Take the buyout?

[TangoJuliet]

After I graduated college I got a job with a small company. I worked there long enough to become vested and qualified for an annuity. When I retire in 20 years I will be able to collect $6000/year from them.

I got a packet in the mail the other day offering me a buy out in the amount of $13,000. At first I kind of scoffed at the amount they offered thinking if I live 20 years past 55 then that would be $120,000. I work for the government now so I thought what would happen if I invested that $13,000 into my TSP. They have a calculator online and using a rate of return of 10% that $13,000 would come out to around $120,000 over the next 20 years.

Obviously if I lived longer then 20 years - say 30 years then the total would be $180,000 (using the $6000x30). I also thought that the company could go bankrupt or fail to fund the pension and have nothing to pay out in 20 years. Then I would have $0

Not really sure if I should take the money now or just let it be. If I do take the buyout the money is not going to be spent but rather invested back into my TSP.

 

[DaTT]

Take the money and invest

 

[utahraptor]

Do you know if the annuity has a cost of living adjustment like going up a certain percentage each year or is it fixed at 6K?

 

[TangoJuliet]

Do you know if the annuity has a cost of living adjustment like going up a certain percentage each year or is it fixed at 6K?

pretty sure its fixed at $6k

 

[Rakehellion]

How long have you been there so far? $6k a year that isn't adjusted for inflation and isn't guaranteed seems pretty low. You can get another job that pays more in the meantime.

 

[utahraptor]

Also, this is not a buyout in the sense that you have to quit if you take it is it?

 

[Fayd]

After I graduated college I got a job with a small company. I worked there long enough to become vested and qualified for an annuity. When I retire in 20 years I will be able to collect $6000/year from them.

I got a packet in the mail the other day offering me a buy out in the amount of $13,000. At first I kind of scoffed at the amount they offered thinking if I live 20 years past 55 then that would be $120,000. I work for the government now so I thought what would happen if I invested that $13,000 into my TSP. They have a calculator online and using a rate of return of 10% that $13,000 would come out to around $120,000 over the next 20 years.

Obviously if I lived longer then 20 years - say 30 years then the total would be $180,000 (using the $6000x30). I also thought that the company could go bankrupt or fail to fund the pension and have nothing to pay out in 20 years. Then I would have $0

Not really sure if I should take the money now or just let it be. If I do take the buyout the money is not going to be spent but rather invested back into my TSP.

your TSP isn't going to return 10%. that line is pure BS.

 

[TangoJuliet]

How long have you been there so far? $6k a year that isn't adjusted for inflation and isn't guaranteed seems pretty low. You can get another job that pays more in the meantime.

Also, this is not a buyout in the sense that you have to quit if you take it is it?

I don't work there any longer.

your TSP isn't going to return 10%. that line is pure BS.

I couldn't find anywhere that said how much the average rate of return would be over 20 years. In the past 5 years I have been averaging over 20% which I know is not going to continue. I just "picked" 10% because it was a nice round number

 

[stlc8tr]

I couldn't find anywhere that said how much the average rate of return would be over 20 years. In the past 5 years I have been averaging over 20% which I know is not going to continue. I just "picked" 10% because it was a nice round number

Yeah, averaging 20% in a bull market from the crash of 2008 wasn't that hard. Getting 10% for the next 20 years? That might be a little bit more difficult...

 

[Imp]

A balanced portfolio, IIRC, returns ~7%. Let's say 5% for shits and giggles.

Rule of 70: 70/5=14 years to double money.
20 years: 20/14 = 1.43 Doublings or 2^(1.43)=2.69 -- I think?

Ignoring taxes:
$13,000 x 2.69 = $34,970 in 20 years
(if 7% growth, it's 10 years to double, so $13,000 x 4 = $52,000)

And not only am I a bit drunk, I am not a financial advisor/anything, so don't use this for anything but laughs.

 

[MrRamon]

Take the money and invest

This

 

[ponyo]

Not having done any math, I just have one question. Why would they offer you a buyout that benefits you? Anything they offer will be in their favor. I would decline just knowing this. Keep your annuity.

 

[edro]

Is the company owned by a larger company? Higher chance of them paying out down the road maybe.

 

[TangoJuliet]

Is the company owned by a larger company? Higher chance of them paying out down the road maybe.

It was a small private company that was recently purchased by Rockwell Collins. I'm guessing the buy out is for them to reduce debt in the future.

 

[Jaepheth]

By law, the amount they offer will be actuarially equivalent. The question is what assumptions did they make (mortality, interest, etc) and do you agree with them.

Say you live for 20 years after payments start and interest stays at 8% from now until you die.
http://financialmentor.com/calculator/present-value-of-annuity-calculator

Gives the present value (at the time payments start) as 58,908.88
Further discounting by 20 years at 8% gives 58908.88 * .92^20 = 11,115.71

In which case you should take the buyout.
At 7% interest the present value is 14,889.18 In which case you should keep the annuity If you think you can't beat 7%

Basically, if you take the $13,000 NOW then you have 20 years to get it to the value of your annuity at retirement.

 

[vi edit]

Is that $13,000 going to be taxed as income right now? Personally, I'd hang on to it as a defined annuity. My wife and I both have some basic pension plans from our previous employers that will pay somewhere in that range and we're just going to use them for insurance premiums and property tax bills when we retire. Toss in our own individual retirement accounts plus whatever pittance we get from social security and it's not a bad chunk of monthly change.

 

[pete6032]

10% is overly optimistic. 7% is an OK number. If you get 7% over 20 years on $13,000 that's $50,305 at retirement.

 

[TangoJuliet]

Is that $13,000 going to be taxed as income right now? Personally, I'd hang on to it as a defined annuity. My wife and I both have some basic pension plans from our previous employers that will pay somewhere in that range and we're just going to use them for insurance premiums and property tax bills when we retire. Toss in our own individual retirement accounts plus whatever pittance we get from social security and it's not a bad chunk of monthly change.

Yeah I wasn't counting on this money towards retirement. Just some extra cash to have around to play with. I have my own personal retirement account, a pension and social security.

I'm not sure if the $13,000 is taxed but if it is then I'd definitely not take the buy out.

The only thing that worries me is if I decline the buyout and the company goes bankrupt the. I'll get $0

 

[Exterous]

Yeah I wasn't counting on this money towards retirement. Just some extra cash to have around to play with. I have my own personal retirement account, a pension and social security.

I'm not sure if the $13,000 is taxed but if it is then I'd definitely not take the buy out.

The only thing that worries me is if I decline the buyout and the company goes bankrupt the. I'll get $0

I think its likely the payout would be taxed as income. I'm thinking unless the company used post-tax dollars to fund the pension then tax is still due on it. If this is the case you might be able to get around it by routing the disbursement to a retirement fund (IRA) but these are just guesses

 

[Net]

After I graduated college I got a job with a small company. I worked there long enough to become vested and qualified for an annuity. When I retire in 20 years I will be able to collect $6000/year from them.

I got a packet in the mail the other day offering me a buy out in the amount of $13,000. At first I kind of scoffed at the amount they offered thinking if I live 20 years past 55 then that would be $120,000. I work for the government now so I thought what would happen if I invested that $13,000 into my TSP. They have a calculator online and using a rate of return of 10% that $13,000 would come out to around $120,000 over the next 20 years.

Obviously if I lived longer then 20 years - say 30 years then the total would be $180,000 (using the $6000x30). I also thought that the company could go bankrupt or fail to fund the pension and have nothing to pay out in 20 years. Then I would have $0

Not really sure if I should take the money now or just let it be. If I do take the buyout the money is not going to be spent but rather invested back into my TSP.

Here is a way to look at it. Calculate inflation from 1993 to 2013 (that's 20 years):

http://www.westegg.com/inflation/
What cost $6000 in 2013 would cost $3777.23 in 1993

Inflation changes of course but the current sentiment is that we are going to have worse inflation then in the past. However, we will assume it won't be worse and it will just be how it was historically from the above time period.

Now every year you get $3,777.23 (in today's dollars). It will take about 3.5 years to get to $13,000 in today's dollars (if you didn't invest the $13,000).

If you take $13,000 and invest it and assuming a 7% return (s&p 500 historically gets 6-7% return).

$13,000 @ 7% return for 20 years = $50,305.90

It would take 8.4 years of receiving $6,000 payout to get to $50,305.90 (actually a little longer because each year out of the 8.4 you are losing money from inflation). Each year out of the 8.4 years the company needs to still be around without changing the pension.

You don't know if the company is going to be around so you need to take into account the risk that you might get $0 20 years from now.

 

[acheron]

The only thing that worries me is if I decline the buyout and the company goes bankrupt the. I'll get $0

Yeah, this. I have a pension floating around that's even smaller.. 3-4k maybe. Not a lot, but money is money, right?

I have very little confidence I will ever actually see it though. If I got offered a buyout I'd jump on it.

 

[Jaepheth]

...
The only thing that worries me is if I decline the buyout and the company goes bankrupt the. I'll get $0

The PBGC should have your back (in theory)

 

[Exterous]

The PBGC should have your back (in theory)

:thumbsup: I worked for a company that went bankrupt in 2009 that had a pension. From the PBGC documents I kept getting (even though I wasn't eligible) it looks like almost everyone who was eligible for pension payouts is\will be getting the full amount. There was something about the high payouts potentially not getting the entire pension due to something like their Maximum Monthly Guarantee or some calculation but the cap was really high.

I will say it took a couple of years to get everything straightened out but the PBGC prioritized those who were already retired and then worked backwards from there so I don't think anyone actually missed a pension check