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Old 11-05-2012, 10:50 AM   #1
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I just received a letter regarding a pension I am eligible to receive. A lump sum payout option is being offered. I must decide by the end of the month. The lump sum offer may or may not be offered again. The annuity options will still be offered. Here are the details.

Lump Sum: $36,607

Pension @ 65: $399 per month

Pension now @ 56: 289 per month

Immediate annuity says a lump sum of $36607 provides $165 to $173 per month depending on option selected. $63966 would be needed for $289 monthly payments.

Another site calculated the current monthly benefits to be worth $99787 as a lump sum.

I ran firecalc and looks like it was show a monthly payout of $113 per month with 99% chance of success. $93110 Starting portfolio value with 99% chance of success.

Based on my calculations, this is one of those limited time offers to be rejected. Am I missing something?

If I engaged a financial planner in this exercise, which I do not think is required. What would be a fair price or how much time would be required for this exercise?

Your input is appreciated.
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Old 11-05-2012, 11:00 AM   #2
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Originally Posted by BooBoo View Post
Based on my calculations, this is one of those limited time offers to be rejected.
Assuming you did your "due diligence" on this and used an Immediate Annuity site to compute your figures, I would agree this is not to your advantage.

We went through this exercise a few months ago when the company DW retired from (earlier this year) wanted to "offload" their future pension obligations.

Using the same tools (e.g. an Immediate Annuity payout), we found her lump sum payout was certainly lacking, based upon today's interest rates.

In fact, she received a call this past Saturday (after the hurricane) to ask again if she would be willing to take the lump sum. The reason they called was that the option to take the lump sum needed to be postmarked by October 31st, but due to weather conditions it may not have been posted in time.

She said "no"; it did not make sense, based upon the calculations that she (and me ) did.

She will start her pension payout on June 1'st of 2013.

BTW, kudos to you to be able to get the inital information to formulate your feelings concerning the offer, on your own...
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Old 11-05-2012, 11:17 AM   #3
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Sounds like the right decision to me.
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Old 11-05-2012, 11:50 AM   #4
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Based on the numbers you ran it would be in favor of the pension.

Other things, is the pension COLA'd and safety of the pension.
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Old 11-05-2012, 12:14 PM   #5
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I agree no on the lump sum, though you might try a spreadsheet calculation to see what kind of return would be required for the lump sum to match the expected lifetime payments.

However, you might want to consider taking the earlier pension payments. That looks like a 3.6% growth rate in payments while delaying 9 years. If it's not a COLA'd pension that's going to be just above inflation and $399 won't be worth a whole lot more than $289 today. Meanwhile, you've forgone 9 years of payments. Plus any investment gains.
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Old 11-05-2012, 12:47 PM   #6
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I agree no on the lump sum, though you might try a spreadsheet calculation to see what kind of return would be required for the lump sum to match the expected lifetime payments.

However, you might want to consider taking the earlier pension payments. That looks like a 3.6% growth rate in payments while delaying 9 years. If it's not a COLA'd pension that's going to be just above inflation and $399 won't be worth a whole lot more than $289 today. Meanwhile, you've forgone 9 years of payments. Plus any investment gains.
+1
I would take the pension now, same as social security @ 62 vs 66, YMMV.
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Old 11-05-2012, 01:46 PM   #7
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I agree to skip the lump sum. There are some out there who either think they can earn more than the pros or are desperate for the cash, so they take the lump sum. Those desperate ones will likely spend it all within 6 months and be just as desperate later.
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Old 11-05-2012, 03:15 PM   #8
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If the PV of the lump sum equaled the FV of the pension, I'd take the lump. Here, it appears not to, unless one uses a very high rate, or very long lifespan...

First table shows the interest rate for starting now, the second for starting at 65, the third shows the PV using current 10 and 30 year bonds.
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Old 11-05-2012, 03:29 PM   #9
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There are some out there who either think they can earn more than the pros or are desperate for the cash, so they take the lump sum. Those desperate ones will likely spend it all within 6 months and be just as desperate later.
Hate to say that I know a few of them and glad I'm not one of them.

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Old 11-05-2012, 10:24 PM   #10
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If the PV of the lump sum equaled the FV of the pension, I'd take the lump. Here, it appears not to, unless one uses a very high rate, or very long lifespan...

First table shows the interest rate for starting now, the second for starting at 65, the third shows the PV using current 10 and 30 year bonds.
I'm not matching those numbers. More periods of annuity payments for the same lump sum should require a higher investment return. The table, as I understand it, says it's less.
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Old 11-06-2012, 04:11 AM   #11
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I suppose the offer is targeted at those in need of cash to pay off CC debt or other debt.
If you could pay off debt with high interest that you could not get rid off for years because of unhealthy spending habits the offer might look attractive.
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Old 11-06-2012, 08:18 AM   #12
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+1
I would take the pension now, same as social security @ 62 vs 66, YMMV.
Completely different scenario, and I disagree. The delay in S.S. that you mention is only 4 years vs. 9 years in the OP example. Also S.S. has Inflation Protection with a COLA.

I do agree with take the Pension now, however.
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Old 11-06-2012, 08:39 AM   #13
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DW also had to face the same choice when she retired. She had a few weeks to decide. She was leaning on taking the lump sum that she can pass on to the kids. On the first day that she retired, we have to go to ER for what we thought was a heart attack. It turned out to be acid reflux. This was followed with another trip to ER 4 weeks later - this time for Diverticulitis. These events really pushed her into getting the lump sum.
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Old 11-06-2012, 08:59 AM   #14
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Originally Posted by HFWR View Post
If the PV of the lump sum equaled the FV of the pension, I'd take the lump. Here, it appears not to, unless one uses a very high rate, or very long lifespan...

First table shows the interest rate for starting now, the second for starting at 65, the third shows the PV using current 10 and 30 year bonds.
Numbers is hard...

Let's try again. The table shows the interest rates implicit in the calculations for several periods, with 24 years being the actuarial assumption of the longevity of a 56yo man. The last two rows show the lump sum payout using the current 30yr bond rate, and the life expectancy wherein breakeven occurs.

The conclusion is still the same; the lump sum is a rip-off, unless one croaks early...
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Old 11-06-2012, 09:18 AM   #15
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Numbers is hard...
You'll receive an invoice for the royalty payment shortly...
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Old 11-06-2012, 09:41 AM   #16
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Originally Posted by BooBoo View Post
Lump Sum: $36,607
Pension @ 65: $399 per month
Pension now @ 56: 289 per month

Based on my calculations, this is one of those limited time offers to be rejected. Am I missing something?
Wow, that's the worst lump sum offer I've seen yet. You're not missing anything unless the provider plans/knows they won't be around to pay the pension for the duration. Obviously they don't want to pay out lump sums for some reason. You couldn't come close to buying an annuity that would match the pension amounts they're offering with that lump sum.

Quote:
Originally Posted by Finance Dave View Post
There are some out there who either think they can earn more than the pros or are desperate for the cash, so they take the lump sum. Those desperate ones will likely spend it all within 6 months and be just as desperate later.
Way to paint everyone with the same brush, what nonsense...
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