Help with decision

[Backdraft57]

I am retiring June this year. I have a fixed pension I will have for life with survivor benefits for wife. Also was on a plan of "retire/rehire" where my pension check went into an account. When I leave in June I have the option of taking that money or rolling into a "life time benefit". It will be about $343,000. They will up my pension by $2,000 a month if I roll this into the "life time benefit". I suppose it's like buying more time or an annuity. Anyway I can't determine if I should go that route or save the money and withdraw as needed from it. It would be a nice nest egg for kids if wife and I get whacked the week after retiring but $2k a month seems like a good return on $343k?
Can some of you wise ones help with some pros/cons?
Thanks so much.
BD57


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[rodi]

The only way to know if the lump sum is a better deal than a pension is to look at how much money it would take to buy an equivalent SPIA annuity.

Try one of the quotes sites like immediateannuities.com

This presumes your pension is non-COLA. It's hard to find COLAd annuities.

When I did the exercise in my very tiny pension - the lump sum was about 2/3's of the amount I'd need to buy an equivalent annuity. So I'm planning on letting my former employer pay me the pension rather than taking the lump sum.

 

[Backdraft57]

Thanks rodi
Web site comes back with mostly $1,600 a month. Pension has no set cola, board votes each year for cola which can be 0 up to 3%. The last two years it was .6%.



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[pb4uski]

So if I understand you correctly your choice is to get a $343k lump sum or $2k/month for life of you or your wife. Plus, the $2k a month is subject to a discretionary COLA but would not decrease.

If that is correct, I would take the $2k a month. That is a 7% payout rate and very attractive.

Is the pension plan well funded? Is the sponsor financially strong?

 

[Backdraft57]

Yes pb4uski, pension is 98% funded and it's a state fire/police pension fund, very sound. My trepidation I suppose is having that chunk of money available but a guaranteed 7% for life is hard to get I suppose.


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[Sunset]

Take the Pension, and save the "extra" for the first little while so you have an emergency fund.
Best gift you can give your kids is to not be a burden on them later in life.
That is what the bigger pension with cola will be, vs $343,000 that gets spent on crap and then you need to help from the kids..

 

[Backdraft57]

Thanks pb4uski and sunset for your thoughts. I had pretty much thought I would take the money since I already had a pension but now leaning towards the "extra" $2k


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[pb4uski]

I guess one other thing to consider is your health and family longevity. If you and your DW are healthy then the pension is better... if not then perhaps the cash is better. Assuming 0% interest, you need to collect benefits for almost 15 years to get the $343 back.

 

[BTravlin]

I'd take the addition to the pension since a 7% guaranteed return year in and year out is awfully tough to beat.

DW had the same decision 3 years ago when she retired and opted for the 8% return.

 

[ugeauxgirl]

Not advice but some thoughts-

A 7% payout is great but it isn't equivalent to the same money in a 7% bond because you won't get your money back at the end. To calculate the actual return on the pension money you have to know how long you'll live, which presents some problems... Also you can't get at the money. If you have a sizable chunk of money somewhere, that's fine, but if you don't you are going to end up financing things (cars, major home repairs, etc) in retirement because you can't get at your principal.

Conversely- studies show that people who have guaranteed income in retirement are happier than those who don't. Its probably the worry factor but that certainly counts for something.

How close is your primary pension to your goal spending level?

 

[travelover]

........... To calculate the actual return on the pension money you have to know how long you'll live, which presents some problems.............

This is an excellent point. Surely there is an app.

 

[ugeauxgirl]

Have your considered taxes? Some pensions are taxable and some aren't. If the second pension is taxable you may bump yourself into a higher tax bracket. More info would help. Do you have significant savings/457 or something like that? How much is your goal spending- how much is pension 1? The payout IS a good deal- but not ideal for EVERY situation

 

[ugeauxgirl]

This is an excellent point. Surely there is an app.

Nope. I checked

 

[pb4uski]

No but you can see with a spreadsheet what the return on your premium is depending on your longevity. If you die early, you lose. If you live long, you prosper. The rate of return converges to the payout rate if you survive long.

Lump Sum	343,000
Monthly benefit	2,000
n	IRR
0
1	-97.9%
2	-78.5%
3	-57.1%
4	-41.4%
5	-30.3%
6	-22.4%
7	-16.7%
8	-12.4%
9	-9.1%
10	-6.5%
11	-4.4%
12	-2.8%
13	-1.4%
14	-0.3%
15	0.6%
16	1.4%
17	2.1%
18	2.7%
19	3.2%
20	3.6%
21	4.0%
22	4.3%
23	4.6%
24	4.9%
25	5.1%
26	5.3%
27	5.5%
28	5.6%
29	5.8%
30	5.9%
31	6.0%
32	6.1%
33	6.2%
34	6.3%
35	6.4%
36	6.4%
37	6.5%
38	6.6%
39	6.6%
40	6.7%

 

[pb4uski]

Have your considered taxes? Some pensions are taxable and some aren't. ...

Since in the OPs case it is from a pension plan pension benefits are likely to be fully taxable.

 

[Big_Hitter]

Since in the OPs case it is from a pension plan pension benefits are likely to be fully taxable.

public sector benefits are likely contributory, some of it may be tax free unless the contributions were "picked up"

 

[Big_Hitter]

more on annuity versus lump sum...


http://mobile.nytimes.com/2016/01/23/your-money/pension-lump-sum-payment-options.html?_r=0

 

[Big_Hitter]

Nope. I checked

there are several "lump sum" calculators out there (which I can't vouch for) that use interest rates and mortality assumptions to convert annuities to lump sums - this concept is just the inverse

 

[ExFlyBoy5]

I would look at tax implications and then how much $$$ you have now. I can't think of many emergencies that would require $100,000 that wouldn't (should be) covered by insurance. Also, is there a provision for survivor's benefits on the additional amount or will it go away if you die first? I guess what I am saying is there are too many variables that you haven't listed, so it's hard to give more than VERY general information.

 

[eta2020]

It would be a nice nest egg for kids if wife and I get whacked the week after retiring but $2k a month seems like a good return on $343k?
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Depends on your age

 

[Backdraft57]

I want to say thank you for all the thoughtful responses and all the food for thought. This lump sum vs "annuity" is in addition to a pension that basically covers living expenses. I don't have much more in savings ($100k in IRA). You have given me some good questions to ask before signing papers and more things to research. I vacillate between the two options. I did find out that I can set the amount. So, perhaps I keep half the money in the account and roll half into a life time benefit? I was telling my wife about this site and she was amazed that so many people would talk to and help a total stranger. So, thanks again for being some great people.


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[ExFlyBoy5]

I want to say thank you for all the thoughtful responses and all the food for thought. This lump sum vs "annuity" is in addition to a pension that basically covers living expenses. I don't have much more in savings ($100k in IRA). You have given me some good questions to ask before signing papers and more things to research. I vacillate between the two options. I did find out that I can set the amount. So, perhaps I keep half the money in the account and roll half into a life time benefit? I was telling my wife about this site and she was amazed that so many people would talk to and help a total stranger. So, thanks again for being some great people.


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I participate in 3 forums with regularity and I can say beyond the shadow of a doubt that the folks here are the best!

I like the idea of splitting the amount; for me that would be a better option. Definitely more numbers to run, but for most of the financial minds here, we love the calculator!

Sent via mobile device. Please excuse any grammatical errors.

 

[ugeauxgirl]

No but you can see with a spreadsheet what the return on your premium is depending on your longevity. If you die early, you lose. If you live long, you prosper. The rate of return converges to the payout rate if you survive long.

Lump Sum	343,000
Monthly benefit	2,000
n	IRR
0
1	-97.9%
2	-78.5%
3	-57.1%
4	-41.4%
5	-30.3%
6	-22.4%
7	-16.7%
8	-12.4%
9	-9.1%
10	-6.5%
11	-4.4%
12	-2.8%
13	-1.4%
14	-0.3%
15	0.6%
16	1.4%
17	2.1%
18	2.7%
19	3.2%
20	3.6%
21	4.0%
22	4.3%
23	4.6%
24	4.9%
25	5.1%
26	5.3%
27	5.5%
28	5.6%
29	5.8%
30	5.9%
31	6.0%
32	6.1%
33	6.2%
34	6.3%
35	6.4%
36	6.4%
37	6.5%
38	6.6%
39	6.6%
40	6.7%

Did you do this with a calculator or a speadsheet? If you used a calculator I'd like to know where you got it- thanks!

 

[ugeauxgirl]

I'm kind of a control freak about wanting to be able to get my hands on my money if I need to. I don't know how old you are, but I wouldn't feel comfortable with $100 K emergency cash for all of my retirement, even if all of my expenses are covered. The rate is good though- I would consider taking at least a portion in cash and roll it into your IRA.

 

[pb4uski]

Did you do this with a calculator or a speadsheet? If you used a calculator I'd like to know where you got it- thanks!

It's a spreadsheet. It just calculates the IRR (aka the interest rate that causes the present value of the cash flows to be zero where the time zero outflow is the premium and the subsequent inflows are the pension benefits) assuming that you live a certain number of years using Excel's RATE function.

The Excel formula is: =(1+RATE([number of years]*12, [monthly benefit],[-lumpsum]))^12-1