07 Jan My pension: a lump sum or a monthly payment?

Q. My present employer is offering me a pension plan buyout, but I think their payment isn’t sufficient. Here are the particulars:

Pension Plan Enrollment: August 2009

Date of Employment: July 20, 2009

Service at Retirement: 11.5 years

Age at Retirement Eligibility: 62

Salary: $83,750 per year

Projected Pension: $1,440 per month

Employer Lump Sum Offer: $60,000

Is it possible for you to assist me in determining the present day value for my pension under my current plan?

A. Good for you for asking the question rather than just taking what’s offered.

It’s also common for lump sum buyouts to seem very low compared to what your monthly or yearly pension would be, but it all depends on the numbers.

When making a decision, you have to take into account outside items including your monthly payout choices, your life expectancy, your current age and the solvency of the pension plan. Then, simply, you have to run those numbers.

We took the information you provided to Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights. Assuming what you provided is correct, you’re being offered a $60,000 lump sum instead of $17,280 a year starting at age 62.

“Assuming a 3 percent discount rate and also assuming the reader collected to age 85, I estimate a present value of roughly $174,000,” Maye said.

Another angle would be to see how much of a single life immediate annuity the $60,000 lump sum would buy for a 62-year-old.

“Assuming the reader is a female and already 62, the $60,000 currently only buys a benefit of $294 a month or $3,528 per year, which equates to an internal rate of return (IRR) of 2.68 percent, assuming someone collected for 23 years,” Maye said.

He said you have some checking to do.

“I think some key information to assess the situation is missing,” he said. “In the event all the information is correct, the lump sum offer appears too low.”

Confirm at what age the $1,440 monthly pension benefit is available, Maye said. It’s possible the $1,440 isn’t available until age 65 rather than age 62.

Or perhaps, he suggested, your years of service were frozen in the past, so perhaps the pension offer is based on credits for fewer than the full 11.5 years you served.

Go back to your employer to make sure the numbers are correct, then consider meeting with a financial advisor to see how the pension choice could impact your overall retirement plan.

Good luck!

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This story was first posted in January 2015.