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Another pension lump sum vs. monthly payment question
Old 02-07-2011, 12:41 PM   #1
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Another pension lump sum vs. monthly payment question

Going to keep my other financial details out of this for now. A simple search on my username will give them anyways.
Have a pension question for you.
There is no COLA on this pension.
I'm not married. No kids.
I am 62 yrs old. Mother died at 80 yrs. Father died at 82 yrs.
Plan on retiring July 1st, 2011
Here are the details for the pension:
Lump sum at age 65 = $35,000
Lump sum at age 62-1/2 = $29,750
Monthly payment at age 65 = $280.46
Monthy payment at age 62-1/2 = $238.39
There is a 1/2 of 1 percent penalty for each month you take the money before age 65.
Do I take the monthly payments or lump sum? At 62-1/2 or 65?
The one fly in the ointment is the company I work for has under-funded the pension fund.
Thoughts.
Thanks in advance.

Rob
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Old 02-07-2011, 12:59 PM   #2
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The simple approach is the 16x model for non-COLA pensions. And 25X for COLA pensions.

If you want something more sophisticated then go to:

https://www.pensionbenefits.com/calc...em=lumpsum_cal

choose your Mortality model, and your dates and your underlying rates and let er' rip.

this stuff gets complicated fast.
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Old 02-07-2011, 03:47 PM   #3
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Due to low interest rates, now is a lousy time to buy an annuity, but a great time to take a lump sum pension. Plus, you can invest to hopefully compensate for inflation...
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Old 02-07-2011, 07:02 PM   #4
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I'd take the lump sum when you go out in July.
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Old 02-07-2011, 10:41 PM   #5
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"The one fly in the ointment is the company I work for has under-funded the pension fund."

Then take the money in a lump sum and invest it for growth. It's safer with you than it is with them.

-- Rita
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Old 02-08-2011, 09:01 AM   #6
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Thanks for all the input.
Pretty much decided to take the lump sum at 62-1/2.
Rob
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Old 02-08-2011, 10:28 AM   #7
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Quote:
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Due to low interest rates, now is a lousy time to buy an annuity, but a great time to take a lump sum pension. Plus, you can invest to hopefully compensate for inflation...
That depends on how your pension fund figures the lump sum. Some systems (mine included) calculate it by compounding your actual contributions over your period of employment using an assumed interest rate. If you're in that type of system, it doesn't matter whether interest rates are high or low when you retire, the lump sum will be the same regardless.
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It's a Lousy Time for Everything !
Old 02-08-2011, 10:44 AM   #8
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It's a Lousy Time for Everything !

Quote:
Originally Posted by HFWR View Post
Due to low interest rates, now is a lousy time to buy an annuity, but a great time to take a lump sum pension. Plus, you can invest to hopefully compensate for inflation...
So you take the money as a lump sum and do what with it ?

Invest in bonds ? I would suggest that it's a lousy time to invest in bonds.

Invest in bank savings accounts or CD's ? Enjoy that negative real return after taxes and inflation.

commodities or Gold ? You'll be buying at the top

Invest in stocks - Whoooaaa what a wild ride. Those stocks could really tank if inflation kicks up and does a number on sales profit margins.

Invest in real estate ? Another wild ride.

perhaps the only good investment here is in fine wines and old whisky. At least those investments can be "liquidated"

Or just maybe that monthy check from an anuity isn't so bad after all.
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Old 02-08-2011, 10:49 AM   #9
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Or put it in a Total Stock Market fund, or split it between several 'total' index funds. The OP isn't getting a large lump sum, and even the annuity is not large. Depending on the other assets available this lump sum is, hopefully, a small part of the total portfolio. How it gets invested would have to be considered in terms of the total asset allocation the OP is using.

In any event, a pension plan that is underfunded rings warning bells with me that one needs to take the money when it is available to safeguard it.

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Old 02-08-2011, 04:38 PM   #10
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My first step in evaluating these is to see how much the lump sum would buy in todays market with a top rated firm. So I'd plug the numbers in to annuity calculator like Berkshires, or the government TSP annuity calculator. In your case at 62.5 it looks like you get a private pension e.g. SPIA of around $170 or significantly below what the company is offering. The low interest rates not only result in lower annuity payments but also result in much lower lump sum payments. Recently I have noticed monthly payments are a much better deal than lump sum, due to change in the rules regarding pension fund accounting.


The underfunding of the pension is certainly a reasonable concern but you are well under the limit of the PBGG corporation if if does go bust, you are likely to be made whole. (unless there is another global financial meltdown.)

At 62.5 that $238/month is 9.6% on $29,750 well above any reasonable rate of return in today's market. With no kids, you aren't worried about an estate so why not take the monthly check
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Old 02-08-2011, 04:46 PM   #11
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Quote:
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Invest in bank savings accounts or CD's ? Enjoy that negative real return after taxes and inflation.
Quote:
Or just maybe that monthy check from an anuity isn't so bad after all.
In a non-COLA pension situation, aren't these about the same?
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Old 02-08-2011, 04:52 PM   #12
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In a non-COLA pension situation, aren't these about the same?
Oh Perhaps. I'll leave it for others though to pontificate on the fine similarities and differences between the two.

the bigger point is that the high cost of SPIAs lately is offset by the dearth of and risk of other investments available.
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