If I were ready to retire and faced with a choice, I would always choose a lump sum. However, I was surprised to learn of several people who chose monthly annuity payouts. What would be the logical explanation why they chose that option? The only thing that comes to mind is worry about managing a lump sum payment.
39 replies (most recent on top)
yes ford is asking GRP people to take the lump sum and one financial person (not advisor, was finance in ford) suggests the same, because of inflation. part of me is thinking it's a better idea to bet against and take the annuity. but it's not my decision to make
@4hsg Your hurdle rate of 6% apparently assumes you never touch the principle. I suppose if you want to make sure you have the pension at age 100 and are risk adverse, then the pension is for you. Of course, it will have declined in value to less than 25% by then. But no, with 30 years, the lump sum could give you equivalent pension payments for close to 20 years at 0 interest. Use a simple amortization formula to calculate how many years 4% will give you.
The September inflation rate was announced by government yesterday at 8.1%. Which is down from previous month.
Please explain what conservative investment paid that amount. Wasn't any Treasury bill or CD. Most of those are paying 4%.
Then calculate your hurdle rate - the amount your lump sum needs to make before it's better than the monthly pension. If you have been here 30 years, it likely over 6%.
Yes - to get the liability/funding requirements OFF THEIR BOOKS!
@1mjz+1j8aaAHp
That monthly pension will not adjust for the COLA/INFLATION changes, and will devalue year over year. A lump sum invested properly will adjust for both if invested well. It will also leave a nest egg for your family in the end. Should you pass only your spouse (if you have one, and have designated them) will continue to receive the de-valuing, mthly annuity payments.
What rates can you get on long term CDs right now? Are they insured? What is the effective rate on your pension?
Agree don't know why so many people scoff at the PBGC.
- Ford pension currently funded, surplus has increased year over year
- PBGC is funded and has been paying pensions where companies have ended programs or bankruptcy
- Most Ford pensioners are well under the pension limits for PBGC, will not see decrease in pension monthly amounts even if they take over.
- Ford, while seemingly willing to renegotiate promises to retirees, has protected the basic payment of pension - at this point in time.
Your Ford pension is insured by the feds (PBGC) even if Ford goes under, try getting that kind of insurance with any other investment.
I actually enjoy these varied opinions, as they come from people all in different situations. If a person is happy with a pension of $1000 or $6000 a month, so be it. If the want a lump sum nest egg, do it. Its their life and money. The sense of freedom is what gives me the greatest joy in retirement. Not how many things I can buy or pass to the next generation.
@dph+1j8aaAHp
"If an employee had 1.5M in 401k and another 1M in savings/investments they might chose a pension and treat it as their bond component in their retirement portfolio. "
Why not take the lump sum and roll into an IRA for 5-10 years and live off the 1M in savings/investments?
Comments regarding lump sum vs pension from people who took a pension years ago are not relevant to the situation now. Interest rates Ford uses in the present value computation are over a year old. When you had a year of rising interest rates like this year, the resulting gap means you are starting out with 20% more than your pension is worth. Some years the lump sum is a good deal, others it is not.
I suggest you learn to read before offering invest advice.
To the OP
If your 401k was $1m in 2019 and is $801k now, you lack basic skills in investing. Again, 22% 16% 14% returns. 2019 2020 2022 plus your contributions and your match? Still down 20% from 2019?
You need a better investment adviser.
Who insures these investments and how much do they insure them for.
How does taking the pension give you time for your 401k to come back? You could set up an income stream with your lump sum as well. There are secure investments returning over 4% now. Do the math - how many years would your lump sum at 4% last with equivalent withdrawels as your pension? If course most won't settle for 4% and will take on more risk.
Taking the pension affords me the time to wait for my 401K to come back which I'm sure it will, one of my biggest holdings is the Fidelity Growth Co Fund, great fund, but down 35% this year. ouch.
1M in 401k last December could have easily fallen to 800k now, but it should not have fallen that far from 2019. Another thing, 2019 was a bad year to take a lump sum, just as 2023 will be a bad year. 2022 is an excellent year, because you are actually getting 20% more than the real present value.
If you read my post I didn't take the lump sum, I took the pension and left the 401k in the market, if you remember the VIP was offered at the end of the year in 2019, haven't changed my investments in the last 10 years because they have been doing so well...till this year.
To. Post ID: @1mjz+1j8aaAHp
If you took $1M lump sum in 2019 and have $806k now you invested wrong.
A balanced stock bond combo vanguard fund returned 22% 16% 14% for 2019 2020 2021 respectively. Sure 2022 has been rough but 2019-2021 was a great 3yr run.
Who was your financial adviser?
Took the VIP offer in 2019 had a little over 1M in the 401k and the lump sum offer was 1M, took the penson and left the 401k in the market, the 401k is now worth 806k and I didn't take a dime out but those pension checks that are insured by the PBGC just keep on coming.
Reading the article about those depleting their lump sums in 5.5 years - the people that did so did not control their spending. They blew it on large ticket items. The same mentality would blow through a pension and 401k. Gee, I better not take the lump sum because I might blow it all on a second home. Of course you need to plan on income streams and realistic spending.
Then you had a horrible rep at Edelman. I shopped several, including Edelman. ALL provided detailed breakdowns of both annuity and lump sum options. All had discussions about how it will be impacted with inflation and cost of living. You have to interpret the information and decide which will work the best for you and your family.
And if you pass before your ex, it goes on. Take the 25% hit, make it up in investments, and move on!
Have you heard about the great reset? 2001, 2008, 20xx. Recession, Great Recession, (Depression) next in the series.
It's never been more important than now to be right about your investments. I told everyone in my circle, Ford is done at $25. Sell. Gaps exist at $20, and at $16, and they exist at $5. The indexes have gaps down back to the March 2020 lows, and they will fill.
If you think your going to make bank in the future, then that's what they want you to think. Why? Because it's only ever in the history of stocks, a good time to buy stocks. buy the dip, buy the dip, until it becomes a falling kn--e.
You can't afford to be wrong in todays market. Learn the game.
A pension plan cannot cut already accrued benefits. The plan can be frozen so benefits do not continue to accrue but what you have already earned is yours.
If I take the lump sum my ex gets 25%. If I take the annuity, my obligation stops if my ex passes before me.
You are getting a 20% premium on the lump sum immediately from interest rates. Go ahead and calculate the earnings you will need on the lump sum to get an equivalent on the pension out to age 85, or make it 90 if you wish. You will likely find you will need less than 3% return. Can you average better than 3% over 25 years?
Various possibilities in the next year or three
Interest rates come down after inflation is tamed.your SSIP increases and lump sums recover half of their cut.
Interest rates keep increasing. Lump sums further cut. Economy declines. Recession. Cuts. Maybe with severance maybe not.
Interest rates stay same. You are cut in December. Maybe severance maybe not. Smaller than 9 months.
Economy tanks, company converts pension to 401k at reduced amounts. I believe ibm did this. You are cut. Reduced lump. Not sure what annuity payment plan is.
Is there any way company can cut annuity planned payments for those who have not yet taken pension?
Yes, it is in Ford's (or any employer's) best interest for you to take the lump sump. The financial risk moves from Ford to you. The biggest reason you should think hard about taking the lump sum is the financial risk moves to you.
If you are worried Ford will go under, ask yourself what the economy will look like if Ford goes under. I get that everyone hates Farley but if Ford were heading for bankruptcy, the whole economy would be heading south, including however you invested your lump sum. Ford won't go down alone.
https://www.metlife.com/about-us/newsroom/2022/february/retirees-depleting-retirement-plan-lump-sums-faster-than-five-years-ago/
and thoughts to ponder... If Ford Motor Company wants you to take the lump sum you better believe it is in their best interest.
One of my parents had a pension, not at Ford. Their employer terminated the plan an converted to a lump sum which was moved into the 401k. They retired and made a plan to withdraw a fixed amount each month.....and then the great recession happened. The account balance tanked but they still needed to withdraw the same amount each month to meet expenses. To make the same monthly withdrawal, they had to sell more shares. When the markets recovered, they had way fewer shares so their recovery was minimal. The account was wiped out by 2015.
One a lump sum is gone, it's gone. I know everybody thinks they have a fool proof investment strategy but the annuity does provide a safety net against something eating up your 401k.
Because people can decide what is best for them. Do I tell you to buy, or lease, or drive a beater vehicle? Do I tell you Honda or Ford. I interviewed several investment advisors including Ford local Edelman's / fidelity office. They all could not wait to get their fingers on my potential lump sum to manage and start racking up fees. Did not even discuss the benefits of an insured pension annuity or consider any other alternative than the lump sum which makes them the most profit, except for 1. So you can guess which one I am with.
One reason is that an employee is diversifying their retirement portfolio.
As an example, If an employee had 1.5M in 401k and another 1M in savings/investments they might chose a pension and treat it as their bond component in their retirement portfolio. The pension and social security being fixed income and the remainder being surplus to pass on to their heirs / fun in the sun money.
Another reason might be that the employee’s spouse is not good with money and the employee wants to ensure that their spouse has income if he passes before her.
Several people who took lump sums in 2008 blew thru their money in under 5 years. I know some who took jobs at Costco, Lowes, Home Depot, etc to get benefits and income until they could take social security. One guy took the lump at 55, blew thru it by age 58, took a job at Home Depot until 59.5 then started blowing thru his 401k at 59.5, by age 62 he had blown thru his 401k and now is living off social security. To each their own.
Financial advisors are excellent salesmen - they sell investors on the upside - that is their job.
Annuity can be someone’s choice if they:
See themselves living to 95
See Ford and funding of pension plan surviving during that time
They feel uncomfortable making investments choices, decisions, and actions
Their spouse is aligned to their decision
They already have investments outside of pension and consider annuity a stable option choice part of portfolio
They feel inflation will be back to normal soon
Because you can easily outlive your lump sum.
Most people think they are smarter than Ford and can make more investing in their own. 2022 should prove you wrong, even if you had a bunch of conservative investments. The average person who takes a lump sum is broke in 5.5 years (that's a fact, look it up).
76776Plus, if you retire before 59.5 you can can't get to your money penalty free unless you are over 55 and leave your money in the Ford 401k. All financial advisors want you to move out so they can make money off you.
Um.....The company going bankrupt for 200 pat Vanna
No, just worrying about the company going under.