Ep 38: Pension Lump Sum or Monthly Payment?

Ep 38: Pension Lump Sum or Monthly Payment?

The Smart Take:

Pension lump sums are significantly higher in 2020 than 2019. But which should you prefer? Listen to Kevin discuss how to financially evaluate the decision as well as what research shows retirees prefer.

Whether you have a pension from your company or not, you’ll benefit from this episode. Why? Anyone can invest money with an insurance company and receive a lifetime income in the form of annuity payments. So these considerations are universal in crafting your retirement plan.

Company pension plans specifically discussed include Akron Children’s Hospital, FirstEnergy, Goodyear, Mercy Health, and Rockwell Automation.

Prefer to read? See below for the transcript of the show.

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The Host:

Kevin Kroskey – AboutContact

Intro:                                     Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to retire smarter.

Walter Storholt:                It’s time to retire smarter, once again. Welcome to the podcast Walter Storholt here alongside Kevin Kroskey of True Wealth Design, serving you throughout Northeast Ohio. Listen to past episodes of the show and find us online at truewealthdesign.com or look up, Retire Smarter on any of your favorite podcasting apps. Kevin, great to have you along with us, once again, sir. How have you been?

Kevin Kroskey:                  I’m good, Walter. I’m looking forward to talking to the man of the half-hour. How are you?

Walter Storholt:                You flipped it around this week.

Kevin Kroskey:                  I did, I did. How’s everything with you?

Walter Storholt:                I understand you just went to Disney, and did you get to put the Mickey mouse ears on and all that good stuff?

Kevin Kroskey:                  Well, when you are a father of two young girls, you do whatever makes them happy. So we had a good Disney experience. Yes.

Walter Storholt:                You put on the ears, you ride in the teacup, you do all this stuff, right?

Kevin Kroskey:                  Yes. Yeah, absolutely. Yeah. My oldest is six, and our youngest is more  in the stroller going around. She’s 17 months, so I’m sure she won’t really remember the experience but yeah, so no really big roller coasters just yet. I’m starting to do it a little bit for my six-year-old, and she’s tall enough, so she’s more than 48 inches. So we were able to get on most of the roller coasters, which was great, and she did enjoy it. So I would say, “Aubrey hands up.” And we were going pretty fast a few times and her hands were up in the air, both of them. So I was proud of her.

Walter Storholt:                Nice. Very cool. What would you say was the most popular character walking around Disney for Aubrey?

Kevin Kroskey:                  For Aubrey, most popular, well, we had breakfast at our hotel, and so we had a character breakfast. And so as many young girls, the whole Elsa and Anna thing is still ridiculously huge. And that was the case for my daughter as well.

Walter Storholt:                Yeah. Yeah. I can’t beat the Frozen characters these days. They’re like superstars, right?

Kevin Kroskey:                  Yes, princesses. So daddy did not dress up as a princess, but everything else I pretty much did.

Walter Storholt:                Got you. Fantastic. Well glad it was a good experience. And we’ll see if you can work your magic on a great new podcast today. How about that for a little Disney transition into the show today. We’re talking about pensions and lump sums. I would dare to say Kevin, probably two of the more popular topics. I mean they  go hand in hand when it comes to retirement and financial planning, even though people don’t have pensions as much as maybe they used to. There’s still lots of talk about pensions and lump-sum buyouts and all those kinds of things for people who are preparing for retirement and maybe dealing with their employers and just lots of considerations to work through here.

Walter Storholt:                So looking forward to learning everything that you’re going to teach us today on this particular subject. Because you’ve noticed over the  the past year and heading into this year a little bit in the world of this pension and lump sum world  some changes, some movement,  some news in that side of things.

Kevin Kroskey:                  Sure. I guess to put this in context first and also explain why this really is going to apply to anybody that’s listening and not just those that do have a traditional defined benefit pension. So firstly the reason why this matters is again you think of your overall financial plan and want to make sure that your money lasts and you’re doing smart things with it to go ahead and create income. You have your spending goals and then you have your income sources that are maybe at least in part, maybe completely, but generally in part going to meet your spending goals. So you’re going to have some social security. You may have a pension, it may be sizable, it may be relatively small or it may be none.

Kevin Kroskey:                  But then whatever is not met by those income sources has to be met by your savings and investments over time. So that’s kind the general process and again, creating the income. You have some decisions on the pension about how you’re going to take it. So that factors into, well how are we going to create and optimize our retirement income? So that’s why I would say that this conversation in general is important.

Kevin Kroskey:                  Now if you don’t have a traditional fine benefit pension plan where the company that you worked for maybe most or all of your career. Has promised to pay you some monthly amount for as long as you live, it’s still relevant for you. And I say that because in a fact you could go ahead and create a personal pension if you wanted to. Pensions are really annuity payments and not necessarily those evil annuities that I always talk about that are really  high cost and oversold and misused. But you could go to an insurance company and say, “Hey, there’s $100,000 just give me a monthly income stream for my lifetime that I can outlive.” And that type of annuity is called an immediate annuity.

Kevin Kroskey:                  And in a fact, it’s really the same thing as a pension. So the difference being in a pension plan where you work for the company, their obligation is they’ve promised to pay you a monthly amount that you can outlive. Whereas if you do not have one of those, you have liquid assets, savings and investments that you could decide to give to an insurance company to obtain a pension like payment, annuity payment that is going to last for your lifetime.

Kevin Kroskey:                  So this really applies to everybody, the majority of what we’re going to talk about, but as you indicated Walter, there are some unique things that have gone on recently that certainly warrant the lump sum options on defined benefit pensions, another consideration, and certainly understanding. So, so that’s what we’re going to talk about today, and we’ll just go ahead and get right in.

Kevin Kroskey:                  Before we get into any of the math or anything like that, I think it’s incredibly important to say that when you look at retirement income in general, there has been a lot of studies over the last decade or so on retirement satisfaction. Psychological studies, sociological studies as well as financial studies about retirement. And it’s very clear from the evidence that’s emanating from this that people definitely prefer to spend a fixed monthly amount rather than having a lump sum.

Kevin Kroskey:                  So we can think about this in a couple of different ways. Certainly, as the case of the subject of today’s podcast. You can have the company promising to pay you $1,000 a month, for example. Let’s just say it’s $500 per month forever. Or they’ll give you say, $100,000 in a lump sum that you can go ahead and then invest or spend and do with whatever you see fit. So it’s a decision that you have now. People generally prefer at least on average spending the monthly amount and not really having to worry about the lump sum.

Kevin Kroskey:                  You can look at this in a couple of different ways. My wife is a full-time mom now, but when I used to tell the joke and joke to some, maybe not so funny to others, including my wife. But I would say when, when she was working at American Greetings and she was a greeting card writer and editor. The money that she made was her money and the money that I made was our money. And so it was like this really unique mental accounting exercise that I felt that she did. But people do that all the time. We have a way that we  perceive money in our minds or account for money that is more emotional rather than  financial.

Kevin Kroskey:                  And whenever you think about spending money, and we see this all the time with our retired clients. They undoubtedly would prefer to go ahead and spend social security rather than spending money that they have in their own IRAs or 401ks or any sort of savings or investment account. They just look at it differently. It’s really an asset. They really shouldn’t perceive it to necessarily be different. I would say the financial question is, well, here are the assets that we have. So what’s the best financial answer to go ahead and produce the income or meet the objective of your plan?

Kevin Kroskey:                  However, people are emotional. We use reason to justify how we’re feeling in many cases. And that part of our brain or rear brain or our reptilian brain is faster than the thinking brain. So there’s been a lot of this behavioral finance, all of the psychology that has come in to finance over the last 10 or 20 years. And it’s important to understand because if you had the best financially crafted plan, but somebody can’t sleep at night. Well, you’re not really doing a good job for your client. The corollary to that I would say is, well, and again, I’ll  pick on these annuities again, but they sound good. But mathematically, they tend not to be a really good deal for the client.

Kevin Kroskey:                  So we believe in certainly running the numbers, understanding the math, but then  fitting into the qualitative desires of the client to make sure that it’s something that they understand. Something that they feel comfortable with, and they’ll be able to sleep at night with. So you always have to do the math, but it’s really important to remember that when you do look at the satisfaction, people derive much, much greater satisfaction out of spending social security or pension versus having an equivalent lump sum amount. So certainly those are averages. You may have somebody that is saying in the back of their mind right now. Well, that’s not me. Sure we’re all unique little snowflakes. But in general, I think that’s the base case because the results are so compelling when you look at that.

Walter Storholt:                It does feel like you’re spending someone else’s money when it’s social security dollars, just because it’s not something that’s coming out of that account that you’ve been watching it go into all those years. You’ve seen it coming out of your paycheck. So it doesn’t really feel like something that you’ve been building toward all these years. So maybe that’s part of the psychology a little bit. I don’t know, maybe people disagree with that, but it seems to be almost like that’s not the money that I worked so hard to build up in my 401k or my IRA. So it’s just, let’s spend that first because that’s the government’s money and my money too. But it’s coming from them in a way. I can see why that would feel different for folks.

Kevin Kroskey:                  Oh, completely. And even though retire smarter and people get to peer into myself and my personality, and some would say, and maybe I’m boring in and an egg head or who knows. But none of us are immune to it. We’re all human. Some of us are maybe a little bit more emotional than others. Some of us are maybe a little bit more rational, but we’re all human at the foundation of it. We have the same traits, and I’m no different. At the end of the year, last year I got a bunch of $50 gift cards from a credit card that we use for business purposes and they were $50 gas cards. Well, I’m like giving them out. Like they were pieces of gum to people. Like, oh, hey, you’re a dental hygienist. You’re fantastic. Here’s $50 for you and here’s $50 for you.

Kevin Kroskey:                  And one, I enjoyed it. It was something that I liked to do for these people. Some of my staff, I did it as well as a little thank you  unexpected thing, but the other side of it was it was like found money. It was just like what you were saying, Walter. I mean, it was just another example of that mental accounting. It was money. It was in the form of a $50 gift card. But rest assured, I go to the pump and I put that in. It translates to $50 in gas.

Walter Storholt:                It’s  like how people will treat inheritance dollars differently. In many cases, it comes with an emotional attachment to it. So they may be less willing to sell assets that might’ve been inherited versus assets that we’re always putting their money away. They may say, “Well, I don’t know if the person who passed that onto me. I don’t know if dad would want this money spent in this way. Maybe they want me to apply it differently.” So yeah, emotions definitely enter the equation a lot of different ways when it comes to money.

Kevin Kroskey:                  Yeah. Another great insight. See, that’s why you’re the man of the half-hour today, Walter. Thank you for that.

Walter Storholt:                I get smarter each time I listen to the show. [crosstalk 00:11:59] That’s why it has the namesake.

Kevin Kroskey:                  There you go. So satisfaction is very, very important. Now let’s  get beyond satisfaction. And I would say if there’s a tie mathematically or it’s somewhat close, then it’s generally a good idea to go ahead and let satisfaction be the overriding factor. If the math is such that hey, the lump sum is likely, way more beneficial. You can’t know for sure because if you take a lump sum, you’re going to have to invest it in something. And certainly, all investments have some uncertainty and risk, but we can deduce what we would call a hurdle rate if you will.

Kevin Kroskey:                  So let’s think about this and how we would look at this. And we have a lot of clients that we’ve looked at recently. Rockwell Automation. We have several clients from there. They’re a Fortune 500 company, and they have a lump sum that often makes sense to go ahead and take in lieu of monthly pension payment. First Energy, another public company in Akron. They also have a pension plan that often makes sense to go ahead and take the lump sum. Akron Children’s Hospital, Goodyear, Mery Hospital – we have a lot of clients at these places and have been relooking at the pension options.

Kevin Kroskey:                  Now for the last couple of months, we knew it was coming in 2020, but here we are now and  explain why it makes sense to re-look at these. It always makes sense to look at them, but the lump sums have gotten more beneficial this year. So again, suppose the choice is $500 a month for life or $100,000 that you can go ahead and roll over to your IRA and use as you see fit. Generally, we would say, “Well, hey, if you’re going to get $500 a month or 6,000 per year, or you go ahead and take that lump sum and you get and you don’t get 500 per month. Well, what  rate of return do you need to earn on that $100,000 to just go ahead and produce the $500 per month that the company had guaranteed to you?”

Kevin Kroskey:                  So it’s just  a simple starting point where you just look at it. We just call that a hurdle rate, if you will. So suppose you’re 65 years old and you’re taking the lump sum, and you get $500 per month, $6,000 per year, and you live for 10 years. So Walter, I haven’t asked you a question yet, but how much money have you received over that 10 year period?

Walter Storholt:                So you can’t throw out a string of numbers and-

Kevin Kroskey:                  You got to be paying attention, Walter. This is your job, buddy. Sorry.

Walter Storholt:                Did you say, 6,000 a year for 10 years? So 60,000, right?

Kevin Kroskey:                  You got it. There you go. Good recovery, good recovery.

Walter Storholt:                I thought you were maybe going to throw me a curveball with some interest rates and some percentages.

Kevin Kroskey:                  No, no, no. Not yet, anyway.

Walter Storholt:                All right.

Kevin Kroskey:                  So you’re right-

Walter Storholt:                I’ve got my calculator ready now, though. Just in case you do.

Kevin Kroskey:                  So you’re 65, 10 years now you’re 75, you receive $6,000 per year in $500 per month installments, cumulative of $60,000. Something happens and you’re no longer with us on this earth and you receive $60,000 over those years. Or you could have received a $100,000 lump sum. So pretty simple example there, where hey, you would’ve been better off taking the lump sum, right? You really don’t even have to do, well, what  rate of return would I have needed on the $100,000 to get $60,000 over 10 years? It would’ve been a negative return, right?

Walter Storholt:                It’s an easy choice in that example of what the right thing to do would have been.

Kevin Kroskey:                  Right. But the thing that we all have to be mindful about and I think most concerned about is outliving our money, not passing away too soon. So as you go out over a longer and a longer period of time, say you go out 20 years and now that 65 year old is 85 or you go a 30 and now they are 95. The rate of return is going to get higher because you have to produce that $500 per month for a longer period of time. So when you do the math on that, well, I’ll just use an example that we did for somebody at First Energy recently.

Kevin Kroskey:                  So he was just below 60 years old. He was retiring and I think it was 30 years at age 90 he needed about a four percent return or so. That was his hurdle rate. He needed four percent  net returns year in, year out to go ahead and have his lump sum produce the same monthly amount that he would have otherwise had, had he not taken the lump sum. So you with me on that, Walter?

Walter Storholt:                I got you so far.

Kevin Kroskey:                  All right, so it was four percent. Now I’ll come back to him in a minute. But so when you think about this four percent, we’ve talked in past podcast episodes about return expectations, and we had good returns in 2019. Usually, when you’ve had outsized returns, they reduce forward-looking returns. So you always  have to think about, well, if I take that lump sum and now I know what the hurdle rate is. Now, is it reasonable to expect that I can get that? And then you  start working through like, well, if I’m really against taking any stock risks and I’m only going to be investing in bonds, I would say, well no, I mean it’s probably not reasonable that you’re going to get a net return of four percent by only investing in bonds.

Kevin Kroskey:                  However, if you’re going to have a mix of stocks and bonds, you may not get four percent, certainly every year. That’s not going to happen. But when you do the math, you can probably make a case that, hey, it’s fairly likely, maybe more than fairly likely. But you get the idea here, you need to calculate the hurdle rate, and then you look at the return expectations and then figure out if that’s reasonable to take the risk to go ahead and achieve or maybe do better than just the preference. Do better than the hurdle rate.

Kevin Kroskey:                  So that’s really, really important. Probably what’s more important though, and perhaps I should’ve started here, but all of our clients are a little bit different. Everybody goes through that planning process where, hey, here are the spending goals; here are the income sources that you have and here’s what your investments are going to have to make up. Anything that the income is not covering. We go ahead and we’ve talked about this in past episodes, but you have to go through and you measure the required return on the investments, but you also measure the capacity for risk that you have.

Kevin Kroskey:                  So what I mean by risk capacity is some clients have a very, very well funded retirement plan. They’ve worked hard, they saved, they invested, they lived below their means, and they ended up with more money than frankly they probably ever dreamed possible when they started down that path. When they started working and their spending hadn’t really increased at a similar rate as their income over those years. So they end up by most accounts probably being pretty wealthy. Some may call them rich in their minds, and they call themselves hardworking. And that’s what we call them too.

Kevin Kroskey:                  But we have a lot of clients where literally they could put the money in the mattress and just as long as the mattress didn’t burn up or somebody steals it from the mattress, they’re going to be fine. They could just spend it out over time. They don’t really have to have any sort of positive rate of return on their dollars. The corollary to that is they could also take pretty much a 100% stock risk and even if another 2008-09 happens, it’s not going to harm their lifestyle. Nobody’s going to like having your money go down by about half, but it’s not going to impair their lifestyle. And as long as they continue to be prudent and disciplined, more likely than not, I mean the market has always come back.

Kevin Kroskey:                  So they have a lot of risk capacity. They can be very conservative, and they could be very aggressive. Either way, it’s not going to impact their lifestyle negatively. Their lifestyle was very, very well funded. Now, if you contrast that with somebody that  certainly has done well, but maybe they spend more than the client that I mentioned previously, maybe they’re spending and their assets are a little bit more  toe-to-toe if you will. And maybe they need a higher required return. Maybe they don’t have as much capacity for risk. They can’t just put it in the mattress. They can’t just put it in all bonds because bonds and really aren’t going to provide the return that they need. But at the same time, if they go too far up the risk ladder and have too much in stocks and stock sell-off like it did in 08, 09. They’re going to have to really pull back.

Kevin Kroskey:                  So you’re  looking for that porridge that’s just right in the middle there. But the important thing is, I started with the hurdle rate, and it’s  looking at the pension in itself in isolation, but really what everybody also needs to do. That’s a good starting point. The hurdle rate is, but you really need to fit it into your plan. If you don’t have a lot of capacity for risk, more likely than not the pension, as long as the hurdle rate isn’t so ridiculously low, the pension is probably going to be a better solution. Because it’s going to provide a better floor, better income floor to your plan, and alleviate some of the stress that the investments are going to have to do.

Walter Storholt:                So it’s not always take the pension or always take the lump sum. It’s definitely going to depend on somebody’s particular situation.

Kevin Kroskey:                  Yeah, as pretty much everything should. I mean, if you go back to when we first started the podcast, I went through a series of episodes where the retirement rules gone awry. I mean, if you start using rules of thumb, what’s the chance that you’re just average? The rules of thumb, in general, were constructed for the average person. Frankly, the average person in the U.S. is making a household income of around $50,000. And I would speculate that’s not the average person that’s listening to the podcast. So if you’re following these rules of thumb, well they’re probably really not going to apply to you or if they do, it’s just by chance. So yes, we always believe in doing the math, connecting the dots, making the decision very clear, and making our recommendation mathematically. But then also and very seriously considering the more qualitative aspects of things that we started with about satisfaction.

Kevin Kroskey:                  And just having some peace of mind and yeah, the lump sum looks good and maybe the hurdle rates low, but  what, I think I would be just happier just knowing that I didn’t have to worry about it and then I’ll just keep the other money that I have in my IRA and 401k invested. We have a client right now that’s facing a decision like this, and the decision hasn’t been made. They still have some flexibility over the timing of it. But one of the reasons why we’re doing this podcast episode today is, as I mentioned, lump sums are a lot higher in 2020. So most plans are, most of these defined benefit plans are on a calendar year basis. And the interest rates in the plan for say generally what you find is the August, in this case, August 2019 interest rates are going to dictate what the 2020 lump sums are going to be. Let me say that again. I’m using generalities here.

Kevin Kroskey:                  You have to look at the plan document and really  dig into this. But in general, the majority of plans that are out there that are still in operation or even if they’re frozen but they’re still around, and you can still take a lump sum on them. Most of the lump sums in 2020 are determined by the August 2019 interest rates. Technically they’re called the IRS 417(e) segment rates. So yeah, there’s my a wonky factoid for the day.

Walter Storholt:                That’s the egg head moment of the day.

Kevin Kroskey:                  But these are incredibly important, and as most people have seen, interest rates went a lot lower in 2019 and 2018. So when you had the decreasing interest rates, it’s an inverse relationship. So what the company has promised to pay you is a monthly amount for your lifetime. Now, you can take that only in your life. You can maybe take it a joint survivor benefit. There are different forms that you can go ahead and take it. And all of those really involve some sort of insurance that you’re taking through the pension plan. And not all plans have to offer a lump sum. Many do, many want to get out of the pension business. It’s not what they are in business to do and it’s more of a hassle than anything. And they don’t like the risk of people living longer than having to put more money into the plan.

Kevin Kroskey:                  So a lot more plans do have these lump-sum options on them. And the rates have gone lower last year. And so what that means is lump sums are higher. If I go back to our example, $500 per month is what they promised to pay. Well, if interest rates are lower. That’s going to take a larger lump sum to go ahead and produce that $500 per month. And that’s just an actuarial calculation. But that’s what happens. Just imagine a teeter-totter, on one end of the teeter-totter, you have interest rates. On the other end of the teeter-totter, you have lump sums. As interest rates go down, the lump sums go up and vice versa.

Kevin Kroskey:                  So once we get into, say August of this year and those rates are actually published come mid-September, there’s about a two-week lag. But we’ll know what the lump sums are going to be the next year. So for our clients that have these lump sums, this is  a common thing that we’ll do. We’ll look to see, well, hey, we don’t have perfect foresight into this, but here’s where interest rates are. Here’s the month that the plan uses to go ahead and determine the lump sums in the next year. Well, hey, are rates going up or down? Are lump sums going down or up? When is it likely going to be the best time to go ahead and take this?

Kevin Kroskey:                  And again, I can say, and this is the reason why we’re doing this episode today, but because rates have gone down and gone down a lot from 2018 to 2019, the lump sums are significantly higher in 2020. Because the 2020 lump sums are determined based on some monthly rates in the prior year. Again, generally, that’s August. Some plans we’ll use as late as November and then people are scrambling at the end of the year because those November rates aren’t published until two weeks into December. And then there are only two weeks left to decide, well, hey, am I going to take the lump sum this year? Am I going to wait until next year?

Kevin Kroskey:                  But that’s why people hire us. So we worry about those details, and we make sure that everything gets done. But again, teeter-totter interest rates, one side, lump sums on the other. Interest rates have gone down a lot. Lump sums have gone up a lot in 2020.

Walter Storholt:                Interesting to see that analysis. And  the forces that are driving the background of all of those decisions that then you boil down to an individual basis for folks. But now I’m really worried about the true question here, Kevin. If we really get down to it, if I win the lottery, do I take the lump sum or the pension? Because nobody ever takes the pension in the lottery.

Kevin Kroskey:                  We thought somebody was pranking us, but we had a local news station come into our office about a year or so ago when the lottery was really high. And they came in and interviewed us and were just asking us about taking benefits in a blind trust or things like that. And that’s the closest I’ve ever got to having to do any sort of analysis on lottery winnings. But I know you hear a lot of stories about people  blowing through it. So you may go ahead and override any math and just go ahead and say, “Well, let’s go to the forced monthly payment option on something like that.” So they don’t blow it all on NASCAR memorabilia and end up broke again or something.

Walter Storholt:                I’ve always thought the pension would be the smartest thing to do. Because usually, your lottery winners aren’t used to managing large sums of money and that’s why you hear about all the pitfalls, so. I’ve always thought, why wouldn’t you get the pension? And then it’s like still probably a couple of million dollars a year that you’re getting depending on which lottery you win. And then it’s like, even if you blow it all this one year. You get to start over next year and learn from your mistake.

Kevin Kroskey:                  Yeah, no, exactly right. We have a client, a very sharp, sharp, sharp guy. He had a shirt that said, “Lottery is for people that can’t do math.” So it’s not an investment, it’s speculation. It’s really an experiential enjoyment, I guess of the what if that could happen, but on average, you better expect to lose. It’s not a solution.

Walter Storholt:                I would imagine you’d have better odds going to Vegas. Right? I mean, compared to the lottery.

Kevin Kroskey:                  I don’t know.

Walter Storholt:                That could be an interesting study.

Kevin Kroskey:                  Yeah. We picked up a client one time that was leaving a prior advisor, and you always want to make sure, like, well, hey, why are you leaving this advisor? Potentially the client has some unreasonable expectations that can’t be met. And the client said to me, “Well, he said, my advisor owes about $50,000 to some of the golf buddies at the golf club. And I just don’t think that’s a good trait in my financial advisor.” And I said, “I agree with you.” So yeah, I’m not a big gambler. I don’t gamble at all as a matter of fact.

Walter Storholt:                Yeah, it’s not a great financial policy to gamble, that’s for sure. Too funny. Well, it’s really helpful information. I think, though, Kevin, to  analyze that because it’s something that a lot of workers are going to have to face. Do I take the lump sum, do I take the pension? What works best for my financial situation and my future? And there’s that little piece of emotion that comes into the whole equation as well. And you got to  balance all those things. So it makes the planning process, I’m sure a little tricky, but also  what makes this whole job fun for you. I would imagine.

Kevin Kroskey:                  Yeah. I started telling this story, and I’ll just  put a bow on the episode with it. So we have a client, a very significant pension, lump sum. It’s in the low seven figures and certainly, it’s gone up this year and it’s interesting to see they haven’t made a decision yet. They are two very smart, high-income people who recently retired with plenty of other liquidity elsewhere. But hey, you get a monthly pension or you can have another seven figures rolled over to your IRA. And there’s a certain order of magnitude that just makes us different.

Kevin Kroskey:                  Years ago, the husband had a pension buyout from a former employer, and at the time, he decided just to not roll it over and keep a monthly pension. And I said to him, I said, “You’ve already made this decision whether you want to take the lump sum or not.” I said, “The math wasn’t incredibly different back then.” Certainly, it’s a little bit more favorable today because the hurdle rate is lower. However, back in 2012, the return expectations were higher than what they were today. So just call it a wash and he made the decision and he thought that was a very valid point that I brought up. But I think the order of magnitude is really  causing some indecision here. It’s like, well, hey, do I really want to a nice six-figure pension per year or do I want seven-figure plus rollover?

Kevin Kroskey:                  And they haven’t made that decision yet, but we’ve been talking about it now for a while and they don’t have to make it right away. We’ll see what happens to interest rates over the course of the year. If they stay about the same, the lump sum, it will be a little bit lower next year. Interest rates are one of the two factors that really go in to determine the lump sum. It’s also mortality, how long you’re expected to live. So as you get older, you’re expected to live less. And so the lump sum, all else being equal, will go down.

Kevin Kroskey:                  So we have some time for them to  consider this. And all the pensions really work on a monthly basis. So each month, the lump sum is technically going down a little bit, but they just haven’t made this decision yet. I think just because of the magnitude of it, even though they’ve made a decision on the same sort of subject in the past. So everybody’s different. We always do the math. We always fit it into their financial plan. We always talk about the qualitative considerations as well. We’ll connect the dots as best we can and then help the client decide.

Kevin Kroskey:                  But this is just a particularly interesting one I think because of the magnitude of it. Again, we have a lot of people, First Energy, Goodyear, Rockwell, Akron Children’s, Mercy Hospital. All of these places have a lump sum that does make sense to at least seriously consider taking via a lump sum. So if anyone’s listening and has questions on that and whether you’re not from those companies or not, but if you have an option, certainly you want to take a look at it.

Walter Storholt:                Well, if you’d like to schedule a time to meet with an experienced financial advisor on the True Wealth Team, you can certainly do that by going to truewealthdesign.com and click the are we right for you button. To schedule your 15-minute call. Again, truewealthdesign.com your place to go to do that or you can call the old fashioned way, 855-TWD-PLAN that’s (855) 893-7526. And we’ll put the phone number and the website in the show notes or description depending on what app you’re listening to the show on today. We’ll put that in the description and show notes of today’s show. So you can access those resources there. Truewealthdesign.com though, again, the place to go online to sign up for a time to meet with the team at True Wealth Design.

Walter Storholt:                Kevin, always a lot of fun being with you here on the show today. Thanks for letting me be the man of the half-hour. We’ll look forward to another great episode next time around.

Kevin Kroskey:                  All right. Thank you very much, Walter.

Walter Storholt:                All right, that’s Kevin Kroskey and Walter Storholt. Thanks for taking the time to join us. If you have any questions, don’t ever hesitate to reach out, and we’ll talk to you next time here on Retire Smarter.

Outro:                                   Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.