Roll-over non-COLA pension lump sum into 401(k) or IRA?

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Topic Author
Johnny_Excitement
Posts: 17
Joined: Fri May 28, 2021 1:35 am

Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by Johnny_Excitement »

Hello,

I'd like to get some advice from folks here.

Here's my current situation:
Age: 56
Single, no kids
$160/year base salary (can get more with OT and bonuses)
401(K): $1 million
IRAs: $38K
Current investment style: 90/10 (aggressive, but I'm comfortable with it.) <-- this can change
Pension from former employer: $12,240/year starting at age 65 with no COLA
No debt, aside from $249K left on mortgage (~$150K in equity)

I like what I do for a living and plan on working until I'm at least 65. I might keep it going until 67.

The pension listed above will start in 9 years when I turn 65 and has no cost of living adjustment. It'll always be $1020/month until I die.
However, I can get a pension lump sum payment today for about $111,400. I'd like to hear your thoughts on rolling the pension lump sum into one of my IRAs or my 401(K). Assuming the stock market doesn't tank horribly, I think I can do much better putting that money into index funds. While my current investment style is aggressive for my age, I will eventually make it more conservative. Maybe go to 70/30 or even 60/40 within the next few years (or sooner?).

What are your thoughts on this? Should I just keep the pension knowing that I'll always get a humble/modest monthly payment (with no COLA) or should I put that money into index funds (stocks and bonds) with the goal of at least an 8% rate of return?
RyeBourbon
Posts: 1220
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by RyeBourbon »

That lump sum number sounds a bit low to me. I am about the same age as you, had a pension that would pay about 20% of yours and my lump sum that I took at the end of 2020 was about $33k.
Retired June 2023. AA = 55/35/10
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ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by ResearchMed »

Johnny_Excitement wrote: Fri Jun 11, 2021 9:16 pm Hello,

I'd like to get some advice from folks here.

Here's my current situation:
Age: 56
Single, no kids
$160/year base salary (can get more with OT and bonuses)
401(K): $1 million
IRAs: $38K
Current investment style: 90/10 (aggressive, but I'm comfortable with it.) <-- this can change
Pension from former employer: $12,240/year starting at age 65 with no COLA
No debt, aside from $249K left on mortgage (~$150K in equity)

I like what I do for a living and plan on working until I'm at least 65. I might keep it going until 67.

The pension listed above will start in 9 years when I turn 65 and has no cost of living adjustment. It'll always be $1020/month until I die.
However, I can get a pension lump sum payment today for about $111,400. I'd like to hear your thoughts on rolling the pension lump sum into one of my IRAs or my 401(K). Assuming the stock market doesn't tank horribly, I think I can do much better putting that money into index funds. While my current investment style is aggressive for my age, I will eventually make it more conservative. Maybe go to 70/30 or even 60/40 within the next few years (or sooner?).

What are your thoughts on this? Should I just keep the pension knowing that I'll always get a humble/modest monthly payment (with no COLA) or should I put that money into index funds (stocks and bonds) with the goal of at least an 8% rate of return?
Play around a bit with

www.immediateannuities.com

Enter your age, gender, state of residence, and when you would want the life annuity (your personal pension equivalent) to begin.

Right now, it looks like that lump sum would not get you as much per month starting when you are 65, compared with what your company is offering.

However, one should also consider the strength of the company plan in terms of will that money really be there in the future, etc.

Also, about that "goal of at least an 8% rate of return" - where are you planning to get a safe (an minimum!) 8% rate of return in the future?

RM
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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by Watty »

One thing to check on is what happens to the pension money if you die before you start the pension. It varies by how the pension is set up but with some plans your estate would get nothing. There is nothing nefarious about that, it is just how the pension can be set up to allow the people who live to a ripe old age to collect more. Still that would be good to know especially since you are not married so you do not have a spouse that would get the pension if you die.

The decision about taking the lump sum or not should be made in conjunction with your decision about when to start Social Security. Social Security is adjusted for inflation so it would be hard to justify taking the non-COLA pension but starting Social Security before you are 70. If you are not already budgeting and planning to delay starting Social Security at 70 then one way to think of it is that taking the lump sum could allow you use that money to fund your early retirement so you can delay starting Social Security to get a larger inflation adjusted Social Security check later.

You can do complex math to analyze the choice but a very simplistic way of looking at it is that if you take the lump sum and it under a mattress then start taking out $1,020 a month when you are 65 it would last until your reach a "breakeven point" when you are about 75. With even minimal investment returns you could be over 80 when you would reach the breakeven point. Since it is not adjusted for inflation it will not be worth a lot in 24+ years and if here is high inflation it could be worth very little by then.

I like to turn this question around and ask, "I have $111K in an IRA, should I buy a deferred annuity that starts paying me $1020 a month when I am 65?" They actually sell deferred annuities like that but few people buy them except for very special situations. That is really the same question but it sounds a lot less appealing when you ask it that way.

The way you stated the question I would just take the lump sum and roll it out to an IRA.

The devil is in the details though. I have a similar old pension that was converted to a cash balance plan years ago, I have the option to take it as an annuity or lump sum at any time. Back when it was converted to a cash balance plan it was guaranteed to grow based on a treasury rate or 5% whichever was greater. Back then 5% was laughably low but now it is really good so I am leaving the money in the pension plan to grow at 5% a year and I count it as part of my fixed income asset allocation. I can do this until I am 72 when it would be converted to an annuity. Most likely I will roll it out as a lump sum to an IRA before then.

One "gotcha" though is that for a few years the pension funding percentages were too low so they suspended the lump sum option for about five years.

Something to check on your pension plan is if you can take the lump sum at any time or if this is a one time offer. If you can take the lump sum at any time then check to see just how it is calculated to see if you get favorable terms like I do.
RetiredAL
Posts: 3537
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by RetiredAL »

Johnny_Excitement wrote: Fri Jun 11, 2021 9:16 pm
What are your thoughts on this? Should I just keep the pension knowing that I'll always get a humble/modest monthly payment (with no COLA) or should I put that money into index funds (stocks and bonds) with the goal of at least an 8% rate of return?
When I retired 5 years ago, I chose to take my pension as a lump sum into an IRA. This IRA was invested at a 55/45 asset allocation.

After those funds were in my Pension IRA, I set up a withdrawal plan for the same amount I would have gotten as a single life pension payout. I expect that some day this IRA's balance will go to zero. My modeling placed zero most likely at 22 to 28 years, depending on what average return I used. A zero return computed to 15 years of withdrawals. Today, that Pension IRA's balance is 13% higher than it started at, even with 5 yrs of withdrawals.

The bulk of our income since retirement has come from this Pension IRA plus our SS. While I draw down my Pension IRA, the 401K balance that I retired with is growing under a 60/40 asset allocation. I did roll that 401K into a different IRA, for tracking ease.

Yes, I do understand the sequence of returns has been good to me so far.
Topic Author
Johnny_Excitement
Posts: 17
Joined: Fri May 28, 2021 1:35 am

Re: Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by Johnny_Excitement »

Thanks for the advice.
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: Roll-over non-COLA pension lump sum into 401(k) or IRA?

Post by Valuethinker »

Johnny_Excitement wrote: Fri Jun 11, 2021 9:16 pm Hello,

I'd like to get some advice from folks here.

Here's my current situation:
Age: 56
Single, no kids
$160/year base salary (can get more with OT and bonuses)
401(K): $1 million
IRAs: $38K
Current investment style: 90/10 (aggressive, but I'm comfortable with it.) <-- this can change
Pension from former employer: $12,240/year starting at age 65 with no COLA
No debt, aside from $249K left on mortgage (~$150K in equity)

I like what I do for a living and plan on working until I'm at least 65. I might keep it going until 67.

The pension listed above will start in 9 years when I turn 65 and has no cost of living adjustment. It'll always be $1020/month until I die.
However, I can get a pension lump sum payment today for about $111,400. I'd like to hear your thoughts on rolling the pension lump sum into one of my IRAs or my 401(K). Assuming the stock market doesn't tank horribly, I think I can do much better putting that money into index funds. While my current investment style is aggressive for my age, I will eventually make it more conservative. Maybe go to 70/30 or even 60/40 within the next few years (or sooner?).

What are your thoughts on this? Should I just keep the pension knowing that I'll always get a humble/modest monthly payment (with no COLA) or should I put that money into index funds (stocks and bonds) with the goal of at least an 8% rate of return?
Keep the pension. It is disaster insurance. If everything else goes wrong. e.g. if stock markets crash 50% and then stay down for years. Or you lose your job (or your health) between now and then.
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