Take the (Retirement) Money and Run

The following financial news item may seem alarming:

Combined pension deficits among the 100 largest U.S. corporate pension plans soared last year to a record $388.8 billion, according to actuarial and benefits consulting firm Milliman Inc.

In a later paragraph, we discover:

At year end, the 100 largest pensions were 77.2% funded combined, down from 79.2% at the end of 2011, Milliman said.

It's really not that bad. Using simple arithmetic, we can easily calculate that the present value of these pension plan obligations is about $1.7 trillion, while the assets are a little over $1.3 trillion. Because of the size of the assets already in the plan, rising financial markets can reduce the deficit significantly. Also, depending on the age of the workforce, companies have years, perhaps decades to make up the shorfall, if any. Workers who participate in these plans should not lose any sleep over the security of their retirement.

All that said, I jumped at the chance to take my pension in a lump sum when I early-retired several years ago. Very roughly, the lump sum was about the same as ten times the annual pension (for example, receive $100,000 now or $10,000 per year from age 65 until death). My employer was a company with an investment-grade credit rating and can easily manage indefinitely its total required actuarial contribution of a few million dollars per year. Making good on the pension obligations was not a concern. Nevertheless, I elected the lump sum and rolled the distribution into an Individual Retirement Account.

The reasoning was: 1) Take the bird in the hand. If I were hit by the proverbial bus, the funds would be in the estate. If there were an emergency, the funds would be available. 2) If I did live to a ripe old age, I was confident that I could beat the returns that my company would earn on its pension assets. 3) Tax flexibility was also a benefit. During a high-income year, no funds need be withdrawn from the IRA. Distributions would occur in low bracket years. (Note: flexibility is reduced after the age of 70 1/2, when "required minimum distributions" must commence.)

So far, everything is going according to plan. Though there's more work to be done than waiting for and depositing a monthly check, I'm less worried now that I have taken the retirement money and run. Wish I had the same option for my Social Security checks, though....... © 2013 Stephen Yuen