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Annuity, Pension, Lump Sum - due diligence question
Old 03-28-2016, 09:39 AM   #1
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Annuity, Pension, Lump Sum - due diligence question

So my wife - who still works, but changed jobs - got the paperwork from her old job regarding her pension options. In short, she can either leave things as they are and get about $1000 a month (Not inflation adjusted starting 13 years from now), or take a lump sum of about $56,000 (taxable,now or more likely roll into her IRA tax free).

The pension is automatically a 50% Joint and Survivor benefit. If she dies, I get $500/month til I die.

A quick internet search and phone call to immediateannuities.com quotes an annuity purchased on the open market for $56,000 to have a monthly benefit of less than half the pension.

The difference between the pension and an annuity make this such a no brainer in favor of keeping the pension that it seems too easy to me.

Am I missing something?

Btw- her old employer is a Catholic based hospital system - so I think solvency is not a major concern....or is that the part I am missing?




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Old 03-28-2016, 09:52 AM   #2
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You may have. You need to calculate what that $56K would be worth, if invested, in 13 years and then look at the annuity. Maybe that's what you did.

FWIW, I had a previous employer make that lump sum offer on my pension some time ago. It was what you found out - not even close.
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Old 03-28-2016, 09:59 AM   #3
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Employers want to rid themselves of pension liabilities by offering a lump sump to extinguish them. The lump sum almost always favors them, but they figure some people will jump at the chance to get some instant cash out of the deal rather than a small payment every month.

Clearly $1,000 per month is worth more than $56K lump sum, even if it doesn't start for 13 years. I don't even need a calculator to figure that one out.
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Old 03-28-2016, 11:36 AM   #4
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Quote:
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Employers want to rid themselves of pension liabilities by offering a lump sump to extinguish them. The lump sum almost always favors them, but they figure some people will jump at the chance to get some instant cash out of the deal rather than a small payment every month.

Clearly $1,000 per month is worth more than $56K lump sum, even if it doesn't start for 13 years. I don't even need a calculator to figure that one out.
Agreed, the pension and the lump sum payout seem to be a bit out of whack.

If you take the lump sum and compound it over 13 years at say 5% the $56k will have grown to $106k. Using the usual 4% rule of thumb that will provide you with a $4200 inflation linked income. The $12000 a year pension with the 50% survivor benefit is far better and as the OP says a commercial annuity is also far worse.
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Old 03-28-2016, 01:48 PM   #5
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Agreed, the pension and the lump sum payout seem to be a bit out of whack.

If you take the lump sum and compound it over 13 years at say 5% the $56k will have grown to $106k. Using the usual 4% rule of thumb that will provide you with a $4200 inflation linked income. The $12000 a year pension with the 50% survivor benefit is far better and as the OP says a commercial annuity is also far worse.
Don't forget to reduce the $1k/mo non-cola'd pension by 13 years of inflation. The $1k OP's DW will start receiving 13 years from now will only have a fraction of the buying power it would have today.

Also, if you're going to use the 4% guideline, don't forget that gives a 100% survivor benefit while the pension only gives a 50% survivor benefit.

Comparing a deferred DBP pension, especially when it's a long time out like this one at 13 years, with an immediate lump sum is tough. So many assumptions have to be made. What returns might you get on the lump sum? What will inflation be since the pension is non-cola'd? How long will you live?
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Old 03-28-2016, 03:34 PM   #6
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Don't forget to reduce the $1k/mo non-cola'd pension by 13 years of inflation. The $1k OP's DW will start receiving 13 years from now will only have a fraction of the buying power it would have today.

Also, if you're going to use the 4% guideline, don't forget that gives a 100% survivor benefit while the pension only gives a 50% survivor benefit.

Comparing a deferred DBP pension, especially when it's a long time out like this one at 13 years, with an immediate lump sum is tough. So many assumptions have to be made. What returns might you get on the lump sum? What will inflation be since the pension is non-cola'd? How long will you live?
The $1k/month in 13 years time is known and the $56k lump sum is known. 5%/year seems like a reasonable return on the $56k in an IRA.......that gives $106k compounded over 13 years. For a 30 year retirement that sum is nowhere near as good as a non-COLAed $1k/month. At 3% inflation a 4% SWR from $106k would take 36 years to equal $1k/month.

Of course early death would detract form the value of the DB pension in the usual ways, but the 50% survivor benefit is still initially better than $106k @ 4%. If the pensioner died before the pension age and the survivor gets just the 50% benefit that would be a non-COLAed $6k/year. The $106k would produce $4.2k. If we assume 3% inflation it will take 12 years for the lump sum income to overtake the pension income.
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Old 03-28-2016, 04:08 PM   #7
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Originally Posted by Ready View Post
Employers want to rid themselves of pension liabilities by offering a lump sump to extinguish them. The lump sum almost always favors them, but they figure some people will jump at the chance to get some instant cash out of the deal rather than a small payment every month.

Clearly $1,000 per month is worth more than $56K lump sum, even if it doesn't start for 13 years. I don't even need a calculator to figure that one out.
+1 I would also take the pension.
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Old 03-28-2016, 08:16 PM   #8
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+2 stick with the pension, reject the lump sum.
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Old 03-28-2016, 11:12 PM   #9
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If you assume you can invest your lump sum at 5%, then the value of the pension exceeds the lump sum value after 11 years of annuity payout (24 years from now). If you assume you can invest at 7%, then the pension becomes more valuable after 20 years of payout (33 years from now).

So how long is your wife going to live, and will you want that taxable cash flow stream beginning in year 13?
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Old 03-31-2016, 04:36 PM   #10
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This bulletin, out today, from the PBGC, could be meaningful, in making decisions.

PBGC Report: Multiemployer Program will require significant Additional Premiums
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Old 03-31-2016, 04:36 PM   #11
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Originally Posted by urn2bfree View Post
So my wife - who still works, but changed jobs - got the paperwork from her old job regarding her pension options. In short, she can either leave things as they are and get about $1000 a month (Not inflation adjusted starting 13 years from now), or take a lump sum of about $56,000 (taxable,now or more likely roll into her IRA tax free).

The pension is automatically a 50% Joint and Survivor benefit. If she dies, I get $500/month til I die.

A quick internet search and phone call to immediateannuities.com quotes an annuity purchased on the open market for $56,000 to have a monthly benefit of less than half the pension.

The difference between the pension and an annuity make this such a no brainer in favor of keeping the pension that it seems too easy to me.

Am I missing something?

Btw- her old employer is a Catholic based hospital system - so I think solvency is not a major concern....or is that the part I am missing?




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Yes, I think you're missing the fact that Catholic-based hospital centers can be bankrupt and close like the one my sister-in-law worked for many years in NYC, which closed in 2010. PBGC might cover the pension liabilities in that case, but it's always possible for many things to happen to PBGC or the employer 13 plus years from now.
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