Retirement buyout

newbeginnings

New Member
I made my decision this way-In the hopes that UPS will stay in business, and guessing at how long I might live, say 20 more years (barring hit by a bus or other), I calculated: $600 per month X 12 months X 20 more years, looks like $144,000 if I stay in the pension plan. Can I invest the buyout to make more than this on my own? This gave me a place to start.
 

overnite

Member
I made my decision this way-In the hopes that UPS will stay in business, and guessing at how long I might live, say 20 more years (barring hit by a bus or other), I calculated: $600 per month X 12 months X 20 more years, looks like $144,000 if I stay in the pension plan. Can I invest the buyout to make more than this on my own? This gave me a place to start.

That's a bit more complicate.

A few broad points to consider, in today's low interest rate environment, it is difficult to generate reliable retirement income. That's why having a pension where someone guarantees the amount you get every month is valuable. You could take it and invest it yourself and do better, but you have the risk that you will do worse. and the question becomes whether that's a risk you can afford to take depending on your own financial condition.

Second, studies indicate that the majority of people who take a lump sum pension payout burn through the money in less than 6 years. So while you may have the best intentions, you also have to assess your own discipline, risk tolerance, and investment savy.

Third, unless you roll the money directly to a 401k or IRA there will be a major tax hit.

That said if you want to compare the value of the two options, i.e. the lump sum, versus the value of the future pension payments, you have to discount the future income stream to present value. This is because payments that don't start until a number of years from now and then are spread out over an additional number of years are worth less than the same amount of money today. This is known as the time value of money.

So to do the calculation you need to know the number of years before the payments starts, how many years you will receive the payments (this can be estimated by using a life expectancy chart), and you have to assume a discount rate. (6% might be appropriate,based upon a reasonable rate of return to be expected from a diversified investment portfolio, but might arguably be high in today's low interest rate environment)

You take all those numbers and plug them into the formula (or a financial calculator) and it tells you whether the present value of the lump or the pension payments is greater.

In most cases the pension payments will have the higher value. (If the payouts were worth more than than the pension payments, do you think UPS would be so anxious to buy you out?)

Another way to look at this is could you buy an annuity equal to or more than your pension benefit from the lump sum benefit. Again the answer is likely no.

Thus for most people they are much better off leaving the money in the plan. Doing so helps eliminate the risk you outlive your retirement savings, or lose your money through bad investments.

For me, the present value of my pension exceeds the value of the buyout so its an easy calculation. Even if the lump had a slightly higher present value, I'd still stay with pension so that portion of my retirement remains guaranteed for life.
 

overnite

Member
I made my decision this way-In the hopes that UPS will stay in business,

I wouldn't factor whether UPS stays in business into your decision making on whether to take the lump. First, UPS as company appears to be doing pretty well, certainly as well or better than the broad US economy. Second, Pension plan is about 80% funded, and with it closed to new entrants, and being frozen entirely in a couple of years, any funding gap should go down. Thus, even if UP ceased to exist, there would still be funds available to pay the pension.

Third, your pension benefit is fully insured by the Pension Benefit Guarantee Fund. If your benefit is less than $5,000 or so (it varies by age and other factors) you'e fully covered.

Forth, and most importantly, nothing is completely risk free. If you took the money and invested it yourself, i'd wager your risk that your risk of losing money in the market is greater than the risk that 1) UPS will go bankrupt, 2) the funding set aside for the pension, as required by federal statute, vanishes , and the PBGF goes away.

All 3 things have to happen for you to lose your pension and its extremely unlikely.
 
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