Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

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mesaverde
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Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by mesaverde »

I’m 50 years old and will likely retire from my teaching position in a few months.

The question is what to do with two defined benefit pensions I have. Here are the numbers:
Pension #1:
Current balance (that I could roll over to an IRA): $104k.
If choose to keep the pension (and start withdrawing the earliest unreduced benefit starting at age 65), the estimated benefit would start at $34,400/year, and increase each year after that based on an inflation index.

Pension #2:
Current balance (that I could roll over to an IRA): $27k.
If choose to keep the pension (and start withdrawing the earliest unreduced benefit starting at age 65), the estimated benefit would start at $6,800/year, and increase each year after that based on an inflation index.

I’m leaning towards rolling the pension balances over to an IRA now and investing in the total stock market index. Does that make sense?
Over a period of 15 years odds are pretty likely that I’d come out ahead, but this is certainly not an oranges to oranges comparison (given that there’s a different level of risk).
Last edited by mesaverde on Sat Mar 25, 2023 6:22 pm, edited 1 time in total.
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delamer
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by delamer »

What assumptions are you using that make you think you’d come out ahead by doing the rollover?

Will the annuity amounts you cited be adjusted at 65 for inflation, or are they nominal?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
bikesandbeers
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by bikesandbeers »

There are others on this forum that can run the math better but taking 10Ok now or $34k per year starting in 15 years for you rest of you life, I think I would take the $34k for the rest of your life. Wouldn’t that $100k have to go to $1million if 3.4% is a SWR?

Certainly 100k if a safe investment like bonds is not going to grow the much
The two catches are if you think you won’t live long pass 65 or think the pension system is at risk
bikesandbeers
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by bikesandbeers »

There are others on this forum that can run the math better but taking 10Ok now or $34k per year starting in 15 years for you rest of you life, I think I would take the $34k for the rest of your life. Wouldn’t that $100k have to go to $1million if 3.4% is a SWR?

Certainly 100k if a safe investment like bonds is not going to grow the much
The two catches are if you think you won’t live long pass 65 or think the pension system is at risk
Topic Author
mesaverde
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by mesaverde »

delamer wrote: Fri Mar 24, 2023 5:10 pm What assumptions are you using that make you think you’d come out ahead by doing the rollover?

Will the annuity amounts you cited be adjusted at 65 for inflation, or are they nominal?
Good questions. By rolling over I would retain more flexibility and the opportunity to leave the $ to heirs/charities (not counting any financial advantage, which there may or may not be). The annuity amounts are nominal (and would annually be adjusted upwards from the $34,400k/$6,800k figures I gave with inflation).
"Learn from the past, live in the present, plan for the future"
Topic Author
mesaverde
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by mesaverde »

bikesandbeers wrote: Fri Mar 24, 2023 5:17 pm Wouldn’t that $100k have to go to $1million if 3.4% is a SWR?
A very good point. Turning ~$100k into ~$1 million over 15 years would be a far stretch :-) That puts it into the proper perspective.
Last edited by mesaverde on Fri Mar 24, 2023 5:25 pm, edited 1 time in total.
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peteyboy
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by peteyboy »

Some simple math:
  • $104K + $27K = $131K
  • $131K @ 10.13% for 15 years = $557K
  • $557K (0.04) = $22.3K at 4% SWR
I'd take the $41,200/yr pension with COLA starting at 65
Topic Author
mesaverde
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by mesaverde »

peteyboy wrote: Fri Mar 24, 2023 5:25 pm Some simple math:
  • $104K + $27K = $131K
  • $131K @ 10.13% for 15 years = $557K
  • $557K (0.04) = $22.3K at 4% SWR
I'd take the $41,200/yr pension with COLA starting at 65
Thank you. It's actually pretty simple.
Last edited by mesaverde on Fri Mar 24, 2023 5:50 pm, edited 1 time in total.
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delamer
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by delamer »

mesaverde wrote: Fri Mar 24, 2023 5:21 pm
delamer wrote: Fri Mar 24, 2023 5:10 pm What assumptions are you using that make you think you’d come out ahead by doing the rollover?

Will the annuity amounts you cited be adjusted at 65 for inflation, or are they nominal?
Good questions. By rolling over I would retain more flexibility and the opportunity to leave the $ to heirs/charities (not counting any financial advantage, which there may or may not be). The annuity amounts are nominal (and would annually be adjusted upwards from the $34,400k/$6,800k figures I gave with inflation).
Flexibility and legacy are reasonable goals. But if you have other savings that will fulfill those goals, then you should run the numbers on investing the lump sums to see if you’d come out ahead with a reasonable return.

Obviously, the fact that the annuities cited won’t increase for 15 years is important to any comparison. In 2038, the $34,400 (assuming 4% annual inflation) will have purchasing power of $19,100 in 2023 dollars.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
billfromct
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by billfromct »

You don’t say if you will be getting Social Security, but if getting a teacher’s pension, you probably didn’t contribute to SS, so having a monthly inflation adjusted check is a nice fallback.

bill
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Re: Defer defined benefit pensions until age 65 or roll over now (at age 50) and invest?

Post by Grt2bOutdoors »

mesaverde wrote: Fri Mar 24, 2023 5:21 pm
delamer wrote: Fri Mar 24, 2023 5:10 pm What assumptions are you using that make you think you’d come out ahead by doing the rollover?

Will the annuity amounts you cited be adjusted at 65 for inflation, or are they nominal?
Good questions. By rolling over I would retain more flexibility and the opportunity to leave the $ to heirs/charities (not counting any financial advantage, which there may or may not be). The annuity amounts are nominal (and would annually be adjusted upwards from the $34,400k/$6,800k figures I gave with inflation).
There’s no way I would take the pension and roll it over. You will not beat a guaranteed amount of $34.4K per year and adjusted for inflation beginning in year 15, short of you picking the next Apple.

What makes you believe you can generate a high enough balance to payout $34.4K + Y over your lifetime?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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