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Life After Salary: Rolling Over My Pension

This article was written by in Investing. 22 comments.


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. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar Investor Junkie

It’s a no brainer to take the lump sum. If you get 6% per year, for 35 years it’s $138,349.56. For the same time period, with the monthly annuity, it only totals $27,300.

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avatar Kyle

Yeah, $65 per month amounts to nothing more than an accounting nuisance considering your income. I’d definitely take the lump sum without even thinking about it.

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avatar Steve

That’s what I was thinking. It’s just not worth the effort to track this additional “account.” And that’s on top of the fact that you can probably do better on your own. Roll it over and don’t think about it any further.

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avatar rewards ♦31 (Newbie)

Agreed. The goal should be less transactions to account for. Also, which company would have underwrit your (flexo) pension?

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avatar TFB

Because it’s a cash balance plan, not a traditional pension plan, you made the right choice. The balance in a cash balance plan only grows at a low rate tied to bond yields.

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avatar krantcents

I agree with your choice! Investing it at a higher return is more attractive than 3+%. What is your investment choice in Vanguard?

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avatar Luke Landes ♦127,535 (Platinum)

I’m going with the Total Stock Market Index fund.

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avatar Brandon

Taking the money was definitely the right decision.

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avatar MKV

I also opted for a direct rollover to an IRA instead of monthly payments. Instead, each year since 2002, I have been converting certain amounts of the lump sum to a Roth IRA — because:
a) The payments would end after my death, so any beneficiaries would have been out of luck.
b) Just like IRA withdrawals, the income would have been 100% taxable to the IRS, though not state taxable.
c) There’s more control of the amount of taxes paid; my annual conversion amounts are kept within or below the 15% tax bracket.
c) Monthly pension income would have made future Social Security payments more vulnerable to be taxed — depending on other income, up to 85% of Social Security payments could be taxable.
d) Any amounts that were converted to a Roth is no longer subject to RMDs (Required Minimum Distributions) at age 70-1/2.
e) Any withdrawals from a Roth IRA will not adversely affect the taxability of Social Security income.

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avatar Evan

Any thought of earmarking this relatively small (and unexpected) account as retirement INCOME. So putting it into a fixed or deferred annuity. Before responding with fees – it may be worth checking out an illustration or two (Vanguard has really low fees with them).

Not sure it would be right or wrong, just a random thought

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avatar Lowdown

If you were to die unexpectedly before receiving a significant portion of the lifetime annuity, all of that money would presumably go back to the pension fund. By taking a lump sum, you are in control of the distribution of those monies in your discretion.

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avatar skylog ♦368 (Nickel)

i agree with the consensus here, you made the correct decision, pretty much for all the reasons you provided. i found it funny that it would have taken you 23 years of 65.00 payments to get to 18,000.00

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avatar Barb Friedberg

I did a net present value calculation for you with a discount rate (expected return you would get on the money over time) of 7%. The net present value of the $65/month is about $11,000. That’s $7,000 less than the $18,000 you got from the company. Congrats, good choice!. I’m also a big fan of the Vanguard Total Market Index.

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avatar Tough Love

I’m well versed in these calculations.

Unless you are 45-50 years old and female (who have longer life expectancies), the $65/mo (as a Single life Annuity) vs the $18K Lump sum make no sense. And, in employment situations, Unisex mortality tables are required (which means they make even less sense).

The $18K is SO far and away the greater value, that I suspect the person who quoted these figures may have made a mistake.

One qualification….. If the $65/mo has an annual COLA increase of say 3%, the relationship isn’t that far off, because $65/mo WITH such a COLA is roughly equivalent to $100/mo without a COLA. However, guaranteed annual COLAs are rare outside government sector employment.

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avatar Squirrelers

No question you made the right choice. I was going to do an NPV on it, but Barb beat me to it above:) Just eyeballing it, the lump sum appeared to be the better choice when incorporating time value of money into the assessment of the fixed $65 monthly payments. Which, as you pointed out, would be eroded by loss of purchasing power over time. Why deal with “transaction costs” which may not even be financial but just your time in dealing with these payments.

Even if both appeared equal from a strictly analytical point of view, I’d take the lump sum anyway. Better you have control over your money than someone else.

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avatar Craig

had a similar decision when I left my previous employer. The amount was only a little bit bigger.
I chose the lump sum over bigger monthly payments (I was only able to take half as a lump sum in my plan). My decision was in big part because we were about to buy a home and figured having the extra money would enable us to pay extra towards out down payment or have some extra padding in our bank account if we needed it.

For me, the amount wasn’t so much that it would make a big difference as a monthly payment. Using the money for our home made much more sense to us.

I find it amusing that I’ll be receiving a check for the rest of my life, even if it can only buy a subway ride in my later years.

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avatar rewards ♦31 (Newbie)

On a related note: does anyone know of a good reason(s) to stick with a company’s Vanguard retirement account after leaving? with the alternative being a rollover to a Vanguard Individual IRA? I don’t know what kind of perks to look for in my old company’s plan that I won’t have access to with an individual account.

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avatar MR ♦295 (Nickel)

I would have taken the lump sum too. I think I would put some in a Roth, and invest the rest in my regular brokerage account. I might even put all of it in a Roth over a few years span.

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avatar eric ♦1,549 (Half-Dollar)

Good food for thought as I don’t come across pieces on pensions a lot. Lump sum seems to make the most sense in this case.

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avatar jw

Have a question. My pension comes in about three months. I can take $1638 a moth for 7 years and then it’s reduced to $70.50 a month for life or I can take $730.00 a month for life. I’m going to be 55 soon and my Social Security at age 62 is at about $1500.00 a month as of now. Any suggestions?

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avatar Karen

A bit late to the party …

I have a pension with an employer I separated from in 2005. Since early 2006, there have been rumors that the pension program would end, but it hasn’t happened yet, and I’m not required to take my money out. The numbers are very similar to the ones in the article, with one difference: It looks like the thing is earning about 8% per year. There’s no way I can match that on my own.

I like the idea of taking a lump sum withdrawal so that I have control of the funds and they won’t be reabsorbed by the pension fund if I die. However, my actions show that I like the idea of 8% per year a lot more. Any thoughts? Should I suck it up and get this money into an IRA?

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avatar Julio

Hi All,

I think we all agree that he made a good decision taking the lump sum. My question is what to do with it next.. Roll it over to an IRA.. which one makes more sense TRADITIONAL or ROTH?

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