Impending retirement - pension, etc., questions.

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Topic Author
Laika
Posts: 54
Joined: Sat Jul 14, 2018 1:49 pm

Impending retirement - pension, etc., questions.

Post by Laika »

Dear Forum Members,

I have prepared for an exit from my job, potentially in about 1 week.

Part one: The classic "pension or lump-sum" question.

I'm in my early 60's, with a choice between a pension and a lump-sum:
  • The pension would be about $9,300 per month, with up to a 2% COLA per year, and a (non-guaranteed) contribution towards health care.
  • The lump sum would be for about $1,600,000, with no other benefits provided.
The lump sum is calculated based on a 7.75% expected return, which is high in a zero interest rate world, and hence the pension appears mathematically superior at the moment. The pension program is roughly 80% funded.

My current invested assets are in the mid seven-figures range, with about a 50-50 split between stock and bonds+cash (I am quite cash-heavy at the moment, as I may buy a more expensive house in retirement). So the pension would be a nice contribution to my retirement, but it would not be the dominant one.

I heard an interesting point in an earlier post: that if your pre-retirement assets are relatively dominant over your pension/lump-sum, then in some ways perhaps the lump sum may be the better choice after all, i.e. there's more flexibility, you / your heirs receive all assets should your retirement be cut short, and there's no risk of the pension failing (though certainly a remaining risk of mismanagement, etc.).

Furthermore, one of the usual arguments in favor of a pension - reduced "longevity risk" - isn't as important in that the other, more substantial, assets would presumably be sufficient to carry you through to the end anyway.

I still lean towards the pension. What are your thoughts?

Part two: The classic "should I go vs. one more year" question.


I'm not very worried about money, but like so many here have expressed, I'm still conflicted about the idea of retirement. This last year of work (in near complete isolation at home), and indeed the last several years, have not felt satisfying or productive. I'm clearly somewhat burned out. But taking the plunge now feels a little precipitous given the strain of the last year in particular. I half think I should stick with it for the classic "one more year" just to see if the burn-out lifts as normality returns. But if I had to wager about that, I'd guess not.

As well, continuing to work vs. retiring means that I'm working for less than minimum wage. The take-home difference between my pension and my paycheck would be about $300 per month. That's crazy! And all I've been doing with my paycheck is throwing it into retirement accounts anyway, as I live well beneath my means.

There's also a great collaborative project that I've been aiming at for a decade which has always seemed to be one year away from reality. It's likely to stay one year away for another 5-10 years, but I'd feel quite disappointed if it did finally come through the moment I stepped out the door. But again, if I had to wager, that would likely not happen.

Finally, there's the old advice about retiring "to" something instead of "from" something. Frankly, I don't have much in mind for the "to" part yet. I think I'd need a year or more to find or construct a bit of a newer self. But my career is one in which, classically, few retire from voluntarily, and doing so means substantially closing off a source of engagement with the world that was once extremely important to me. (I do not believe I would be looking for other work post-retirement.)

Your thoughts?

Thank you very much!
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David Jay
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Location: Michigan

Re: Impending retirement - pension, etc., questions.

Post by David Jay »

If it is me, I take the $9300 a month with COLA (2% cap). This is especially true if you have a mid-seven-figure portfolio for a new home, etc.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
Laika
Posts: 54
Joined: Sat Jul 14, 2018 1:49 pm

Re: Impending retirement - pension, etc., questions.

Post by Laika »

Thanks for your input. What is your rationale?

BTW, I'd expect my portfolio to drop by up to a third if I did buy a more expensive house, but it would remain at least twice what the lump-sum would be.
bltn
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Re: Impending retirement - pension, etc., questions.

Post by bltn »

With an after tax savings of 3.6 million, after the purchase of the new home, I also recommend the pension, with the probable cola.

The return on your pension lump sum is excellent. If you die in a few years , only your decedents will be left with less. It won t matter to you. If you live to age 90, you will have had the security of an excellent annuity.

Based on your savings and age, I would limit my withdrawals to 3% of the 3.6 million. Then I would delay my social security as long as I could do so comfortably.

As far as retiring "to something", I had that same concern prior to my retirement. I knew of a few successful businessmen who retired, then went back to work within a year due to boredom. I had no particular hobbies that were so time consuming as to replace my job. Then I realized that more than 95% of the retirees I knew were very happy to be retired. And most had retired prior to their mid sixties. I decided to retire and give my self more freedom with my time. I never missed work, and I liked my job until the end.

Good luck.
retiredflyboy
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Re: Impending retirement - pension, etc., questions.

Post by retiredflyboy »

How well funded is the pension system? If married, what is the survival benefit? I sure love lifetime income especially one with a yearly increase.
Facts are stubborn things. Everything works until it doesn’t.
SQRT
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Re: Impending retirement - pension, etc., questions.

Post by SQRT »

I had a similar decision (re pension) when I retired. The lump sum would have been around 10-20% of my net worth at the time. Took the pension with 100% survivor benefit. Now 15 years into retirement that monthly pension (not even cola’d) really is nice to get. It allows me to set a more aggressive AA and really sets a solid base for our lifestyle.
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bhwabeck3533
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Re: Impending retirement - pension, etc., questions.

Post by bhwabeck3533 »

Laika wrote: Sun Jun 20, 2021 3:36 pm My current invested assets are in the mid seven-figures range, with about a 50-50 split between stock and bonds+cash (I am quite cash-heavy at the moment, as I may buy a more expensive house in retirement). So the pension would be a nice contribution to my retirement, but it would not be the dominant one.
Our situations are similar, with some significant nuances. I faced this same situation, except I was "involuntarily" retired due to RIF at my employer in 2014 (I was 58 YO). Also, my "lump sum" value (very low seven figures) was >50% of my retirement assets. I took the lump-sum (and along with 401K balance) and converted to traditional IRA with Edward Jones. One year later a friend recommended I read Bogle's book ("The Little Book of Common Sense Investing"). I moved all investments from EJ to Vanguard at their recommended mix and percentages of index funds (equities and bonds). I have never looked back, and have enjoyed the run-up in returns since 2015.

Regarding continuing to work or not when you are (more-or-less) financially secure, I enjoyed a few years consulting (Quality Management/ISO 9001). The professional challenges on a very time limited basis were rewarding, and the per diem made it worth it.
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