December 16, 2014
Evaluating a Pension Buyout Offer
Like many baby boomers, I’ve received an offer from a former employer that’s meant to entice: “The Company is offering you a limited-time opportunity to receive this benefit now, rather than waiting until you otherwise become eligible to receive payments from the Plan.”
My 17-year employment as a Boston Globe reporter entitles me to a $1,762 monthly pension for life, starting at age 65. I’m 57 now. But a few weeks ago, the company put two alternatives on the table: take a smaller pension that starts now or trade my pension for a lump sum of $170,000 in cash. The deadline for accepting the new offer: the day after Christmas.
The New York Times Co., which used to own the Globe, has no doubt made this offer to employees for the same reason most companies do: to reduce burdensome pension liabilities and create financial certainty. But what’s in it for me? And how should other boomers think about similar offers coming over the transom?
My first thought was this: I’m working now and don’t want or need a pension right away. This money is for my retirement. I view my decision as choosing between the remaining two options: my original pension at 65 or the new lump sum offer.
A senior economist here at the Center for Retirement Research, Anthony Webb, helped me compare these two options.
Webb calculates that I could use the $170,000 to buy an annuity that would start paying $1,256 when I turn 65 – versus my original $1,762 pension from the Times at 65. By this standard, the lump sum isn’t very generous.
Another strategy would be to accept the lump sum and invest the money in the booming stock market. This could solve one problem with my pension. The pension, in contrast to Social Security, will be fixed at $1,762, and inflation will erode its value over what I hope will be many years of retirement. If the stock market rises – as it tends to do over the long haul – the lump sum would add substantially to my 401(k). But the market’s a crapshoot.
So how much would my lump sum have to grow so I could buy an annuity, using today’s market rates, that starts paying $1,762 every month at age 65? According to Webb, $323,790. That requires 9.6 percent in annual returns by investing the lump sum over the next 7.5 years. That rate of return looks high to me and even more unlikely with a U.S. stock market flirting with record high levels. And why should I take all that risk?
If the pot of money did grow to $323,790, however, I could forgo the annuity and just withdraw about 4 percent of it every year once I turn 65 – or $1,079 a month, an amount that would grow with inflation.
This is just one way to look at a buyout offer. I’ll need a steady and predictable flow of income when I retire, and the original Times pension of $1,762 a month still looks pretty good to me.