Financial Advice for family member (retirement)

[edro]

57yo, wants to retire in 3 years
Yearly Income: $32,000
Retirement savings: $0 (will eventually get Social Security)
Pension Option 1: $870/mo (fixed for life)
Pension Option 2: $169,000 Lump Sum (rollover into IRA)

Simple payback: $169k/$870 = 16.2 years (doesn't account for growth or inflation)

My family member asked me for advice so I am asking you.
What are your thoughts on Monthly Benefit vs Lump Sum?

Option 1 - Monthly Payment
Benefits
- Access to money now
- No need to worry about investments
- Less work, guaranteed
Drawbacks
- Still no retirement savings
- No growth of retirement account
- fixed dollar amount erodes due to inflation

Option 2 - Lump Sum
Benefits
- Growth of retirement account
- Taxes are lower in retirement (for them)
Drawbacks
- No access to money now (without penalty)
- More risk due to investments

I believe both options (monthly pension, or IRA withdrawals) are taxed equally, depending on your tax rate at the year of use. (local, state and Federal)

Thoughts?
Thank you for any advice!

 

[JEDI]

if the pension isn't inflation adjusted, then go for the lump sum!
also, in case he dies early.

put it in a Target/freedom retirement fund of 40% stocks, 60% bonds.
target = vanguard brand name, freedom = fidelity brand

4% of 169k = $6760/yr = $563/month
4% = recommended safe withdrawal rate

 

[Genx87]

Lump sum provided they invest the money in low risk fund they provide steady return.

 

[NesuD]

I'm generally not a big fan of annuities especially when the amount of the principal is that small. I'm thinking lump sum might be the better option in this case.

 

[Drako]

What are his monthly expenses?

 

[Slew Foot]

Thats........ not a whole lot of money to retire on

 

[edro]

Doesn't matter what his expenses are.
He will have to live off of this pension/IRA and Social Security, plus side jobs.
Perfect example of a baby boomer without a plan.
He is lucky he even has the pension.
At least his house is paid off.

I can't believe there aren't any Lump Sum vs Monthly Benefit calculators online. Seems like a common request.

 

[Ns1]

depends on how long he wants to live.

 

[manly]

Everyone would love to retire early, but why age 60? Seems fairly young considering he doesn't have a big nest egg. Although having the $169k pension and a paid off house probably puts him above the national average.

Correct me if I'm wrong but unless he's in dire need of money and/or in relatively poor health, the worst decision would be to draw on SS before full retirement age.

 

[boomhower]

Considering he is 57 with $0 saved for retirement go with the monthly check. I have serious doubts he would be smart with $169k falling in his lap only to squander and be even more screwed than he already is.

 

[JEDI]

Considering he is 57 with $0 saved for retirement go with the monthly check. I have serious doubts he would be smart with $169k falling in his lap only to squander and be even more screwed than he already is.

ahh.. that is true.
does he have financial discipline?
if not, then choose $870/month pension.

but can he live on $870/month till he gets (severely reduced) social security at age 62?
if not, then obviously work till age 62.


Also, OP, you said Lump Sum No access to money now (without penalty).
If he's retiring at age 60, then he will have access w/o penalty.
You can withdraw from your IRA penalty free starting at age 59 1/2.

 

[ponyo]

My vote is pension for life. 76 years is still pretty young.

 

[Drako]

Doesn't matter what his expenses are.

Surely you can't be serious.

 

[fuzzybabybunny]

Considering he is 57 with $0 saved for retirement go with the monthly check. I have serious doubts he would be smart with $169k falling in his lap only to squander and be even more screwed than he already is.

This is the thing.

Spending habits are hard to change. It's not uncommon for people to, say, get a big pay raise but still end up with the same amount of money saved aside because they simply spend the difference.

This person is 57 years old with zero savings for retirement. That says something about their personality. That's a LOT of years of not putting any money aside. If he spends all 169K too early, he'll be screwed with none of the methods of recovery that a younger person would have, like going back to work or even getting hired at a well paying job.

 

[zinfamous]

Not enough to retire on at his age, especially missing out on full age benefits.

....but as others have said, and assuming that they will retire now, no matter what, then probably go with the monthly pension because I have doubts about someone doing well with a sudden pile of cash after spending the last ~40 years not learning how to save.

 

[purbeast0]

I'm 35 and would like to retire in 3 years too.

Too bad that isn't a possibility.

 

[DaveSimmons]

Is there any risk of the company declaring bankruptcy after they loot the pension fund?

Vanguard is 100% safe. Tony Soprano's Paving Repairs LLC is much less so.

Also good luck to them retiring early with no savings. That seems unwise.

 

[fuzzybabybunny]

Another option is to take that monthly income and social security and go live in an area of the world where the cost of living is very cheap, such as parts of Asia, South America, western Europe, etc. The quality of life will likely be better in those places with that smaller level of income than in the States.

If they don't own a house (which, guessing from their savings is likely?) ~$850 can get blown easily on rent with not much left over for the essentials. If anything bad happens they could be up shit creek, moreso at their age.

In a cheaper country rent is cheap, you can eat out for all meals on $10 a day, etc.

And even if they did own a house they could vacate it and rent it out or put it on AirBnB and hire a person or company to manage it

 

[PowerEngineer]

IMHO lump sum is an invitation to disaster. With zero savings, I have to wonder how good he will be at limiting his spending. And that $169k could become a lot less if the stock market tanks soon after he retires (and his living expenses force him to "sell low"). My quick calculations suggest that the breakeven for the $890/month pension (assuming about 3% return and no inflation) is at about 72 years (22 years into retirement). I'd go with that.

I'd also put off taking SS as long as possible; to 70 years of age if he can.

He should also look quite carefully at medical expenses. The premiums until he reaches Medicare age will likely be a major expense.

Although his SS will help some, I agree with others who have said he has nowhere near enough money to comfortably retire at 60. I hope health is not forcing this upon him.

 

[Mai72]

Honest Opinion?

Work. At least until he's 65.

I'm sorry but you gotta be out of your mind if you think $870 a month is going to cut it. IMO, it looks very bleak. $169k lump sum is peanuts. Divide that in 20 years.

When people look at retirement they never think of the worse case scenario. I learned a valuable lesson when I took care of my uncle who had Parkinson's disease. Perfect health up until about the age of 75, then boom. His body deteriorated quickly. What was in his favor was the fact that he was a millionaire. He could afford 3 massages per day. He could afford a nanny, the best meds, etc. That stuff matters. What happens when you get a disease like Parkinsons and you're on a limited income? That's a bad situation I'd never want to be in. Sadly, the relatives take the brunt of it financially and IMO that's not fair.

So, I would have a frank talk with your relative. Show sympathy, but be honest. Go over best, and worst case scenarios. Don't try to sugarcoat it.

 

[NesuD]

I can't envision how someone could retire at that age with only that to fall back on. I am the same age and have significantly more than that saved but no employer pensions coming. My plan has me working probably until 67 maybe 65 but even then My plan is to be a greeter at the local Meijer store for a little extra income. I cannot work out any realistic scenario where he can do that especially after factoring in healthcare in the years before medicare kicks in.

 

[soulcougher73]

Given his age and way early retirement and the fact he wasnt disciplined enough to have any savings by now. Id go with the monthly payment for life.

 

[Chromagnus]

One big question is does the person have a spouse and what happens to the annuity if the spouse is still alive after the pension owner dies? If there is some benefit from the annuity provided to the spouse this might really tip the scales. If the annuity has no spouse benefit and he/she dies young then the spouse is fucked, but if there is a spouse benefit then the annuity makes a lot more sense and changes the present value calculation because the annuity might transfer over so you are essentially looking at the life expectancy of two people instead of one.

 

[edro]

He is single.
He works in the school system, so he has heavily discounted health insurance for life. (not guaranteed though)
He will continue to work part time jobs on the side, but wants to quit his full time job with the schools because he is wore out. (whatever that means)

I agree. 60 is too young to retire for him, but that is on him. If he gets in financial trouble, he could go back to working full time I suppose.

I guess he is counting on inheritance (no idea how much), social security, pension and part time work through the rest of his life.
I should confirm with him his social security benefit as it stands today, and see the benefit for various retirement ages.

 

[JEDI]

He is single.
He works in the school system, so he has heavily discounted health insurance for life. (not guaranteed though)
He will continue to work part time jobs on the side, but wants to quit his full time job with the schools because he is wore out. (whatever that means)

I agree. 60 is too young to retire for him, but that is on him. If he gets in financial trouble, he could go back to working full time I suppose.

I guess he is counting on inheritance (no idea how much), social security, pension and part time work through the rest of his life.
I should confirm with him his social security benefit as it stands today, and see the benefit for various retirement ages.

he cant get social security at 60.
can he live off $870/mo?