In a country where large employers are offering fewer defined benefit plans, like pensions, and more defined contribution plans, like 401(k)s, it’s surprising I have a pension. A little more than a month after quitting my day job, I received a notification from my former employer that I was eligible to begin receiving payments from my cash balance pension, a type of pension where the employer contributes a percentage of my salary, above my salary, to a plan that accrues interest credits every month.
This pension is significantly overshadowed by my 401(k). While I was contributing the maximum allowed to my 401(k), the pension grew more slowly, with an interest rate of 3.87%. I am fully vested in the plan, so the company offered me the choice between a lump sum payout and an annuity, based on the full amount of the pension. With no spouse, and with the payout scheduled to begin on March 1, annuity payments would amount to about $65 per month for the remainder of my life, while the lump sum would be about $18,000. A $65 payment each month for the rest of my life would, assuming I live long enough, provide me with more money over that period of time when compared to the lump sum, but inflation would quickly erode the real value of increasing my income by $65 per month. By taking the lump sum now, I can invest the full amount and likely, over time, create a more valuable benefit for myself.
I elected to receive the lump sum, but to forgo accepting the payment as income now by rolling the benefit over into a new Traditional IRA at Vanguard. I also had the option of leaving the pension alone until a future date, delaying the benefits payout until as late as April 1, 2041, but I decided to take the benefit now rather than wait.
I have not included my pension balance in my net worth, so once Vanguard receives the check and credits my IRA, scheduled for March 1, my calculations will be affected.
Do you think I made the right choice? Given the numbers above, would you take the annuity payment or lump sum? Would you let the cash balance pension remain accruing interest credits and wait before receiving the benefits or take the benefits as soon as possible?
Published or updated February 10, 2011.