Were you offered a lump sum for your pension and turned it down?

[runwad]

My former employee sent me an offer to take my pension in a lump sum now instead waiting to collect the monthly benefit at full retirement age. Well I didn't think much of it, had always read you are better off taking the payments over the lump. My break even point between the payments and lump was 5 years, I figure I'd make out taking the payments.

Well tonight I talked to a friend who said she was offered the same deal a year or so ago by her former employer and she too denied the lump. Well 6 months or so after she denied the lump she got a letter saying they were changing the formula that determined her monthly payments and now her payments would be less (by almost 1/2) than what it had originally said in the offer. She said they are only required to pay you the pension but there is no law on if they can or cannot change the calculation formula.

Has this happened to anyone else? My pension isn't that much cause I was only there 10 years, but it's something. But if it gets cut in half, I'll be lucky if I can use if for lunch 20 years from now! Just wanted to get other peoples experiences with dealing w/this same issue. Thanks

 

[BridgetBordeaux]

The information you presented is so alarming that I would encourage you to contact the Clark Howard consumer resource team and/or call the show while it is on the air. The info can be found on his website. In case you aren't aware, he is a consumer "expert" that has a national radio audience.

The refiguring of the formula is scary!

If you get advice from them, please share it here.

Good luck and I hope you are able to get some quality information.

 

[eliza61]

My former employee sent me an offer to take my pension in a lump sum now instead waiting to collect the monthly benefit at full retirement age. Well I didn't think much of it, had always read you are better off taking the payments over the lump. My break even point between the payments and lump was 5 years, I figure I'd make out taking the payments.

Well tonight I talked to a friend who said she was offered the same deal a year or so ago by her former employer and she too denied the lump. Well 6 months or so after she denied the lump she got a letter saying they were changing the formula that determined her monthly payments and now her payments would be less (by almost 1/2) than what it had originally said in the offer. She said they are only required to pay you the pension but there is no law on if they can or cannot change the calculation formula.

Has this happened to anyone else? My pension isn't that much cause I was only there 10 years, but it's something. But if it gets cut in half, I'll be lucky if I can use if for lunch 20 years from now! Just wanted to get other peoples experiences with dealing w/this same issue. Thanks

long story short, "it depends".

First, yes pensions can and do change. If you work for a small company and it goes bankrupt you're pension could also go byby. Now after the Enron debacle where thousands lost their pensions many states have put regulations in place to give some sort of protection but many companies have pensions that are millions of dollars underfunded

There are laws such as ERISA that try to offer some protection but it's geared more toward transparency. Many states require companies to pre fund their pensions but what they should do and what they do do are often two different things.

NJ's Govenor Chris Christie has refused to make pension payments to state employee pension funds for some years now, the state supreme court I think is allowing him to revamp the state employees pensions so in all likely hood they are going to get screwed.

so yes, your company can down the road decide to slash pension payments.

I work for a big fortune 500 chemical company. In 2010, they stopped offering a pension plan to any new hires. old employees were grandfathered in at 1/4 of what we had before. so in essence starting 2010 it takes me 4 years to earn the pension that use to only take 1.

I took my husbands pension in a lump sum for a variety of reasons.

1) If I started pension payments today and got hit by a bus the remainder does not go into my estate meaning my sons wouldn't get a dime of it. When it became a payout, it is now part of my assets so no matter when I kick the bucket it goes to my heirs.

2) I could invest and control it the way I wanted to.

those where my reasons.

 

[vacationer1954]

She said they are only required to pay you the pension but there is no law on if they can or cannot change the calculation formula.

And in truth they have to change the calculation formula if conditions change which they always do though not always in the negative direction.

My pension isn't that much cause I was only there 10 years, but it's something. But if it gets cut in half, I'll be lucky if I can use if for lunch 20 years from now!

This is one concern we had about one of our pensions when we were offered a lump sum distribution ten years ago. My cousin's husband was in retirement banking. He said that if there was a clear answer one way or the other he'd know it and of course share it with us but he made clear that there was no way to know which would be the better choice just based on the numbers. He advised us to consider other factors and then feel comfortable with whatever decision we made. The pension was small (only eight years very early in a career) as well. In the end we did not feel it was worth the risk of the company lowering the benefit later making it even smaller, and we didn't feel it was worth the aggravation of having to track yet another retirement account that we couldn't invest the way we needed to. We took the lump sum.

I think it was the right thing to do. We treat a pension as if it is a fixed income investment. Leaving the pension instead of taking the lump sump would mean that we would have had less flexibility with our fixed income allocation over the years, and flexibility is important. One of our 401k plans has been with an employer that offers very poor choices. The best of the bad choices were bond funds. By having the pension lump sump in an IRA, we were able to invest all of it in equity funds which allowed us to use the bad 401k to fill our need for fixed income investments.

 

[puffkin]

My parents are dealing with this now, except my dad would have to fully retire to get his pension (he is only 60). So far there have been no golden eggs offered, but you never know, especially now that he is near the top for seniority. He has heard rumors for the last 6 months that they are changing the pension calculation starting 1/1. The rumors he has heard (which are usually true) would negatively impact him. They basically will have about 1 weeks notice before the change. They have been meeting with their financial adviser to make sure he can retire if need be and that he is prepared to make the decision quickly. They have already decided that there is no way they are doing the monthly pension regardless and are definitely taking the lump sum. They have a financial consultant who they are very comfortable with, there is a family history of heart problems on my dad's side, and there break even point is in his late 80's so it makes no sense to risk my mom not being secure if something would happen. He is in the steel industry and many local companies folded and could not pay their pensions. He has 35 years in and it is a fair amount of money to risk losing.

 

[runwad]

Ugh, this goes against everything I've been taught to take the lump, it's 22k by the way and my pension is $340 no way I can turn a 22k investment into $340 guaranteed monthly income for life. My old boss works for this company, I've got an email into him to see what the chatter there is. I'm sure with the way my luck rolls whichever choice I make will be the wrong one. I do know at one time their pension was underfunded but I'm pretty sure they were ordered to get it back up. I kinda lost track on it over the years. Guess I have some reading to do today. I really liked the idea of having that little bit of hopefully fun money coming in every month in retirment!

 

[Dakota731]

state employee pension funds for some years now, the state supreme court I think is allowing him to revamp the state employees pensions so in all likely hood they are going to get screwed.

These government pension plans are what is bankrupting these states to begin with and need to be overhauled to 401k plans like most of the rest of us have. We pay $6000 a year school tax (for a modest middle class house) because teachers in our area are retiring with pensions that are 80% of their highest salary. So we are paying for our own retirement along with thousands of other people's. Something needs to change soon!

 

[dcfromva]

My former employee sent me an offer to take my pension in a lump sum now instead waiting to collect the monthly benefit at full retirement age. Well I didn't think much of it, had always read you are better off taking the payments over the lump. My break even point between the payments and lump was 5 years, I figure I'd make out taking the payments.

There are a lot of factors that go into making the decision. Some considerations are how well is your pension funded? Is it covered under the Pension Benefit Guaranty Corporation? If so, does the pension payment amount exceed the amount that would be covered by the PBGC? Would you be able to take the lump sum and buy a comparable annuity? (This is kind of complicated to figure out) How is your health? How soon before you would qualify for the pension?

DH's former company offered a pension buyout which we decided not to take after taking many factors into consideration.

Here are some links to discussions on the boglehead board regarding the decision making process on pension buyout offers that may be of interest to you:
https://www.bogleheads.org/forum/viewtopic.php?t=151212

https://www.bogleheads.org/forum/viewtopic.php?t=168572

https://www.bogleheads.org/forum/viewtopic.php?t=148178

I ran across this list of: "Companies that are offering lump-sum pension buyouts" - See more at: http://www.pensionrights.org/public...lump-sum-pension-buyouts#sthash.pvTkHsfO.dpuf
(Seems there are a lot of companies making the offer)

 

[eliza61]

These government pension plans are what is bankrupting these states to begin with and need to be overhauled to 401k plans like most of the rest of us have. We pay $6000 a year school tax (for a modest middle class house) because teachers in our area are retiring with pensions that are 80% of their highest salary. So we are paying for our own retirement along with thousands of other people's. Something needs to change soon!

and I totally understand Dakota, but first most of these teachers in exchange for the pensions accepted lower pay. second, the reason why the pension funds are underfunded is because past politicians raided the fully funded kitties. Had the prior 3 Gov's not changed the state pension rules to allow them to dip into the till, this problem might have been avoided.

How would you like it if you had a savings account fully funded then your boss comes in, takes the money leaves you an IOU then refused to pay the IOU.
so No you are not paying for some one else's retirement (at least if you live in NJ). You are paying because your elected officials mismanaged the funds.


a good analogy how would you like it if your company mismanaged your 401K and then said "my bad" and you were left with 1/3 of the value??

After Enron, many employees demanded that companies and municipalities stop doing this. for example our company while definitely cut the pensions can no longer use the pension funds as collateral nor can they take money out. they also have to keep the fund 150% funded by law. so while new employees no longer get a pensions, those who now get one at least don't have to worry about it getting cut.

I do think going forward new teachers and state employees have to have cuts but you can't tell someone who agreed to a contract that "oh yeah, I messed up your money and you just have to suck it up?

last option of course is do what I did, I moved out of NJ precisely because of their inability to manage their budget and then make the citizens pay for their stupidity.

 

[vacationer1954]

Both sides will point fingers at each other, of course. For public employees, though, they have to make their financial decisions based on a guess about which way the political winds will blow. A lot of people feel the Detroit bankruptcy was a bellwether, and so the assumption that pension obligations would be fulfilled without substantial reduction is no longer a very reliable one.

 

[tvguy]

The volatility of Pensions is just one of the reasons the shift to IRA's and 401ks happened. My wife's grandfather retired with a comfortable pension and social security as a little extra cash, didn't save for retirement because he had a pension. 3 years after he retired, they ended the pension, and he lost 80% of his income.

 

[jedijill]

My parents are both retired teachers and they both didn't pay into SS but instead paid towards their retirement. They worked in Missouri.

I got an offer to cash out my pension last fall and I turned it down. I think they offered me less than $5K on a $225/mo lifetime pension. (They closed the pension 5 years into my time with that company.) I turned it down. Like a PP said, no way I could turn less than $5K into a $225 lifetime payment.

Jill in CO

 

[runwad]

^Jill after you turned it down did you get any more communications on it? That's what I'm trying to figure out how common it is to then get a letter saying the benefit calculation is being changed hence the payout lower. Doesn't sound like anyone here has experienced that particular situation.

 

[jedijill]

^Jill after you turned it down did you get any more communications on it? That's what I'm trying to figure out how common it is to then get a letter saying the benefit calculation is being changed hence the payout lower. Doesn't sound like anyone here has experienced that particular situation.

Nope, I haven't heard a word since.

Jill in CO

 

[DebbieB]

I work for a major company and our pension plan was changed about 10 years ago. People who were close to retirement were grandfathered but the rest of us get less. It's a cash balance plan, I don't know how monthly payments would work. They did emphasize 401K and started making larger employer match.

 

[runwad]

Who knows how to work the annuity calculators? If I took the 22k lump and put in an annuity for 20 years how much would I have? I can't figure out how to work the calculators. Can anyone help?

 

[crisi]

Who knows how to work the annuity calculators? If I took the 22k lump and put in an annuity for 20 years how much would I have? I can't figure out how to work the calculators. Can anyone help?

Are you taking it out starting now or do you have 30 years until retirement? That's what makes a big difference.

 

[runwad]

^ No I wouldn't start drawing till full retirement age, I'm 49 so another 18 to 20 years before I draw.

 

[crisi]

^ No I wouldn't start drawing till full retirement age, I'm 49 so another 18 to 20 years before I draw.

And how long do you expect to draw for? Or are you hitting a monthly target (the calculators will need one number or the other). The other variable will be the rate of return - both directions.

 

[dcfromva]

Who knows how to work the annuity calculators? If I took the 22k lump and put in an annuity for 20 years how much would I have? I can't figure out how to work the calculators. Can anyone help?

Does this link help? https://www.immediateannuities.com/