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Old 12-12-2014, 06:26 PM   #21
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I'm not sure why you would think it would be unsustainable - the funding is probably based on the assumption that retirees take the life annuity - in his case the $32,400 a year. The benefit levels are probably based on his pay and service with that plan sponsor and the plan could require employee contributions as part of the funding.
The only thing close to this that I know of is actually the numbers I had recently to buy back into my state pension. The state compounded all of my contributions at 8% annually to come up with the amount to buy back into the defined benefit plan. They used 8% as its the average return of the state pension fund over the last 10 years. Still there's something out of whack here with the lump sum amount and the monthly income unless the OP has very long service and is on a really steep part of the pension curve and the payout is far less for the majority of pensioners.
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lump sum
Old 12-12-2014, 09:26 PM   #22
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lump sum

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Originally Posted by Joe0401 View Post
The numbers I provided are for retiring 11/2015 .. If I wait until 11/2016, then the lump sum value is 414,461 with a monthly payout of 3,167. Again, my calculations come out to 9% on the 414,461. I did talk to a financial advisor who says to take the lump sum (of course). But when I ask if he can give me that type of return, he really did not have an answer. I did verify these numbers with our HR area.

This is my first time in this forum and I appreciate the answers. There is so much valuable information here and I commend those who participate and maintain it.

It is important to understand the math....the payout ratio is 9%. That number is dependent on your age and includes the return of your principle. To understand what you are really earning require a calculation of an interest rate that makes the lump sum equal to the present value of the monthly payments
. That calculated interest rate is really what you are earning by choosing the annuity and is the number to use in deciding whether to take the lump sum or the annuity. You should ask your advisor why they think you should take the lump sum other than so they can make money off of you. The issues to consider are laced out in my first post.


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Old 12-12-2014, 09:51 PM   #23
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I believe the bottom line is there is more funding n my the pension than the lump sum number. Just seems if you take the lump sum, you get less than if you take the monthly. Not sure how they calculate, but the monthly seems better



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Old 12-12-2014, 10:01 PM   #24
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I believe the bottom line is there is more funding n my the pension than the lump sum number. Just seems if you take the lump sum, you get less than if you take the monthly. Not sure how they calculate, but the monthly seems better



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Who runs this pension? Do you have long service like 30 years?
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Old 12-13-2014, 10:27 AM   #25
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I believe the bottom line is there is more funding n my the pension than the lump sum number.
That should not be correct, the lump sum or the monthly payout should come from the company retirement/pension plan assets, which are held separate from company operating expenses by law.
Quote:
Originally Posted by Joe0401
Just seems if you take the lump sum, you get less than if you take the monthly. Not sure how they calculate, but the monthly seems better
Yes it does as we've all mentioned, almost too good to be true. It's clear the company wants you to take the pension, not the lump sum - the difference shouldn't be so large (though not unheard of). And most pensions are protected by law, but there can be shortfalls. I'd get more info on the plan, how well it's funded, PBGC insured etc. Some plans are seriously underfunded, some not under PBGC or not eligible to be fully made up in the event the company is underfunded and goes bankrupt in the future.

Not trying to scare you, but with such a large discrepancy in lump sum and monthly payout options, I would be doing a little more homework before making this decision. 'If something sounds too good to be true, it probably is.' It's an important one you'll be living with for 30+ years.

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If you’re counting on a traditional defined-benefit pension, there’s reason to worry that you might not get everything you’ve earned. About 80 percent of the 29,000 private-sector defined-benefit plans insured by the federal Pension Benefit Guaranty Corp. have been underfunded by $740 billion. State and local public employee pensions were recently in a $1 trillion hole.
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Old 12-13-2014, 02:10 PM   #26
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Not trying to scare you, but with such a large discrepancy in lump sum and monthly payout options, I would be doing a little more homework before making this decision. 'If something sounds too good to be true, it probably is.' It's an important one you'll be living with for 30+ years.

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Yes the numbers on this pension look very strange and lob sided, that's why I'm curious who runs it, also whether there is something like very long service that might be biasing the pension.....but that should also be reflected in the lump sum amount....7.9% interest rate for age 57 is very high.

Of course the funding issue with pensions comes about because of failures of companies and the public sector to live up to the contracts and promises they have made. Bizarrely it is usually the pensioners that suffer through reduced benefits rather than the administrators for failing to fund or run the pensions correctly. It's another case of punishing the victims rather than the criminals.
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Old 12-13-2014, 02:28 PM   #27
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is this financial advisor credentialed?
He may be but I bet he's not acting as a fiduciary.
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Old 12-14-2014, 11:57 AM   #28
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I just checked the numbers again. The buyout is actually $548,000 or a monthly of 2700 per month. I could take the buyout and manage it myself ... I'm not very good with knowing the best ways to invest, unless it is super conservative. Looks like the 2700 per month is about 6 - 8% return.. But it is hard to turn away the 548,000 buyout. I am 57, so I cannot I think that I cannot withdraw from this until I am 59 1/2 .. Need to verify that


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Old 12-14-2014, 12:59 PM   #29
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I am 57. My pension lump sum would be $364,000 or I can get a monthly payout of $2,700.
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I just checked the numbers again. The buyout is actually $548,000 or a monthly of 2700 per month. I could take the buyout and manage it myself ... I'm not very good with knowing the best ways to invest, unless it is super conservative. Looks like the 2700 per month is about 6 - 8% return.. But it is hard to turn away the 548,000 buyout. I am 57, so I cannot I think that I cannot withdraw from this until I am 59 1/2 .. Need to verify that
Well that was fun...good thing you rechecked. So your options are essentially a wash, and the suggestions above are mostly if not entirely irrelevant now.

I had the same option 3+ years ago, lump sum and pension were a wash, and I took the lump sum without hesitation. My reasons:
a) I am perfectly comfortable managing money, and assuming some volatility in our lifetime income
b) Annuities are expensive now, which also makes lump sums relatively generous - so when interest rates/yields rise, I will be able to buy an annuity with a higher payout with the same lump sum. And even if interest rates don't rise soon enough, I can still buy an annuity with a slightly higher payout simply by virtue of having waited a few years (graph below).
c) If you take a pension, you no longer have option b), you're committed for life.

That said, for some people, taking a monthly payout/pension is the right choice, see lump sum - pension/annuity table below.

Some info below that might be of interest (two I've posted at ER.org before, apologies if you've seen them). Best of luck...
Attached Images
File Type: jpg IA.jpg (130.4 KB, 30 views)
File Type: jpg Lump v Pen.jpg (359.8 KB, 34 views)
File Type: gif Annuity.gif (36.5 KB, 26 views)
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Old 12-14-2014, 01:13 PM   #30
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Those numbers add up a lot better. The interest rate works out to be 3.9% if you live for 28 years. Without a COLA I'd go with the lump sum.

Apologies to your financial advisor
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Old 12-14-2014, 01:50 PM   #31
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Originally Posted by Joe0401 View Post
I just checked the numbers again. The buyout is actually $548,000 or a monthly of 2700 per month. I could take the buyout and manage it myself ... I'm not very good with knowing the best ways to invest, unless it is super conservative. Looks like the 2700 per month is about 6 - 8% return.. But it is hard to turn away the 548,000 buyout. I am 57, so I cannot I think that I cannot withdraw from this until I am 59 1/2 .. Need to verify that...
Just so you know, your "return" is NOT 6% (or 6-8%) since a large portion of the $2,700 a month is simply a return of the $548,000 you could take as a lump sum. You won't know the return until you know when you will pass on. If you die early, your return is hugely negative and if you live long your return is good or great. Below is a table that shows the return depending on how long your live.

Lump sum  548,000
Monthly benefit  2,700
   
Agen IRR
570 
581-98.32%
592-80.78%
603-60.37%
614-44.87%
625-33.78%
636-25.77%
647-19.86%
658-15.39%
669-11.93%
6710-9.21%
6811-7.02%
6912-5.25%
7013-3.79%
7114-2.57%
7215-1.55%
7316-0.68%
74170.06%
75180.70%
76191.25%
77201.73%
78212.15%
79222.53%
80232.85%
81243.14%
82253.40%
83263.63%
84273.84%
85284.03%
86294.20%
87304.35%
88314.48%
89324.61%
90334.72%
91344.82%
92354.92%
93365.00%
94375.08%
95385.15%
96395.22%
97405.28%
98415.34%
99425.39%
100435.44%
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Old 12-14-2014, 03:06 PM   #32
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I love the existential aspect of annuities. They are the most self reflective of financial products.

The table is instructive.....notice how the interest rate approaches the payout rate as the recipient ages, but without a COLA there is no way that it can ever exceed the payout rate.
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Old 12-14-2014, 08:36 PM   #33
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Interesting point on the payout rate. In the process of proving it I found a glitch in the previous table that affected the early years and had a minor effect on the more relevant years, but I have been able to prove this one. And if I go out far enough (78 years!!) then the IRR approaches the payout rate. It is interesting that it takes over 20-25+ years to get to a IRR that seems at all sensible given the current level of interest rates.

Lump Sum  548,000
Monthly benefit  2,700
   
AgenIRR
570 
581-346.4%
592-154.1%
603-89.1%
614-58.1%
625-40.5%
636-29.4%
647-21.9%
658-16.6%
669-12.6%
6710-9.6%
6811-7.3%
6912-5.4%
7013-3.9%
7114-2.6%
7215-1.6%
7316-0.7%
74170.1%
75180.7%
76191.2%
77201.7%
78212.1%
79222.5%
80232.8%
81243.1%
82253.4%
83263.6%
84273.8%
85284.0%
86294.1%
87304.3%
88314.4%
89324.5%
90334.6%
91344.7%
92354.8%
93364.9%
94375.0%
95385.0%
96395.1%
97405.2%
98415.2%
99425.3%
100435.3%
101445.3%
102455.4%
103465.4%
104475.5%
105485.5%
106495.5%
107505.5%
108515.6%
109525.6%
110535.6%
111545.6%
112555.6%
113565.7%
114575.7%
115585.7%
116595.7%
117605.7%
118615.7%
119625.7%
120635.8%
121645.8%
122655.8%
123665.8%
124675.8%
125685.8%
126695.8%
127705.8%
128715.8%
129725.8%
130735.8%
131745.8%
132755.8%
133765.8%
134775.8%
135785.9%
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Old 12-14-2014, 09:13 PM   #34
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Yes it's instructive to look at the implied interest rate for various mortality dates, but it can be misleading because the pension isn't an investment, it's insurance.....it's very expensive insurance if you die young. Its interesting to do the same calculation with a 3% annual COLA. If you reach 80 the IRR is around 10%, this is why COLAs are so rare now.
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Old 12-14-2014, 09:15 PM   #35
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Yes it's instructive to look at the implied interest rate for various mortality dates, but it can be misleading because the pension isn't an investment, it's insurance.....it's very expensive insurance if you die young. It interesting to do the same calculation with a 3% annual COLA. If you reach 80 the IRR is around 10%.
Of course there exist other settlement options besides a pure single life annunity. In fact if you are married and have a pension the default is a joint life annunity and to go single life requires a signed document from the other party in the marriage. Or you can go for life + term certain if desired.
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Old 12-15-2014, 05:14 PM   #36
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Mine option isn't as great......
100% Contingent Annuity: 268k at 53 (now) = $1215 (around 5.5%)
Will let it ride/grow at 5% for now and figure it out down the road.


Sounds like the OP may have had a grandfather clause in his favor he didn't realize....
One thing you miss walking away at 51... 55 or better gets it.
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Old 12-15-2014, 07:55 PM   #37
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Nun & Midpack,

I would appreciate any illumination you can provide. My situation is almost identical to the OP's original uncorrected post.

Projected for 4/1/15 retirement:
* 27 years of employment.
* Non-Cola pension of $34,776 per year (50% survivor payout)
* Option to convert to a 100% survivor option for a reduced payout.
* Megacorp (DJIA 30 company) just announced a lump sum payout
option. They offered $338,051
* US pension plan funded at 103% as of Jan 1, 2013 with 13.9 billion in
assets.
(Global pension plan is well funded but separate)
* Have some health issues but think I can make it to mid to late 70's.
* Wife is almost indestructible and should live to late 80's early 90's.

The yearly pension payout is 9.9% of the lump sum amount.

I am not sure how to calculate the IRR, but it seems to me a lump sum payout is a bad deal.

I looked at what it would take to provide this in a 25 year annuity and it was something like $500K. Your skepticism on how an annuity can pay this out with such a low lump sum has me scratching my head.

Any feedback would be appreciated.
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Old 12-15-2014, 09:25 PM   #38
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Nun & Midpack,

I would appreciate any illumination you can provide. My situation is almost identical to the OP's original uncorrected post.

Projected for 4/1/15 retirement:
* 27 years of employment.
* Non-Cola pension of $34,776 per year (50% survivor payout)
* Option to convert to a 100% survivor option for a reduced payout.
* Megacorp (DJIA 30 company) just announced a lump sum payout
option. They offered $338,051
* US pension plan funded at 103% as of Jan 1, 2013 with 13.9 billion in
assets.
(Global pension plan is well funded but separate)
* Have some health issues but think I can make it to mid to late 70's.
* Wife is almost indestructible and should live to late 80's early 90's.

The yearly pension payout is 9.9% of the lump sum amount.

I am not sure how to calculate the IRR, but it seems to me a lump sum payout is a bad deal.

I looked at what it would take to provide this in a 25 year annuity and it was something like $500K. Your skepticism on how an annuity can pay this out with such a low lump sum has me scratching my head.

Any feedback would be appreciated.
How old are you?
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Old 12-15-2014, 11:26 PM   #39
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Sorry - critical piece of information.... I am 58
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Old 12-16-2014, 12:04 AM   #40
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I am 57. My pension lump sum would be $364,000 or I can get a monthly payout of $2,700. At first I thought the lump sum is the way to go. However, my calculations get that 2,700 a month is = to $32,400 per year which is about 9% a year return on the $364,000. That is way better than what I can get investing .. at least more consistent. Anyone else making this type of choice ?
Avoid annuities. This is a great way to transfer 15% - 20% of the amount invested to the insurance company. The insurance company always comes out the winner. If low risk is your goal then you would be better suited in a simple mix of about 67% bonds like AGG (the total bond market) and 33% stocks like VOO (S&P 500 index) or VOO and XLP (consumer staples index).
Somebody suggested an immediate annuity. These things are smoke and mirrors. When you estimate actual return on investment (ROI) that's when you realize that they are a bad deal. Interest payment rate is not the same as ROI (what really matters).
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