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Another lump sum pension offer
Old 11-24-2014, 03:06 PM   #1
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Another lump sum pension offer

A former employer is offering me a $73k lump or $500/mo for life. Is this lump a good offer? Should I take it or leave it?

Here's my situation:

I'll be 62 next month. I currently have a "retirement" teaching job (low stress, flexible time) that I enjoy. It pays my living expenses and more, plus I have good health insurance. The job includes a pension benefit but it may be insignificant depending on how long I stay. I'll probably keep working until age 65 for the health insurance, or longer if I continue to like the work.

I have another pension which starts in January 2015. It's $1500 per month. SS of about $1800/mo will also be available in January, should I decide to take it then.

My living expenses are low, probably no more that 25k per year. I'm single (never married) and no kids. I have no debt. I own my house. I don't have lavish spending plans.

I have $1M in retirement accounts. I'll be required to take RMD's when I'm 70.5 years old. According to Vanguard's online RMD tool initial distributions would be about $45k per year if I started now. I think this means I won't be in a super low tax bracket in the future. Which in turn means the tax bite on the $500/mo pension payment will never be insignificant.

I also have another $1M in savings outside the retirement accounts.

If I'm calculating it correctly, the rate of return on the pension is 8.2% (500x12/73k). Income taxes would take 25% of that as long as I'm working. Even though I probably can't achieve an 8.2% rate of return without high risk I'm considering taking the lump and transferring it into in an IRA. I'll just let it grow with the possibility of buying longevity insurance or an immediate annuity later on.

What would you do? I look forward to reading your comments/opinions/recommendations.


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Old 11-24-2014, 04:50 PM   #2
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Based on the 2 income streams you already have coming - pension + SS - you're looking at getting 39.6k annually from just those. Your spending is only 25k. You have 2M in the bank on top of the above income streams.

I don't think it matters what you do with this pension, you will be loaded however you look at it. Given that, I would probably take the lump, because a lump can be left to your heirs where a pension cannot.

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Old 11-24-2014, 05:34 PM   #3
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Originally Posted by km4hr View Post
If I'm calculating it correctly, the rate of return on the pension is 8.2% (500x12/73k).
The 8.2% is a payout ratio, not a rate of return. The $500 per month includes both interest on the 73K plus a return of your principal since at your death there will be no residual value of the pension. To calculate a rate of return, you need to estimate the number of years you will collect the pension payments and calculate the discount rate which equates the present value of the pension payments to 73K. This discount rate will be the rate of return.
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Old 11-24-2014, 05:52 PM   #4
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Lump sum.
"A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do" --Bob Dylan.
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Old 11-24-2014, 05:55 PM   #5
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Nobody's mentioned it yet, but one way to compare is how much a single-premium immediate annuity would pay you for the same investment.

I went to and plugged in the numbers:

FWIW for a 62 year-old male, the quote they give for $73K invested is $378 per month

This seems typical for pension buyout offers - they're offering you significantly less than what the market would charge you for an equivalent annuity.

As a previous poster has mentioned, you're very well set for retirement, so it hardly matters what you choose, but from a purely financial perspective, the annuity seems like a better deal, even factoring in any tax differences (remember that if you put this in an IRA, you will still pay taxes on the money eventually).
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