Is this the other shoe dropping?

[WinniWoman]

So, I am trying to adjust to my unemployment and lack of paycheck. My husband is the sole breadwinner right now and carrying the health insurance for the two of us through his job. This is the one thing about not working that worries me. I keep thinking I am really not retired because of how I came to be unemployed and my feeling this first week was one of "waiting for the next shoe to drop".

5 years ago, his company chopped his pension off at the knees and preserved the rest as of that date in 2013. He lost a lot of money- let's just put it that way. Then they enrolled him in a cash balance plan which is a joke. All new hires also go into that plan as well. Might as well not even offer a pension for them.

Anyway, today my husband came home with a memo from Human Resources. We don't understand what it means other than it looks like he is getting screwed again.

I would appreciate if anyone on TUG can decipher this for us. Trying to contact someone who knows anything at his company has become almost impossible.

This is what it says:

"Final Average Pay Pension Plan lump sum payments are calculated based on multiple factors, including rates released by the Internal Revenue Service every September. According to recent IRS announcement, lump sum interest rates for 2019 payment start dates increased relative to the rates used for 2018 payment start dates.

As a result of the interest rate increases, a Final Average Pay Pension Plan lump sum payment may be about 4.81 to 4.95 percent less in 2019 than the same lump sum pension payment would have been in 2018."

We have never gotten any announcement like this in the past years. Of course, he is not planning on retiring yet for a couple of more years. But we are planning on taking a lump sum and trust me- it isn't THAT much money, but it is to us. Now it could be less?

Any input is greatly appreciated.

 

[VacationForever]

Almost sounds like pension was invested in bonds... interest rates go up, price of bond goes down, value of lump sum goes down. Dunno. Ask your husband to talk to HR.

 

[WinniWoman]

Almost sounds like pension was invested in bonds... interest rates go up, price of bond goes down, value of lump sum goes down. Dunno. Ask your husband to talk to HR.

That's what I was thinking- bonds. We normally would call HR- but these last few years they have Customer Service Reps from all over the world that answer the HR line and they don't know "their you know what's" from their elbows.

 

[breezez]

I agree with VacationForever

 

[Elan]

My advice:. Don't stress over it until you understand what it means.

Sent from my Moto G (5S) Plus using Tapatalk

 

[controller1]

A cash balance pension plan provides either a lump-sum payment option or an annuity upon retirement. The notice is stating that if one retires in 2019 instead of 2018, one will receive 4.81% to 4.95% less if the lump-sum payment option is chosen. In other words, for those planning on retiring in 2019, think again and perhaps accelerate that retirement!

 

[WalnutBaron]

Almost sounds like pension was invested in bonds... interest rates go up, price of bond goes down, value of lump sum goes down. Dunno. Ask your husband to talk to HR.

I agree. Further to this discussion, you may know that the Fed again raised interest rates yesterday by another .25%. This is the third rate increase this year. While no one has a crystal ball, the market has priced in three more rate increases for 2019 and one additional increase in 2020. We're definitely in a rising rate environment as a result of the vigorous U.S. economy, which means a pension plan invested in bonds will continue to be devalued as interest rates continue to climb.

 

[breezez]

I worked for US Navy 11.2 years. No pension.... I worked for another company 5 years that had a pension I was vested. But they sold me to another company that didn’t have a pension. And I got some papers in 35 years I would get $297 a month for rest of life. I got sold over the years to 2 more companies neither with pensions. All only had 401Ks. After 2007 melt down I got a letter from company with pension offering a lump sum payout of $12,000 vs the $297 per month. The paper also showed that current pension fund was underfunded by almost 40%. So fear of getting nothing I took lump sum and put it in my IRA.

So for me too, like millions of others no pension. I only have what I have from saving/investing and if I get SS one day that will be great, but I have doubts just how much I’ll get when I get to that age.

 

[controller1]

Almost sounds like pension was invested in bonds... interest rates go up, price of bond goes down, value of lump sum goes down. Dunno. Ask your husband to talk to HR.

That's what I was thinking- bonds. We normally would call HR- but these last few years they have Customer Service Reps from all over the world that answer the HR line and they don't know "their you know what's" from their elbows.

I agree. Further to this discussion, you may know that the Fed again raised interest rates yesterday by another .25%. This is the third rate increase this year. While no one has a crystal ball, the market has priced in three more rate increases for 2019 and one additional increase in 2020. We're definitely in a rising rate environment as a result of the vigorous U.S. economy, which means a pension plan invested in bonds will continue to be devalued as interest rates continue to climb.

It really doesn't matter what a cash-balance pension plan is invested in because the underlying investment does not change the value (to the participant) of the plan. Cash-balance pension plans use a proxy bond interest rate issued by the Internal Revenue Service and that is the crux of the notice received by the OP. On September 18, the IRS issued new rates and that is what is causing the lump-sum payouts (assuming all things equal such as no additional contributions) in 2019 to be less than what would be received in 2018.

 

[VacationForever]

When I left a Fortune XXX company, I received notice that an annuity payout would happen immediately at about $500 per month or I could elect to take it out in a lump sum of around $110K. Since I was still working, I elected the lump sum payment. My husband who worked for the same company had the offer of taking an annuity of about $800 per month at 65 or a lump sum of around $120K at age 65. I still have no idea why the offers were different because I would have taken the annuity payment at 65 instead of a lump sum in my 40s.

 

[bizaro86]

The way lump sum payouts work is that they are supposed to provide you with a similar amount of income over your life as if you had taken the pension based on investing conservatively.

Interest rates have increased. So for every dollar invested you can expect to earn $3 instead of $2 in interest (or whatever). Thus, a smaller lump sum can provide the same amount of lifetime income.

I would (although of course it isn't my business, so feel free to discount my thoughts) consider taking the pension option. A lifetime of income is a valuable thing, and it is hard to replace it in other ways.

One way to prepare for the decision is to get an annuity quote just before you need to decide. Then you can see if you could get more income from the lump sum than the pension offers. Make it clear you want a plain vanilla annuity. (Not deferred, variable, indexed, etc).

One advantage to that option is you could buy an annuity or bonds with part of the money to provide income, while still using some for other priorities (debt repayment, moving, etc)

 

[b2bailey]

"The Other Shoe Dropping" -- funny because I used this expression recently with a friend and we both wondered the source.
This is a difficult way to live -- waiting for the other shoe to drop. I'd have to say, after the waiting you just endured, I would try my very best to try to live in this very moment. Face and solve ONLY the duties and challenges in the moment. Don't worry or anticipate the unknown. If this letter had required some type of action -- it would be on the 'today' list. If there is any action which may be required -- put it in the future 'to do' bucket. I am thinking the concept of living in this moment, this day, this week may be a challenge for you. But you will find great satisfaction in the small victories of the task. Awhile back, I heard a story about wood gathering. The man was walking along and passed by what looked like a good piece of wood, but his arms were already full. He said to his companion "Not today's stick" . That became a catch phrase between my husband and I for many years.

 

[am1]

Sounds like good advice even for someone elses business. A lot of people decide what to do not based on facts but emotions or what they have heard.

The way lump sum payouts work is that they are supposed to provide you with a similar amount of income over your life as if you had taken the pension based on investing conservatively.

Interest rates have increased. So for every dollar invested you can expect to earn $3 instead of $2 in interest (or whatever). Thus, a smaller lump sum can provide the same amount of lifetime income.

I would (although of course it isn't my business, so feel free to discount my thoughts) consider taking the pension option. A lifetime of income is a valuable thing, and it is hard to replace it in other ways.

One way to prepare for the decision is to get an annuity quote just before you need to decide. Then you can see if you could get more income from the lump sum than the pension offers. Make it clear you want a plain vanilla annuity. (Not deferred, variable, indexed, etc).

One advantage to that option is you could buy an annuity or bonds with part of the money to provide income, while still using some for other priorities (debt repayment, moving, etc)

 

[WinniWoman]

A cash balance pension plan provides either a lump-sum payment option or an annuity upon retirement. The notice is stating that if one retires in 2019 instead of 2018, one will receive 4.81% to 4.95% less if the lump-sum payment option is chosen. In other words, for those planning on retiring in 2019, think again and perhaps accelerate that retirement!

This was in regards to the defined benefit plan- not the cash balance plan.

 

[WinniWoman]

The way lump sum payouts work is that they are supposed to provide you with a similar amount of income over your life as if you had taken the pension based on investing conservatively.

Interest rates have increased. So for every dollar invested you can expect to earn $3 instead of $2 in interest (or whatever). Thus, a smaller lump sum can provide the same amount of lifetime income.

I would (although of course it isn't my business, so feel free to discount my thoughts) consider taking the pension option. A lifetime of income is a valuable thing, and it is hard to replace it in other ways.

One way to prepare for the decision is to get an annuity quote just before you need to decide. Then you can see if you could get more income from the lump sum than the pension offers. Make it clear you want a plain vanilla annuity. (Not deferred, variable, indexed, etc).

One advantage to that option is you could buy an annuity or bonds with part of the money to provide income, while still using some for other priorities (debt repayment, moving, etc)

When the time comes we want to take a lump sum and roll it over into an IRA. We are using Social Security as an annuity.

 

[WinniWoman]

"The Other Shoe Dropping" -- funny because I used this expression recently with a friend and we both wondered the source.
This is a difficult way to live -- waiting for the other shoe to drop. I'd have to say, after the waiting you just endured, I would try my very best to try to live in this very moment. Face and solve ONLY the duties and challenges in the moment. Don't worry or anticipate the unknown. If this letter had required some type of action -- it would be on the 'today' list. If there is any action which may be required -- put it in the future 'to do' bucket. I am thinking the concept of living in this moment, this day, this week may be a challenge for you. But you will find great satisfaction in the small victories of the task. Awhile back, I heard a story about wood gathering. The man was walking along and passed by what looked like a good piece of wood, but his arms were already full. He said to his companion "Not today's stick" . That became a catch phrase between my husband and I for many years.

Good advice. I need that. I am such a worrier and a planner. I am always thinking ahead. In fact, today on my morning walk I was thinking this very thing. That I need to try to live in the moment and try to feel happiness. Then hubby comes home with this memo and tells me I am not going to like this. Lol! That was the end of that. But- we really don’t understand what it would mean in his case.

 

[WinniWoman]

I agree. Further to this discussion, you may know that the Fed again raised interest rates yesterday by another .25%. This is the third rate increase this year. While no one has a crystal ball, the market has priced in three more rate increases for 2019 and one additional increase in 2020. We're definitely in a rising rate environment as a result of the vigorous U.S. economy, which means a pension plan invested in bonds will continue to be devalued as interest rates continue to climb.

Well doesn’t that figure- just as he gets close to retirement. We can’t win.

 

[WinniWoman]

I worked for US Navy 11.2 years. No pension.... I worked for another company 5 years that had a pension I was vested. But they sold me to another company that didn’t have a pension. And I got some papers in 35 years I would get $297 a month for rest of life. I got sold over the years to 2 more companies neither with pensions. All only had 401Ks. After 2007 melt down I got a letter from company with pension offering a lump sum payout of $12,000 vs the $297 per month. The paper also showed that current pension fund was underfunded by almost 40%. So fear of getting nothing I took lump sum and put it in my IRA.

So for me too, like millions of others no pension. I only have what I have from saving/investing and if I get SS one day that will be great, but I have doubts just how much I’ll get when I get to that age.

I myself have 1 pension from
A hospital I worked for for 3 years. It will be $29.00 per month! Lol!

But my husbands' we are counting on. He stayed with this company because of it- he started there in his 40’s.

 

[breezez]

I myself have 1 pension from
A hospital I worked for for 3 years. It will be $29.00 per month! Lol!

But my husbands we are counting on. He stayed with this company because of it- he started there in his 40’s.

I sure hope for you guys he gets what he was promised!

 

[needvaca]

pension annuity payments are almost always better than lump sum (I assume it has survivor benefits)
very few private company workers get pensions anymore, so try to keep what he has, especially since he's so close to retirement.

do you have a financial person in the family who can take a look at it and give you some advice?

 

[PrairieGirl]

Mary Ann,

AHA, I knew that learning about the "time value of money" some 40 odd years ago would come in handy!

The computation of a lump sum benefit is a mathematical formula that uses an interest rate (the discount rate). Your husband's firm must use the rate that is published by the IRS, hence the notice (probably to all employees within a certain time from retirement - my company used five years) that the rate will be changing in 2019. When the interest rate used as the discount rate rises, the PRESENT VALUE (aka, the lump sum benefit) of a SERIES OF FUTURE PAYMENTS (aka the option to receive monthly payments) decreases.

This might be a consideration to people at his company who were on the fence about retiring this year. I wouldn't lose any sleep over it since you have indicated that your husband is planning to work for a few more years.

 

[Talent312]

You need to watch for those "dropping shoes."

I could see the handwriting on the wall for the state's pension plan and it's automatic COL adjustments, so I got out while the getting was good. I'm having to eat the unsubsidized health insurance premium for a bit, but as has been said, "A bird in the hand is worth two in the bush." ... and the numbers worked out well.

.

 

[frankf3]

Mary Ann,

AHA, I knew that learning about the "time value of money" some 40 odd years ago would come in handy!

The computation of a lump sum benefit is a mathematical formula that uses an interest rate (the discount rate). Your husband's firm must use the rate that is published by the IRS, hence the notice (probably to all employees within a certain time from retirement - my company used five years) that the rate will be changing in 2019. When the interest rate used as the discount rate rises, the PRESENT VALUE (aka, the lump sum benefit) of a SERIES OF FUTURE PAYMENTS (aka the option to receive monthly payments) decreases.

This might be a consideration to people at his company who were on the fence about retiring this year. I wouldn't lose any sleep over it since you have indicated that your husband is planning to work for a few more years.

This ^

It may feel that way, but it's not a matter of "the other shoe dropping". The company isn't doing this to screw it's employees. Your husbands fixed pension is expressed in terms of a monthly amount starting at a specific age. The company has the option of offering a lump sum in lieu of the monthly pension benefit, however by law the lump sum must be actuarially equivalent. When interest rates go down, the lump sum goes up. And the opposite is also true like now. Increases in interest rates reduce the value of the lump sum payout (because it take a smaller lump sum to produce the required fixed monthly payment)..

 

[artringwald]

Here's another way to look at it. Say you used the lump sum to buy a simple annuity. As interest rates go up, it would cost less money to buy the same annuity. That's why the amount of the lump sum would go down if the interest rates go up.

 

[Brett]

This ^

It may feel that way, but it's not a matter of "the other shoe dropping". The company isn't doing this to screw it's employees. Your husbands fixed pension is expressed in terms of a monthly amount starting at a specific age. The company has the option of offering a lump sum in lieu of the monthly pension benefit, however by law the lump sum must be actuarially equivalent. When interest rates go down, the lump sum goes up. And the opposite is also true like now. Increases in interest rates reduce the value of the lump sum payout (because it take a smaller lump sum to produce the required fixed monthly payment)..

right, but there is a reason that defined benefit pension plans converted to "cash balance" plans, it eliminated the requirement that payouts depend on the last three years of employment, hurting older workers but potentially benefiting younger workers that quit or change jobs before retirement age.