First, I have to give credit where it is due. Katie at Alongthecamelride’s Financial Porn Segment was the inspiration for this short exercise and this might be one of the few times that I give a real numbers example. If you don’t read her stuff, check it out, it’s a newer blog to me that is pumping out superb content which I am thoroughly enjoying.
Back to the task at hand…
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Oh, numbers. We love numbers in the FI community.
But what do we like more than crunching our own numbers? Seeing other people’s real-life numbers, barred true and exposed in all of their honest glory. We tell ourselves we won’t look, but we do, we can’t help but peek.
And boy oh boy do I have a treat for all of you today. I’m going to give you what you desire deep down in places you don’t want to talk about.
I’m going to give you some REAL-life numbers and let you make your own decision. That’s right, this will be a 3D, in-your-mind play along fantasy of your choice – choose your own adventure baby!
So, without further ado, here’s some financial pension porn to keep you awake late at night…
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In a previous life, when I was first joining the workforce, I worked for a corporation that still offered a pension plan. Nope, I know what you are thinking. It was not a government entity, but a good ol’ USA public company that was one of the few employers to still be offering this defined benefit plan at the time. They discontinued it a few years after I had joined, and I didn’t make that much money back then, but I had accrued a small benefit that had vested nonetheless.
Now fast forward to COVID-19 and the CARES Act, and people can take out under certain circumstances penalty free withdrawals from retirement accounts. So, what does big brother corporation do (and this is entirely my personal opinion), they decide this is the perfect time to roll the dice and alleviate some risky future obligations they might incur, like people living longer and having to pay out long term pension plans.
So, to my surprise I received a letter in the mail a week ago offering me a one-time only, 45-day window decision, to receive a lump sum payment for my accrued pension plan.
Here are my options:
- A lump sum payment to be rolled over into an IRA or employer plan of: $28,895.00
- A single life annuity that would start today, paying me $48.07 monthly for the rest of my life.
- My current benefit: a lifetime annuity at age 65 paying me $457.79 a month until I die.
Whip out your calculators and excel spreadsheets boys and girls. Slap down some present value, future value and net present value formulas to your glee. Dance around all the different options like cannibals circling a cookfire to estimate inflation and CAGR. Indulge in the excesses that these real numbers provide.
It’s your playground now…
In addition, I’ll say a couple more things before I leave you to yourself and let you mull over these different options. I think it is pretty clear which one I definitely did not pick, but I don’t want to taint your decision-making process at all… haha.
Option #1, $28K, is the present value of the future years assumptions of benefit #3 (age 65+). So, my former employer is basically saying, we hope you won’t live a long life, so in order to protect ourselves from this option, we’re going to offer you a single payment estimate of your benefit discounted to today’s dollars to do with as you please (I’m assuming you know how present value calcs work). I’m 38 (almost 39) so let’s just go with 39. That’s still 26 years until I would be able to tap the benefits of my lifetime annuity in #3 at age 65, and 26 years to invest that $28K however I want. Although on the flipside, if I live until I am 90, that #3 option could come in handy (assuming the company’s solvency remains – which is a risk to be weighed).
Both option #2 and #3 are not an inflation adjusted benefit. So, what you see is what you get.
It’s also worth mentioning that in my particular case, I am married, and this benefit does not apply to my spouse (I could be wrong if some CA laws apply here, but let’s assume it doesn’t to keep things simple). It is only for me. When I die, it is gone. So, option #1 is the only outcome that would enable my wife or future kids to benefit from this plan upon my death.
Well, there you have it, a big decision out of the blue. Is this a FI miracle to help me along my journey (yes, it is a very small amount, but every little bit helps with compounding) or should I play it safe and keep a guaranteed annuity down the road?
It’s up for you to decide. Enjoy this little nugget of financial pension porn responsibly and I’m glad I could be of service.
-Q-FI
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P.S. So let’s hear it FI wizards out there, what would you do and why? Have you ever come across a similar example in your own life?
i had the same deal from a place where i only worked 5 years. it was about 10 years ago with the amounts just about half of the ones you mention. i think it was 250 at 65 or about 11 grand cash in hand. i took the cash as i felt like i knew how to grow it. the only screw-up on my part was taking as taxable instead of sending it to an IRA. it was a brain fart and cost me the 10% penalty.
any time you can take an asset from a cruddy company’s control and put it into your control the choice seems easy for me. even if you mess it up it’s still better than big brother messing it up (you know they will try). plus, as you mention, you can pass it to your family.
Ouch… yeah not rolling over and taking the cash is a tough one, sorry that cost you. But I bet you’ll never make that mistake again! And I agree with all of your points on company risk and passing it on. Thanks for chiming in Freddy.
Wow! Thank you for the shout out! I’m so happy I’ve inspired you, especially since I think you have a great blog. This is excellent financial porn indeed!
I’d take option #1 and invest it. At 7% annualized return, you’re looking at $162k in 26 years, which, with a 4% annual withdrawal rate, will churn out $6480 per year, or $540 per month. And your wife and kids will get it if anything happens to you (hopefully, nothing bad will happen to you). It will also continue growing in perpetuity. Woohoo! How exciting for you!
There we go… throwing out some real numbers. I love it! Thanks for chiming in Miss Camel! And all very good points.
You deserve the praise and keep up the great work over there. I always enjoy reading and when this letter came, the first thing I thought of was your Financial Porn segment and this would be a good situation to share with FI folks.
Honestly I’d have to think about option 1 or 3. It comes down to my taxes will be much lower when assets hit for 3, but I could probably get a better return on 1 in stocks.
If you are at large Corporation I wouldn’t worry much about solvency since the Fed has your back. I tend to look at my pension as part of my bond allocation valued at npv. When compared to today’s bond rates it throws me back to keeping the pension. But those rates won’t stay low forever.
I’ve always assumed I’ll one day be forced to make this decision. I have a Corporate pension and so does my wife. I decided that my situation at that time re taxes, income, risk free rate, expected changes in future income etc would drive my decision.
Two corporate pensions… you’re killing it FTF! Hahaha. I thought I was one of the few w/ a small corporate pension and you put me to shame. I agree w/ the NPV of the bond allocation.
I think the choices also play into what kind of investor you are. If you have high flexibility and are fine with risk then option #1 looks promising, if you don’t like risk and favor certainty, maybe option #3 is better for your conscious and planning wise. Either way it’s not a big decision that is make or break. I thought it’d be a fun little exercise for people to mull over.
I missed this one yesterday. I agree with the others for the same reasons – Option 1 for sure.
Thanks for chiming in Mr. Fate!
Katie pretty much nailed it I think, especially if you trust that you’ll invest it appropriately. Thanks for sharing!
Thanks for offering your two cents Impersonal Finances!