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rated:
'First time poster, long time lurker here...

I'm 41 years old, and recently separated from a General Motors subsidiary after 15 years service. After leaving the company, I received a written statement outlining my pension benefits:

I am entitled to a monthly benefit of $835./month at age 65 (I can draw benefits any time after age 55, but at a reduced monthly amount...), OR, I may elect to take a lump-sum payment of $31,000 today.

Before I go further, I understand that $835/month in the year 2029 (when I turn 65) will not afford a very lavish retirement! I've made generous contributions to my 401k, Roth IRA's, and to taxable brokerage accounts over my working life thus far. Hence, I have an excellent start on retirement savings and the pension that I've discribed would be a very small component of my total retirement savings...

I have 2 questions, the first & foremost being, how SAFE is my pension? Most are aware that GM is suffering in almost all respects (market share, bond rating, recent product recalls, THEIR UNDER-FUNDED PENSION PLAN, and so forth). However, my understanding is that a company's defined benefit pension plan is protected under ERISA. Is this correct? Is this "protection" as strong as, say, the FDIC insurance that a savings account carries?

My second question is, what's the better deal - the lump sum or the monthly benefit? My preference would be to leave the $ in the plan, and have guaranteed (albeit small)income stream when I retire. If there is ANY danger though of that pension $ not being there in 25 years, I will probably request a lump-sum and have the $ transferred directly to an IRA custodian.

Any thoughts/opinions greatly appreciated!

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This one's my favorite post. Whodathunkit.

jkimcpa (Nov. 29, 2011 @ 11:43a) |

As an update to this thread which I started 8 years ago, I'll say that I never elected the lump-sum settlement from Gene... (more)

yuenglingdrinker (Dec. 01, 2012 @ 4:40p) |

Great job! Just goes to show you what happens when people think things through and do not make rash decisions based on e... (more)

geo123 (Dec. 03, 2012 @ 9:00a) |

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That 31,000 is going to be taxed right?

If you move it to the IRA could you avoid taxes?

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PhoReal,

As long as I don't take delivery of that $31,000, and have it sent DIRECTLY to an IRA, there would be NO tax until I tap the IRA. 'Least, that's my understanding!

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yuenglingdrinker said: how SAFE is my pension? Most are aware that GM is suffering in almost all respects (market share, bond rating, recent product recalls, THEIR UNDER-FUNDED PENSION PLAN, and so forth). However, my understanding is that a company's defined benefit pension plan is protected under ERISA. Is this correct? Is this "protection" as strong as, say, the FDIC insurance that a savings account carries?
With the caveat that I am not an ERISA expert by any means, your pension is likely to be at least partially protected by the Pension Benefit Guaranty Corporation, which is a non-profit, federally charted corporation which guarantees payment of certain pension benefits if and when qualifying pension plans are terminated. PBGC's protection is NOT nearly as straightforward as FDIC insurance (although some recipients of pensions that are taken over by PBGC will get 100% of their benefits). Some of your questions on this topic can be answered HERE.

Here's a quote from PBGC:
"PBGC's maximum benefit guarantee is set each year under provisions of ERISA. For pension plans ending in 2005, the maximum guaranteed amount is $3,801.14 per month ($45,613.68 per year) for workers who retire at age 65. This guarantee amount is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a survivor or other beneficiary. The guarantee amount may be higher if you retire after age 65 or if you are over age 65 and receiving benefits when the plan ends."

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Looks like your break even percentage would be ~6.7% Your IRA would have to maintain that level of earnings for the next 44 years to allow you to start drawing ~$835/mo for the following 20 years (I'm assuming you die at 85 ). If you think you can beat 6.7% you would be better off moving it somewhere else. Be SURE of the tax consequences before you move tho as that changes your required return substantially

As far as the pension goes... does your spouse (if you have one) get anything if you die at age 66? With the IRA you or your beneficiary will get whatever is in the account. Just something to consider...

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Do some math with a trusted financial planner or CPA.

Calculate the future value of the $31,000 and compare that with your $835 monthly payment.
Quick calculation $31,000, 8% annual return, 24 years = $196,000

Unless the pension benefit is substantially better than the proceeds, I would vote for transferring the funds to an IRA.
1) When United goes bankrupt, their employees will receive only pennies on the dollar for their pensions
2) Given the choice, I would rather have complete control of my funds rather than letting an adversarial third party hold my money.

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THANKS ALL FOR THE REPLIES!!!

waterman said: D 1) When United goes bankrupt, their employees will receive only pennies on the dollar for their pensions : end quote


This item makes me a little nervous...is their pension not covered under PBGC?

As I stated, my preference would be to leave my $ in the fund....so long as it's reasonably safe. The $31,000 is a small amount as compared to what I already have in my other retirement accounts. The $830/month benefit ain't much...but there's something to be said about getting a check in the mail every month. Who knows, I might live to be 90. That's $330,000 in payments.

Somebody stated that the lump-sum would be a better option, if I'm able to maintain a rate of return of 6.7% year, after-year, after-year. Given my conservative leanings in my investments, I might not be able to beat 6.7%/year. At least not by much...

Boy...tough decision here. I don't have to decide anytime soon, though. I can call the pension administrator anytime before I retire to re-check on the lump-sum option. The lump sum amount will increase every year. My monthly benefit is fixed (no COLA adjustments unfortunately).

Thanks again for the great info!!!! 'Anybody else?

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yuenglingdrinker said:
Somebody stated that the lump-sum would be a better option, if I'm able to maintain a rate of return of 6.7% year, after-year, after-year. Given my conservative leanings in my investments, I might not be able to beat 6.7%/year. At least not by much...


It would make you feel alot better though from what I gather.

I don't think GM is going to go BK... but hey you never know these days.

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I can't believe the mods removed my post along with several others in this thread. Yes it was an argument but it was on point to the OP's post. I can understand the mods removing trolls, racists, profanity, etc. but it has gotten to the point where if anyone raises the slightest complaint with what you write they will not give you the benefit of the doubt and just delete your post. It used to be that you could express your opinions here, for better or for worse (right or wrong) and let the community judge the validity of your claims...now the mods just steamroller over anything with very little provocation - they are judge jury and executioner. If this continues, FWFinance will become a bland, homogenized wasteland.

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soupcxan said: I can't believe the mods removed my post along with several others in this thread. Yes it was an argument but it was on point to the OP's post. I can understand the mods removing trolls, racists, profanity, etc. but it has gotten to the point where if anyone raises the slightest complaint with what you write they will not give you the benefit of the doubt and just delete your post. It used to be that you could express your opinions here, for better or for worse (right or wrong) and let the community judge the validity of your claims...now the mods just steamroller over anything with very little provocation - they are judge jury and executioner. If this continues, FWFinance will become a bland, homogenized wasteland.
I couldn't agree with you more. Quite a few of us take the time to post thoughtful and helpful replies and do not exactly welcome or appreciate hasty deletions.

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yuenglingdrinker said: The lump sum amount will increase every year.

You should have mentioned this in the first place. By how much will the lump sum increase ever year? 5%? 6%? 7%? Find out the percentage then compare it against what your investment strategy will get for you.

If the lump sum increase is higher than what you could get on your own then you should adopt a wait-and-see strategy. Just keep track of the GM stock and company health. If the company is in any danger of going BK or about to fail or whatever, then you should immediately contact the pension admin and ask for a lump sum payment. That way, you are still guaranteed the lump sum payment even if GM goes BK.

This strategy is much better than relying on the PBGC because I'm sure you will have to go through a lot of paperwork/grief/lawyers to get the PBGC to honor your pension. All this strategy requires from you is to keep watch on the GM company health and time your withdrawal just before any shat hits the fan.

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soupcxan said: ...If this continues, FWFinance will become a bland, homogenized wasteland.

What? It allready isn't?!



OP: Take the money and have some fun. Retirement is soooo overrated.

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On a side note, things are looking very bad for GM. Their bonds are most likely going to be junk status by the end of the year. When/if this happens it will become much more difficult for them to borrow money to make new cars.

Last year GMAC pulled pulled them into profit, they aren't making much by selling cars anymore.

.02

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mlrtime23 said: On a side note, things are looking very bad for GM. Their bonds are most likely going to be junk status by the end of the year. When/if this happens it will become much more difficult for them to borrow money to make new cars.

Last year GMAC pulled pulled them into profit, they aren't making much by selling cars anymore.

.02


Agreed. Take the money out - you elimintate the risk of GM going under, invest it elsewhere. My $0.02.

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dumroo said: mlrtime23 said: On a side note, things are looking very bad for GM. Their bonds are most likely going to be junk status by the end of the year. When/if this happens it will become much more difficult for them to borrow money to make new cars.

Last year GMAC pulled pulled them into profit, they aren't making much by selling cars anymore.

.02


Agreed. Take the money out - you elimintate the risk of GM going under, invest it elsewhere. My $0.02.

First, would it not be wiser to review the benefits provided by PBGC to determine the level of exposure, if any, the OP would face if GM were to file bankruptcy? Second, I do realize that just last week GM reported a first quarter loss of $1.1 billion, which I believe was its largest quarterly loss in over a decade (didn't they come close to bankruptcy in 1992 or thereabouts?). This does NOT mean that GM is on the brink of bankruptcy now, and even if it were, GM would not immediately default on its pension obligations, and any and all DIP (debtor in possession) financing that GM would be likely to obtain then would at least partially fund GM's pension obligations. Just to clarify, I am not suggesting that the OP should or should not cash out his pension. What I am saying, however, is that those of you stating that he should pull his money out to "eliminate the risk of GM going under" as well as those essentially saying "GM will not be declaring bankruptcy" do not appear to have analyzed the amount of risk the OP would face if his pension remains with GM and do not, therefore, appear to have any basis for your advice.

The reason that some of the employees at United will be receiving pennies on the dollar is because their pensions exceeded benefit levels (see my link above) that were established by PBGC. The OP can analyze the information and determine whether he faces the same risk or whether his pension is safe.

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A bird in the hand is worth two in the bush
Take control of your money...

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Let's not forget that the Polaroid retirees just got a lump sum payment for their pensions of $67. From what I heard on NPR, the pensions were insured but the court battle would have been long and expensive.

20 years ago, who would have thought that Polaroid would be in bankruptcy...

edit: $47

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tehlorax said: Let's not forget that the Polaroid retirees just got a lump sum payment for their pensions of $67. From what I heard on NPR, the pensions were insured but the court battle would have been long and expensive.

20 years ago, who would have thought that Polaroid would be in bankruptcy...

edit: $47

Do you know whether the Polaroid pension situation was analogous to the GM situation or is your extent of knowledge on the subject limited to the NPR clip? Without this information, the moral of the Polaroid story in similar to that of someone getting a speeding ticket and, in response to his inquiry about the potential fine, being told about the number of people on the death row.

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woowoo2 said: A bird in the hand is worth two in the bush
Take control of your money...

There is no way for you to responsibly state that the GM situation is "two birds in the bush" without knowing the level of protection that's afforded to it by PBGC. For all we know, such a relatively small amount may be 100% covered by PBGC.

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geo123 said:
There is no way for you to responsibly state that the GM situation is "two birds in the bush" without knowing the level of protection that's afforded to it by PBGC. For all we know, such a relatively small amount may be 100% covered by PBGC.


True, it's still a good idea to see if you'd be covered fully by PBGC. But I'd personally just take the lump sum nonetheless. Roll it over to an IRA, and earn more than 6.7% per annum and you're ahead. Look at it this way: within the IRA you can invest in GMA and earn 9% on your money! Even if GM declared bankruptcy, there's a good chance that they'd try to split off from GMAC first, or sell GMAC. In that case that exchanged traded bond would still be repaid. It's credit rating might even go up.

But wait, you say you don't want to have this type of exposure to a potential GM disaster? Then don't bother keeping the money in the pension either. I'd say your risk with keeping it in the pension is almost equal to investing in GMA, and the market has determined that this risk warrants a 9% per annum return, significantly higher than the implied 6.7% return on keeping your money in the pension system. Just IMHO, of course.

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Correct me if i'm wrong. Have you check the PBGC balance sheet. Last time I heard that they're in debt of only about 22 Billions dollar. So i guess your money will be really safe with them.

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aarontdang said: Correct me if i'm wrong. Have you check the PBGC balance sheet. Last time I heard that they're in debt of only about 22 Billions dollar. So i guess your money will be really safe with them.
Are you suggesting that PBGC will not be able to honor its obligations? If you are, it would be quite helpful to support that view with something a bit more substantial that the statement above.

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I'm not saying that the won't be able to guarantee the payment. But go to this annual report for 2004. http://www.pbgc.gov/publications/annrpt/04annrpt.pdf Look at page 38. Look at their Net Income... for 2004 ... it's only about 12B losses. Also look at Page 48 for their pass performance From 2001. I have no evidence supporting that will won't honor their obligation. But it's good to know their position.

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It's a little more complicated than that. Yes, they could theoretically default on their obligations as well but that would send shudders throughout the financial world and undermine the world's confidence in US economy. PBGC's default would cause such a ripple effect on the market that the OP's money would likely be in danger as well, no matter where he'd choose to invest them. Remember the S&L crisis when FDIC was on the brink? I think that the way that catastrophe was handled at the time should provide a glimpse into what would be likely to occur if PBGC gets in trouble as well.

On a related matter, the fact that they were in the red at the time the economy wasn't doing particularly well is no more indicative of their overall health than the fact that the federal government is and was allowing large deficits to occur in a less than furtile economic climate.

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Take money out of GM and throw it into GE. Take a 20-yr nap
and wake up a wealthy man.

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Think the issue with PBGC isn't default, but changes in the terms of their coverage. The losses are an potential trigger for legislative and regulatory changes that could endanger the effective value of PBGC insurance.

They giveth and they can take awayeth.

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manuel said: Think the issue with PBGC isn't default, but changes in the terms of their coverage. The losses are an potential trigger for legislative and regulatory changes that could endanger the effective value of PBGC insurance.

They giveth and they can take awayeth.

I am not sure whether retroactive changes to benefits are permitted under ERISA (I don't know one way or the other). To preempt those of you who are about to remind me about the SS debate, to the best of my knowledge ERISA does not apply to SS.

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GM doesn't have to go bankrupt for them to cancel pension benefits... at least I don't think they do. Verify that... also consider things like your health, expenses between now and retirement (kids going off to college? investing in their education could provide the best returns)

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Pretty sure the changes to ding early retirees were done long after pbgc was setup - and it really doesn't matter if changes are permitted under ERISA or not. ERISA is a law, not a commandment - those who make it can change it.

There have been numerous amendments - and given the complexity I'm sure some of them have changed the terms of the coverage, almost certainly retroactively.

None of this makes PBGC coverage irrelevant to the OP's post - just one factor in the decision.

For me the lumpsum would be very attractive.

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whodini said: Take money out of GM and throw it into GE. Take a 20-yr nap
and wake up a wealthy man.


GE, wow , you must have dug real deep and real hard to come up with that obscure name. Congrats!

Reminds me of the 'Buy MSFT and wake up wealthy' crowd 5 years ago. They did real good.

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I would take the lump sum. It's guaranteed money that you can put in the bank or invest and make more money on. Even if you invest in stocks, you can put it in some index or diversified fund and make money on it.

GM is in real danger of running out of money and if they have to borrow, it will be at a high rate of interest. If they spin off the automotive division they make stick it with all the obligations and let it go under. If GM goes under, no one knows how much you will get from PGBC or whatever it's called.

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I am late the the thread but have found it to be a fascinating read. I think this thread really underlines the transition that the American workforce has gone through in the last 20 to 30 years. I think over all, the changes have been to promote efficiency in the workforce, but with added burden on the workers to be more mindful of their own affairs.

To the OP, you are only 41, every retirement investment for you should be considered a long-term. That said, the investment risks for you if you invest in something like an S&P index fund is exceedingly small. I wouldn't hesitate to predict at least an 8-10% annual return on your investment in the next 25 years with virtually no risk. Position this against having your money with one company not doing so well and another that's a government agency... Fact is, I have more far more faith in the American economy than I do for any one company or government agency.

Take control of your money and invest it in an index fund if you are risk-averse. If you want the comfort of a consistent montly check, just exercise self discipline and live within your means when you retire.

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MaxRC is a thinker

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I would take the lump sum and invest it.

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Your GM pension is NOT safe. Most pensions are not truly safe anymore.


GM is already stumbling under the weight of the pension plan, and you can bet that it will be the FIRST thing dumped when they start fighting for solvency. Currently, they LOSE money on their vehicle divisions, and that shows no sign of turnaround.

Take the lump sum and roll it to an IRA

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Thanks all for the replies & for the information. It's a real help. This bulletin board has become one of my favorites.

I still don't quite understand the role of ERISA & PBGC, nor do I really understand how they're related (are they?). They say that you shouldn't invest in things that you don't understand...so maybe the smart thing for me to do is to take the lump sum. It would seem that's the consensus of just about everybody that posted here.

I will contact the plan administrator during the next week, get an up to date valuation, and have the $ wired directly to Vanguard or Fidelity. I will put the $ into an IRA, although I'm not sure what I'll choose for investments. It will be something conservative though. I think I'll sleep better at night...

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yuenglingdrinker said: I still don't quite understand the role of ERISA & PBGC, nor do I really understand how they're related (are they?). They say that you shouldn't invest in things that you don't understand...so maybe the smart thing for me to do is to take the lump sum. It would seem that's the consensus of just about everybody that posted here.Well, then, let me speak for the silent majority.

"ERISA" is the Employee Retirement Income Security Act of 1974, a federal law which regulates every aspect of pensions. Much of it is quite specialized and complex: it's the only body of law that scares off the regular tax lawyers.

ERISA requires that pensions be "funded": the employer must contribute to a trust assets which are projected to be sufficient to pay the promised benefit. For a "defined benefit" pension like you have, under which your monthly benefit, not the amount of the company's present contribution, is specified, there are complex rules that determine how much the employer must contribute each year, but the employer is eventually required to contribute enough to pay your benefit. The funds in the trust must be invested prudently, and for the sole benefit of the beneficiaries. Employers may not reduce previously earned pensions, though they may freeze or terminate them, eliminating or reducing future benefit increases.

ERISA also established PBGC, the Pension Benefit Guaranty Corporation, which is a federal agency that guarantees that pensions will be paid. Like the FDIC, the PBGC is an arm of the government, and its obligations are backed by the full faith and credit of the United States. But where the limit of FDIC insurance is pretty simple (usually $100,000 per account), the amount which PBGC will pay is complicated, depending mostly on the number of years of service. Given your relatively modest benefit, I suspect you are under the limit and so your pension is fully insured.I will contact the plan administrator during the next week, get an up to date valuation, and have the $ wired directly to Vanguard or Fidelity. I will put the $ into an IRA, although I'm not sure what I'll choose for investments. It will be something conservative though. I think I'll sleep better at night...It's your choice, but if that's your level of risk tolerance, keeping the pension is almost certainly your best move.

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here's another question you should ask yourself: do you think GM can internally generate returns of 6.7% annually on your money so they can pay you in the future?

pension costs supposedly add $1,600 to the price of each vehicle they make putting them at a huge competitive disadvantage, for the next 40+ years

Skipping 164 Messages...
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yuenglingdrinker said:   As an update to this thread which I started 8 years ago, I'll say that I never elected the lump-sum settlement from General Motors. I'm 48 mow, and the lump-sum settlement today would be $60,300.

I've now worked 8 years for another automotive company, have contributed to their 401K plan and I'm also vested now in their pension plan.

I feel that my GM pension remains "safe" and have no plans to draw from it now.
Great job! Just goes to show you what happens when people think things through and do not make rash decisions based on emotions.

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