuities.com says ~ $630,000 to generate that income. BUT, I'm being offered $472,000 for a lump sum "option". That's the math I used. So that is actually $158K lower. Not sure where that figure of $172K came from you reference?

Good catch , it was a typo , I meant $472,000 ; and as I said above , using the December IRS lump sum rates and the most recent mortality table , I get very close to that amount ; and by IRS regulation that is the minimum lump sum that you are entitled to ;but take a look at your opening post ,
you seem to think that they are discounting below what is mandated by IRS - they're not ; and by the way the $472,000 is the lump sum based on that $3,545 which is valued as a life annuity at age 60 discounted back to age 55.

The annuities.com number is the amount at age 55 needed to generate that $3,077 amount ; it's pricey for several reasons but one of those reasons is the fact that you're receiving the money 5 years earlier than that $3,545 .

And again whether you should take the lump sum or annuity is grey but to my mind , given what you provided , the lump sum of $472,000 is spot on regards what you're entitled to per the IRS , not a "haircut" and your employer isn't guilty of pushing it down below the IRS mandate .

OK, that means I did the IRS math wrong then so senior moment on my part. I must be discounting it wrong?

I read the IRS rates are in three steps so did the following:
I took $3,077 x 48 months then discounted it at 1.82% (or $137K). so PV of 48 X 3077 = 137K the way I did it.
then $3,077 for years 5-19 at 4.12% (or $302K)
then $3,077 for years 20-28 at 5.01% (or $186K). So those three totaled $625K ish? I can't seem to come up with the $472K "IRS"number. Would you mind showing your math behind the $472K? thanks!

[ubermax]

OP, I think what I'll do is describe the calculation and leave it up to you to do it , if you're interested - sounds like you've done a little research already .

The minimum lump sum is the present value using interest and mortality of the payment stream represented by the accrued benefit payable starting at the plan's normal retirement age .

Interest rates (417(e) segments) : S1 (years 0-5) , S2 ( 5-20) , S3 ( 20+)
Mortality : 417(e) applicable mortality
Monthly Accrued Benefit payable at age 60 : $3,545 ( Life annuity assumed )
Current age : 55

PS: I actually got $480,000 but that is based on the December 2015 segments which might not be correct in your case ; the plan sponsor has choices for segment rate determination which is spelled out in the plan document ; when and if you do the calculation you should first ask HR for the rates that underlie that lump sum .

Good Luck !!

This response is just in time , it was close to going into the black hole called the 2nd page

[supernova72]

OP, I think what I'll do is describe the calculation and leave it up to you to do it , if you're interested - sounds like you've done a little research already .

The minimum lump sum is the present value using interest and mortality of the payment stream represented by the accrued benefit payable starting at the plan's normal retirement age .

Interest rates (417(e) segments) : S1 (years 0-5) , S2 ( 5-20) , S3 ( 20+)
Mortality : 417(e) applicable mortality
Monthly Accrued Benefit payable at age 60 : $3,545 ( Life annuity assumed )
Current age : 55

PS: I actually got $480,000 but that is based on the December 2015 segments which might not be correct in your case ; the plan sponsor has choices for segment rate determination which is spelled out in the plan document ; when and if you do the calculation you should first ask HR for the rates that underlie that lump sum .

Good Luck !!

This response is just in time , it was close to going into the black hole called the 2nd page

Thanks so much ubermax. I think where I messed up is on S2 and S3 I used the present value for those back to today (2016)...when actually S2 would be 2021 and S3 would start in 2036. for whatever reason I couldn't find simple 417e table so used on from the SS site (said I would expire in 27.6 yrs).

Did not realize page two was a bad thing Again thanks for your help with this. I was hoping I could just find this easy web based site and put all my numbers in (based on the minimum lump sum you reference above). You are correct---I talked to our benefits dept and they are using the Dec 2015 rates and mortality factors. Cheers.

[ubermax]

OP, you say the plan was frozen at the end of 2015 ; what was your frozen benefit on the freeze date ?

[Soon2BXProgrammer]

OP, you say the plan was frozen at the end of 2015 ; what was your frozen benefit on the freeze date ?

While this doesn't answer your question to calculate the value. There are no new contributions after the end of 2015. However, the plan will still accrue interest until the person turns 65 (unless still working), or takes the pension.

The benefit calculation will continue to increase if you forecast changing the start date, based on the interest calculations.

[supernova72]

OP, you say the plan was frozen at the end of 2015 ; what was your frozen benefit on the freeze date ?

While this doesn't answer your question to calculate the value. There are no new contributions after the end of 2015. However, the plan will still accrue interest until the person turns 65 (unless still working), or takes the pension.

The benefit calculation will continue to increase if you forecast changing the start date, based on the interest calculations.

OP here: Thanks for jumping in soon2bxprogrammer. The way it was explained to me we still accrue interest credits but the "aged based" credits stopped at the end of 2015 (per freeze).

What is still a mystery to me how it's calculated. I understand the IRS interest rate and mortality rate. I also found out that our calculation is based on the monthly benefit at our full retirement age of 65. So there is a reduction because my calculation was based on 55 yrs old (not 65).

But if I use my data (3077 monthly, 27.6 life expectancy) the interest rate to get a present value of 472K lump is 6.5% (PV in Excel below).

I'm missing something in understanding the calculation. I know theirs is correct and IRS compliant but just can't back into the number for some reason to get a more expected (lower) interest rate.

3077 monthly
36924 annual
27.6 yrs
331.20 periods
0.005433333 monthly rate (6.52%/12)
($472,204.85)

[Soon2BXProgrammer]

Its a two step process to calculate the present value of a deferred annuity.

1. Calculate the present value of the payment stream to the first payment (age 65)
2. Take that result and further discount it for the amount of time between now and then.

Did you do the second step?

----

Also the discount rate that had been offered to ex employees last year that had quit, but hadn't yet taken their pension was 6%.

Also, there is a benefit that your early retirement pension doesn't "cost" you as much to take it early, then if you hadn't made it to retirement age.

OP here: Thanks for jumping in soon2bxprogrammer. The way it was explained to me we still accrue interest credits but the "aged based" credits stopped at the end of 2015 (per freeze).

What is still a mystery to me how it's calculated. I understand the IRS interest rate and mortality rate. I also found out that our calculation is based on the monthly benefit at our full retirement age of 65. So there is a reduction because my calculation was based on 55 yrs old (not 65).

But if I use my data (3077 monthly, 27.6 life expectancy) the interest rate to get a present value of 472K lump is 6.5% (PV in Excel below).

I'm missing something in understanding the calculation. I know theirs is correct and IRS compliant but just can't back into the number for some reason to get a more expected (lower) interest rate.

3077 monthly
36924 annual
27.6 yrs
331.20 periods
0.005433333 monthly rate (6.52%/12)
($472,204.85)

[supernova72]

Not sure what step I skipped now. On my last attempt I tried using those three tiers of IRS interest rates and discount it back. BUT I was not sure how to take into account the age 65 thing. Following those steps above not sure where the mortality fits in?

I actually discounted what I would get at 65 back to now (I'm 55). Then I applied that to the IRS mortality rates and interest rates by using this table for rates and 27.6 yrs for mortality (for me). https://www.irs.gov/Retirement-Plans/Mi ... ment-Rates

Three Tiers
S1 is 1-5 yrs
S2 is 6-20 yrs
S3 is 20+ (or 7.6 for me)

But this came up to ~ 525K.

Its a two step process to calculate the present value of a deferred annuity.

1. Calculate the present value of the payment stream to the first payment (age 65)
2. Take that result and further discount it for the amount of time between now and then.

Did you do the second step?

----

Also the discount rate that had been offered to ex employees last year that had quit, but hadn't yet taken their pension was 6%.

Also, there is a benefit that your early retirement pension doesn't "cost" you as much to take it early, then if you hadn't made it to retirement age.

OP here: Thanks for jumping in soon2bxprogrammer. The way it was explained to me we still accrue interest credits but the "aged based" credits stopped at the end of 2015 (per freeze).

What is still a mystery to me how it's calculated. I understand the IRS interest rate and mortality rate. I also found out that our calculation is based on the monthly benefit at our full retirement age of 65. So there is a reduction because my calculation was based on 55 yrs old (not 65).

But if I use my data (3077 monthly, 27.6 life expectancy) the interest rate to get a present value of 472K lump is 6.5% (PV in Excel below).

I'm missing something in understanding the calculation. I know theirs is correct and IRS compliant but just can't back into the number for some reason to get a more expected (lower) interest rate.

3077 monthly
36924 annual
27.6 yrs
331.20 periods
0.005433333 monthly rate (6.52%/12)
($472,204.85)

[Soon2BXProgrammer]

Can you please go into the tool and estimate the pension at your 65th birthday, i believe it will give you a different lump sum number?

[ubermax]

I feel like I've entered an alternate world - Nova, do you and Programmer work at the same company ? Tool ????

It looks like we have a Cash Balance plan here rather than a Traditional DB plan ; Nova could you provide/answer the following :

(1) Was the plan always a CB or was it a situation where a Traditional DB was frozen and a CB was started ?

(2) If the CB is a conversion from a Traditional then to analyze this we need to know your frozen accrued benefit under the Traditional and then the new CB account balance as of the freeze date .

(3) If not a conversion , then what was your account balance on the freeze date ? Also , do you know what the current interest crediting rate is ?

[Soon2BXProgrammer]

I feel like I've entered an alternate world - Nova, do you and Programmer work at the same company ? Tool ????

It looks like we have a Cash Balance plan here rather than a Traditional DB plan ; Nova could you provide the following :

(1) Was the plan always a CB or was it a situation where a Traditional DB was frozen and a CB was started ?

(2) If the CB is a conversion from a Traditional then to analyze this we need to know your frozen accrued benefit under the Traditional and then the new CB account balance as of the freeze date .

(3) If not a conversion , then what was your account balance on the freeze date ? Also , do you know what the current interest crediting rate is ?

I am very familiar with the plan at the company that Nova works at. I was talking about the pension estimation tool which you can pick when you want to receive the pension and under what terms. (single life, 10 year guarantee,etc). Recently they allow you to see what a lump sum payment would be. They amended their pension plan this year to allow that as a payment option. The plan is very generous (actuarially) when it comes to the pension for early retirees (from 55 until full retirement age of 65), if you work there until you retire.

(1) there are multiple formulas, both a minimum benefit formula based on years of service multiplied by a rate and a cash balance formula based on percentage of income for years worked and interest accrued. based on the numbers nova provided it looks like his pension is under the cash balance formula

(3) there is no place to see the balance of the cash balance of the plan in the tools as far as i know. The current interest rate is 5%.


I was recommending that Nova gets lump sum at 65 vs pension at 65, to take the interest rate between now and then out of it.
If needed he could also generate lump sum / pensions at any other age (if considering taking the pension/lump sum before full retirement age)

[ubermax]

I am very familiar with the plan at the company that Nova works at. I was talking about the pension estimation tool which you can pick when you want to receive the pension and under what terms. (single life, 10 year guarantee,etc). Recently they allow you to see what a lump sum payment would be. They amended their pension plan this year to allow that as a payment option. The plan is very generous (actuarially) when it comes to the pension for early retirees (from 55 until full retirement age of 65), if you work there until you retire.

(1) there are multiple formulas, both a minimum benefit formula based on years of service multiplied by a rate and a cash balance formula based on percentage of income for years worked and interest accrued. based on the numbers nova provided it looks like his pension is under the cash balance formula

(3) there is no place to see the balance of the cash balance of the plan in the tools as far as i know. The current interest rate is 5%.


I was recommending that Nova gets lump sum at 65 vs pension at 65, to take the interest rate between now and then out of it.
If needed he could also generate lump sum / pensions at any other age (if considering taking the pension/lump sum before full retirement age)

I was just interested in seeing if I could duplicate his lump sum numbers since he apparently thought he was getting a "haircut" ; I can do that without the "tool" - I have a spreadsheet - but myself or anyone else would need some basic information and I'm pretty sure the "tool" itself has that same information ; Nova should have gotten a benefit statement at the end of last year showing at the very least his account balance if , like you say, he was under the CB plan only and the dollars X years formula didn't come into play .

The interest rates , in particular the IRS segment rates, are a much bigger driver than the mortality table ; the curious thing is that I was pretty close to the $472,000 based on the December segment rates , a normal retirement age of 60 , a benefit of $3,545 and using his current age of 55 ; and also close to that $630,000 with a benefit that he shared via PM at age 65 and valued at 65 for lump sum purposes ; it's hard for me to believe that the $630,000 was from annuities.com and I'm also not convinced that the December segment rates were used unless Nova knows for sure that the "stability" period is annual .

I think Nova knows a few pension buzz words but this forum format is not conducive to flushing out the information that a consultant would ask for in a sit down meeting .

[supernova72]

Can you please go into the tool and estimate the pension at your 65th birthday, i believe it will give you a different lump sum number?

OP here. Good question. That monthly lifetime pension estimate at 65 is $4,005 (vs. $3,077 at 55---actually April 1st 2106 so 55 yrs 5 months).

[ubermax]

OP, did you dig out your benefit statement from last year showing your account balance in the CB plan ?

[supernova72]

OP, did you dig out your benefit statement from last year showing your account balance in the CB plan ?

This is a traditional DB pension plan. No account balance. As stated above by soon to be ex programmer we can see our estimated monthly income stream with different options and as of 2/4/2016 we can now see a lump sum option.

[Leeraar]

This is why the IRS has banned buyout offers except for those already in process a few months ago. It seems your Megacorp's was.

Send me a pm, we can discuss it. Also see the Wiki entry, Pension or Lump Sum.

L.

[Soon2BXProgrammer]

One note that might be meaningful, you actually have to quit the company to pick how you want the pension money. You can choose to take it as a lump some, or annuity or you can do nothing, and then pick later.

thats why i'm not sure if its considered a "buyout" they just added an alternate payment option.

[ubermax]

So now based on the collaboration between OP and Programmer we have the following :
1. age based credits , interest credits
2. cash balance formula based on % of income for years worked & interest accrued
3. traditional DB
4. Early retirement window or buyout

OP is the employee but Programmer knows a lot about the plan - is it Traditional DB or Hybrid - the above descriptive tidbits lead me to think that if it's a Hybrid design then it's either pure Cash Balance , i.e. pay credits and interest credits or a Pension Equity Plan(PEP) ; but then again Programmer says it's neither but instead a Traditional DB .

At this point I just don't have confidence in any of the numbers ; OP I'm asking for the check and leaving but on behalf of the others here who may want to tag along a bit longer why don't you at least provide them with your benefit statement from last year .

[rgs92]

I would take the pension, period. If you put the $472,000 in a balanced portfolio, at least $200K will be in fixed income earning zip or worse if rates go up, and who knows?

There is nothing like the feeling of a few thousand coming in each month for the rest of your life. I had the same thing as you did with my pension vs. lump sum from megacorp. I've had my pension for years now and I breathe easy.

You have your other $700K for growthyness. I think it would be nerve-racking to have nothing but a portfolio for all my income, even with social security down the road in 10 years or so.

And if you had the $472K + $700K as your nest egg, you would probably have at least $500K in fixed income in a prudent portfolio with an asset allocation correct for your age. So why not consider the pension as that fixed income portion, which will generate a lot more income than a lump of bonds generating a couple of percent or so?

[Soon2BXProgrammer]

So now based on the collaboration between OP and Programmer we have the following :
1. age based credits , interest credits
2. cash balance formula based on % of income for years worked & interest accrued
3. traditional DB
4. Early retirement window or buyout

OP is the employee but Programmer knows a lot about the plan - is it Traditional DB or Hybrid - the above descriptive tidbits lead me to think that if it's a Hybrid design then it's either pure Cash Balance , i.e. pay credits and interest credits or a Pension Equity Plan(PEP) ; but then again Programmer says it's neither but instead a Traditional DB .

At this point I just don't have confidence in any of the numbers ; OP I'm asking for the check and leaving but on behalf of the others here who may want to tag along a bit longer why don't you at least provide them with your benefit statement from last year .

I sent you a PM with some additional information you might find useful. sorry for the confusion, about hybrid/cash/traditional, the plan is ridiculously complex based on mergers and acquisitions, etc. i suppose you'd call it a "hybrid"

employee's do not receive annual benefit statements. they can log in to an online tool and see an estimate of the pension based on what scenario they want to take it.

[ubermax]

I sent you a PM with some additional information you might find useful. sorry for the confusion, about hybrid/cash/traditional, the plan is ridiculously complex based on mergers and acquisitions, etc. i suppose you'd call it a "hybrid"

employee's do not receive annual benefit statements. they can log in to an online tool and see an estimate of the pension based on what scenario they want to take it.

thanks , just curious if you happen to know the name of the consulting/actuarial firm that handles the Boeing account ? I would guess it's one of the biggies and I'm sure they have the programming expertise to put together a powerful tool ; this topic was my career and so I have a pet interest but also concede that the benefit structure can be complex and if you're not versed in the terminology and math involved it can be overwhelming .

if you both work together on this I'm sure SuperNova72 will be OK .

[supernova72]

I sent you a PM with some additional information you might find useful. sorry for the confusion, about hybrid/cash/traditional, the plan is ridiculously complex based on mergers and acquisitions, etc. i suppose you'd call it a "hybrid"

employee's do not receive annual benefit statements. they can log in to an online tool and see an estimate of the pension based on what scenario they want to take it.

thanks , just curious if you happen to know the name of the consulting/actuarial firm that handles the account ? I would guess it's one of the biggies and I'm sure they have the programming expertise to put together a powerful tool ; this topic was my career and so I have a pet interest but also concede that the benefit structure can be complex and if you're not versed in the terminology and math involved it can be overwhelming .

if you both work together on this I'm sure SuperNova72 will be OK .

OP here. Don't know who our Megacorp uses for consulting. I'm sensing some on this thread think I'm making up the numbers which I"m not. I'm going to post one output from the tool so you can see what we see. The 2nd section is a new addition explaining some of the elements behind the "new" lump sum option for existing employees. This is the first time it's been offered ever to existing workforce. Below assumes a retirement date of 4/1/2016. At 65 it would be $4005 a month.

SECTION A
If you would like to receive both your pre 2014 benefit and post 2013 benefit as one form of
payment, you should make one election from Section A only.
Form of Payment Benefit
Total Lump Sum Payment (one-time) $ 472,207.21 (on 4/1/2016 or 55 yrs, 5 months)
Forms of Payment Monthly Benefit Survivor Benefit
Single Life Annuity $ 3,077.77 N/A
Life with 10-Year Certain Option $ 3,046.68 $ 3,046.68*
Accelerated Income Option - Age 62 -
Single Life Annuity
Benefit payable to: 12/31/2022 $ 3,510.08 N/A
Benefit payable from: 01/01/2023 $ 2,810.08 N/A
Accelerated Income Option - Age 62 -
Life with 10-Year Certain Option
Benefit payable to: 12/31/2022 $ 3,481.70 $ 3,481.70*
Benefit payable from: 01/01/2023 $ 2,781.70 $ 2,781.70*

at 65 yrs old (full retirement age)
Optional Lump Sum Cashout $568,361.85
Single Life Annuity $4,005.73 N/A
Life with 10 Year Certain $3,853.91

Part two:
Your Lump-Sum Relative Value
The lump sum amount presented in this packet is determined as the actuarial equivalent of your
single life annuity, based on the mortality table (RP-2000 as set forth in IRS Revenue Ruling 2007-
67) and interest rate assumption requirements (determined quarterly with a four-month lookback
period) under Internal Revenue Code 417(e) and specified by the plan provisions (which may require
that certain reduction factors apply if you have not yet reached age 65 at the time of your benefit
commencement date). However, the lump-sum portion based on the credit-based formula (if
applicable) will equal the actual credit total as of your commencement date. Below is a comparison of
the value of your lump sum to the value of the single life annuity available to you beginning on your
benefit commencement date (based on the same assumptions used for the calculation of the lump
sum):
Ratio of the value of your lump sum to the value of your single life annuity: 80.12 percent
This means that the value of your lump sum is 80.12 percent of the value of your monthly single life
annuity that would begin 04/01/2016, based on average life expectancies.

[Leeraar]

Please read this:

https://www.bogleheads.org/wiki/Lump_sum_vs_pension

It is a road map on how to decide. (I wrote it, or at least the original version.)

And then, consider the point: It is irrelevant how Boeing arrived at what to offer you. You don't have to recalculate it or check their math.

There is an offer on the table. What should you do? There is only one use case you have to understand, your own.

The same is true of when to claim Social Security. It can be infinitely complicated, but much less so as it applies only for your own situation.

L.

[Leeraar]

A Google search on

boeing pension buyout

gives some very interesting results.

L.

[Soon2BXProgrammer]

Just for clarity there was a buyout offer for ex employees in 2014. I believe it used a 6% discount rate in calculating the NPV of the annuity, from a packet that i saw. Those ex employees where given one chance to take the buyout. the offer to current employees is slightly different they have to work past Apr 1 2016 to be eligible for a lump sum option. So unless the news article is brand new, it is probably talking about the old buyout offers.

However the ancillary facts about it are probably true...

[Leeraar]

Just for clarity there was a buyout offer for ex employees in 2014. I believe it used a 6% discount rate in calculating the NPV of the annuity, from a packet that i saw. Those ex employees where given one chance to take the buyout. the offer to current employees is slightly different they have to work past Apr 1 2016 to be eligible for a lump sum option. So unless the news article is brand new, it is probably talking about the old buyout offers.

However the ancillary facts about it are probably true...

That may be.

The fact is that some pension plans, mostly in the public sector, have offered a lump sum or pension offer (or a blend) for a long time. Those plans have tended to be "fair", in that the lump sum can buy the pension.

More recently, pension plans, mostly in the private sector, that did not have a lump sum option, have been able to offer lump sum buyouts. They use a mandated formula to calculate the lump sum, which is generally not fair: The lump sum falls far short of buying the pension.

That is why the IRS has now banned these offers for existing pensioners. It still does not stop companies from making unfair lump sum offers to those who are not yet retired. GM, for example, continues to do that.

There are many issues to consider when deciding for or against a lump sum. See the wiki article. But, how the company arrived at your lump sum is irrelevant. You need to make a decision based on the value to you.

L.