Take the money or wait?
That’s the $90,402 question The New York Times Co. has put to me as it offers to buy out my right to the lifelong monthly pension I earned when the parent of the Times newspaper also owned the Globe.
An increasing number of workers face the same question as corporations drop traditional pensions and seek to unload past obligations by enticing employees and former employees to trade their pensions for one-time, lump-sum payouts. With people living longer and the investment environment in flux, companies don’t want to worry about whether they’ll have enough money to pay their retirees.
Just 7 percent of the companies in the 2013 Fortune 500 offered traditional pension plans to new employees, down from 51 percent of those companies operating in 1998, according to Towers Watson, a global benefits consulting firm. And in a recent survey of 180 mid- and large-size companies with defined benefit plans, Towers Watson found that two-thirds of them had offered lump-sum pension buyouts or would do so by next year.
“The snowball is gathering speed,” said professor Olivia S. Mitchell, executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania. “Partly as a result of the financial crisis and the need to throw a lot of money into underfunded [pension] plans, big corporations have just decided to call it quits.”
Mitchell estimates that about half the people take the lump sums — along with the risks of managing investments and retirement savings. Among the specialists I consulted, the consensus was that those who should seriously consider lump sums are people who are pessimistic about life expectancy, face an immediate financial crisis, or are sufficiently affluent that they don’t have to count on the pension.
I don’t fall into any of those categories. For me, the question became: Could I outperform the pension benefits by investing the lump sum — without losing sleep at night?
I am 60 years old, married, and have no children. If I kept the pension, the payout would depend on when I started to take it and the percentage of the benefit my wife would receive if she outlived me. If I took the pension that expires when I do (note to wife: don’t worry, this is only hypothetical), I would receive $836 a month beginning Jan. 1, 2020.
Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College, suggested these options for the lump sum:
Buy an annuity. After rolling over the lump sum into an IRA to avoid a tax hit, purchase an annuity from an insurance company that would begin paying a fixed income in five years (when I turn 65).
Various websites offer calculators comparing annuity plans. The best of three quotes on Income Solutions, which is used by Vanguard, was $646 per month.
Why so much lower than the pension figure? Annuity customers tend to be wealthier and better educated than the general population, factors that correlate with longevity and thus higher payouts. “The people who will die young or think they will die young are not going to buy annuities,” Webb said.
Invest now, annuitize later. Still using an IRA, invest the lump sum in the stock market over the next five years and then buy an annuity. Beating the pension benefit would require an annual return of at least 9.5 percent. This assumes that annuity costs remain steady; in reality, they fluctuate with interest rates and mortality projections.
Webb predicted a less than a 50 percent chance of achieving that return. Over the last 90 years, he said, the nominal return on stock has averaged 9 percent. But that figure masks wide swings, such as the 50 percent drop in the Dow Jones industrial average five years ago.
Go for broke. Rather than switching to an annuity at age 65, keep the money in the market. Let’s assume that I die at 85, which means I’d collect the pension for 20 years. After that, there would be nothing.
For the lump sum to deliver the same result, I calculated that my average annual investment return would need to be at least 5.7 percent. If it exceeds that, my heirs would benefit. If the return falls short, I’d have to tighten my belt.
I also checked with my financial adviser, which, if nothing else, served as a good test of his objectivity.
Despite the prospect of additional fees, the adviser recommended staying with the pension. He said he probably could exceed the 5.7 percent threshold, but there were, of course, no guarantees. For me, the comfort of a guaranteed income outweighs the discomfort of knowing that I might pass up higher gains. Besides, the pension allows me to take a little more risk with my other investments.
Tolerance for risk is the great intangible. It depends on such factors as the size of your portfolio, your dependents, your desire to leave an inheritance, and, perhaps most of all, your stomach for uncertainty. Each individual is different, specialists stressed, so consult a financial adviser.
Even a pension isn’t risk free, so pensions in the private sector are backstopped by the Pension Benefit Guaranty Corporation, which insures benefits up to $5,000 a month.
And if there’s a run on the PBGC? Then it’s up to Congress to decide whether to come to the rescue.
LOOKING FOR HELP?
Pension Action Center at UMass Boston. A free service that helps you decode pension documents and, if you feel shortchanged, battle for benefits. umb.edu/pensionaction or 617-287-7307 or 888-425-6067.
Pension Rights Center. Washington-based advocacy group; website offers wealth of resources. pensionrights.org or 888-420-6550.
Center for Retirement Research at Boston College. Website offers resources for financial planning. crr.bc.edu.
Steve Maas can be reached at firstname.lastname@example.org.