Taking the Buyout

"I'm gonna do it."
--Robert Gould Shaw (Glory)

I wound up taking the pension buyout. There were strong arguments for keeping the monthly benefit, which I would have begun collecting a few years from now at age 65. In particular, the diversification offered by the fixed pension payment (vs other income streams that are more market dependent) was particularly compelling to me.

There was also the 8-9% annual appreciation until age 65 associated with keeping the pension benefit. I know of few investments with that kind of 'guaranteed' return profile over the next few years.

There is a good chance that if I had a spouse who could collect a residual pension benefit upon my death, then I may have declined the buyout offer for these reasons. 

However, several factors pulled me in the other direction to accept the buyout offer. One was that the offer was better than expected. The low discount rates currently employed in actuarial estimates have driven lump sum valuations higher than they would be under more normalized interest rate conditions. My sense is that interest rates may be headed higher, which would both reduce future lump sum buyout valuations as well as erode the real value of monthly pension payouts. Stated differently, the low interest rate environment that we're currently experiencing makes the buyout option an unusually attractive risk:reward proposition.

Another reason for taking the buyout is that the pension was forecast to comprise a minor percentage of my monthly retirement income. As such, the diversification effect from the fixed monthly payment discussed above would have been muted. If my pension benefit was to be a larger fraction of forecast retirement income, then the buyout choice would have been a more difficult one.

As discussed in a previous post, I also suspect that there is a significant degree of systemic risk building in the financial system stemming from the general state of underfunded pensions. That risk, if realized, ultimately translates into lower real pension payouts--either through plan defaults or through inflationary bailout actions by the federal government. I would rather have a 'bird in the hand' to invest in a manner designed to guard against purchasing power decline wrought by such an event.

Finally, I enjoy markets and investing. The challenge posed by managing the lump sum funds over the next few years offers an intangible benefit that I hope to convert into tangible value over time. At the very least, there should be some residual assets from the original pension benefit available to my heirs should I pass away prematurely.

In any event, my packet has been submitted and is being processed. The lump sum is supposed to be distributed in early-mid December. Once the funds are deposited in my IRA, I will update on what I plan to do with them.