Another Pension Buyout

[Rowdy]

Seems to be a pattern with megacorps ridding themselves of pensions. Here's what they are offering me: $81k lump sum ($70k pre tax & $11k after tax). My pension will be $800/month at age 60; 9 years from now. Pension has no COLA and is covered by PBGC (megacorp not terribly healthy); if I wait to 65, it goes up to $1,200/month. Sooo, here's my analysis.

- Using an immediate annuity web site, it would take roughly $160k to buy an immediate annuity at age 60 paying about $800/month. To grow the $81k to $160k in 9 years would require a return of 8%/year. Although 8%/year seems achievable, 9 years is not a lot of time. Additionally, my 85% equities will be dialing back to 70% between now and then.
- If I had $160k 9 years hence, a 4% SWR would only provide $533/month.
- Using a pension benefits web site, a $800/month pension in 9 years is equivalent to $121k (using 3% interest rate).
- My guess is that megacorp is not bending over backwards to make me come out ahead; they are basically transferring the risk of generating $800/month from them to me.

Other info: Healthy, parents lived into late 80s, also have COLA'd government pension starting at 60.

Although I like the idea of adding $81k to my next egg ($70k to IRA and $11k to Roth IRA), I'm not sure it is the best idea. How say you?

 

[MasterBlaster]

Fun With Compound Interest

Your annual pension will be...

$800/month ==> $9600/year

Using my annual 16X factor to model non-CPI increased pensions.

I get

$9600/yare X 16 = $153.6k

Now discount that using a 7% discount rate and I get a pension lump sum discounted 9 years is $83.5k

Whether or not you think 7% is a fair discount rate or not is up to you !

If you really want to model it go to this website and add in mortality models and interest rate schemes. Beware though it's not for the fainthearted:

https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_cal

 

[Rowdy]

Your annual pension will be...

$800/month ==> $9600/year

Using my annual 16X factor to model non-CPI increased pensions.

I get

$9600/yare X 16 = $153.6k

Now discount that using a 7% discount rate and I get a pension lump sum discounted 9 years is $83.5k

Whether or not you think 7% is a fair discount rate or not is up to you !

If you really want to model it go to this website and add in mortality models and interest rate schemes. Beware though it's not for the fainthearted:

https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_cal

MasterBlaster; thanks, interesting. Where does the 16x come from? Also, I believe that 7% would be pretty high for discounting; I usually use 3%, but not sure that is correct either.

The pension benefits web site gives me $121k.

Thanks for the alternate viewpoint.

 

[MasterBlaster]

Where does the 16x come from?.

The 16x is a number that gets thrown around this website to ballpark what kind of nestegg you need to model a non-COLA pension.

We also use a 25X factor to model lump sums for COLA'd pensions.

I am not sure exactly of it's exact origin but the factors do seem to dovetail with all of the finacial calculators. Perhaps one of our (smarter) forum members can enlighten us here.

Also, I believe that 7% would be pretty high for discounting; I usually use 3%, but not sure that is correct either.
The pension benefits web site gives me $121k.

3 % or 7% there is no right or wrong number. But clearly a discount rate of 3 % would be better for you. Or another way to look at it is... Are they really being fair to you ?