lump sum

[Louis2]

upcoming changes

As mentioned above, I think companies are required to use the IRS information for mortality tables. I did read however that the Society of Actuaries released a study updating mortality rates for the first time since 2000. (Americans are living almost 2 years longer). Some companies are moving out in 2014 to recognized increases in pension liabilities, while others will likely wait until the IRS released new tables that reflect these findings, in 2016 or 2017.

So it seems that a buyout using TODAYS IRS tables may be cheaper than seeing the new rates take effect.

The article also mentions higher premiums being paid to PBGC as another reason to get people off the books and onto an annuity.

Link to the article:

Updated Mortality Tables to Boost Pension Liabilities

Separately, it seems to me that if your pension calculation is tied to US Treasury 30-year yield (or similar) that now might be a "cheap" time for companies to unload, although maybe this is a wash between the company and the insurance company backing the annuity.

Anyway, interesting.

 

[unno2002]

Aspects to consider:

If you take the lump, do you pay tax on the entire distribution in one year, for a net one time yield of?

If you take the monthly, how long does it continue if you die?

If you take the lump, and purchase an annuity, what are the terms for the end of the annuity?

What is your health?

Do you need/want to leave assets to heirs?

Personal babble:

$364,000 (assumed full payment without tax). We've bought rentals with numbers like the following:

[FONT=&quot]In early 2013 we purchased a rental house for $77,500. It is a 2 bedroom, 1 bath, 1 car garage, red brick structure. It is rented for $805/month. After tax, insurance, etc. it’s providing around $7000 a year ($583/month). The net rent represents around 9% annual "cash flow", with (hopefully) additional inflation return in the value of the property. [/FONT]
[FONT=&quot]$364,000 divided by $77,500 would be 4.7 such units. Call it just 4 units, with $54,000 of spare cash in an account. It is "only" $2332/month net income. Yes, less than a $2,700 monthly pension. But how does owning 4 physical assets, with potential for rent increases, which can be left to heirs compare to the potential pension?[/FONT]

 

[Big_Hitter]

unless you roll it over that lump sum is generally taxable with a 10% excise tax in certain situations

 

[Big_Hitter]

(please don't take that as tax advice)

 

[kgryfon]

$364,000 (assumed full payment without tax). We've bought rentals with numbers like the following:

[FONT=&quot]In early 2013 we purchased a rental house for $77,500. It is a 2 bedroom, 1 bath, 1 car garage, red brick structure. It is rented for $805/month. After tax, insurance, etc. it’s providing around $7000 a year ($583/month). The net rent represents around 9% annual "cash flow", with (hopefully) additional inflation return in the value of the property. [/FONT]
[FONT=&quot]$364,000 divided by $77,500 would be 4.7 such units. Call it just 4 units, with $54,000 of spare cash in an account. It is "only" $2332/month net income. Yes, less than a $2,700 monthly pension. But how does owning 4 physical assets, with potential for rent increases, which can be left to heirs compare to the potential pension?[/FONT]

Just curious - where are you finding properties like that?

 

[kgryfon]

PB4Uski, where did you find the calculator to create that chart? I'd like to run one for my own situation. Thanks!

 

[pb4uski]

PB4Uski, where did you find the calculator to create that chart? I'd like to run one for my own situation. Thanks!

I assume that you're talking abut the table on post #33 of this thread? If so, it is simply an Excel spreadsheet using the =RATE function within Excel that calculates the interest rate implicit in a time zero negative cash outflow for the premium paid and positive cash inflows for the monthly benefits for a given number of years.

 

[Brat]

I don't know about kgryfon but I would be lost about how to use that spreadsheet to compare options. Perhaps the poster would share what s/he thinks are the more attractive options for the sharp pencils on the forum to comment upon.

 

[2B]

Just curious - where are you finding properties like that?

It's a lot of work and you are responding to a "best case" scenario.

I've never gotten into the rental business but I looked at it. I'm not saying I won't but I doubt I will. I've known a number of people that are/have been in it. They work very hard at it. It's a real job and anyone that gives you impression they just sit back and collect checks is blowing smoke.

You have to know the rental market in your area. You have to specifically target where the renters want to rent. You have to find below market houses. That usually means fixer uppers. You apply capital there and/or sweat equity.

You have to price your property correctly or you won't get any applicants which is why you needed a below market cost. Renters have to been carefully checked out to minimize the number of deadbeats and vandals.

You have to chase down non-payments. You have to keep up with maintenance issues and pet restrictions. Most laws favor tenants so non-payments could drag out for months is a tenant knows how to pull the legal strings.

After each tenant a certain amount of maintenance needs to be done. After 15 or 20 years, the property is probably in need of a major make over.

Don't let anyone kid you. Being a landlord is work, work, work. There are assets to protect that can rise and fall in value with the local market. There is cash flow to maintain which requires a steady stream of tenants. Maintenance happens.

 

[pb4uski]

I don't know about kgryfon but I would be lost about how to use that spreadsheet to compare options. Perhaps the poster would share what s/he thinks are the more attractive options for the sharp pencils on the forum to comment upon.

You could use the Annual Interest Rate section of this calculator.

Present Value of an Annuity Due Calculator

If you input the upfront premium as the present value, the annual benefits as the payment and the number of years, it will compute the implicit interest rate. It will not exactly match the table because the tables uses monthly cash flows rather than annual cash flows but it will be close enough for making a decision.

If you want the interest rate based on a monthly benefit, substitute the monthly benefit for the annual benefit and then take the interest rate result and multiply that result by 12.

If you are doing it this way rather than using Excel, you could just calculate the rate at 5 year intervals to get a sense of the internal rate of return should you live to a certain age.

 

[nun]

I've never gotten into the rental business but I looked at it. I'm not saying I won't but I doubt I will. I've known a number of people that are/have been in it. They work very hard at it. It's a real job and anyone that gives you impression they just sit back and collect checks is blowing smoke.

You have to know the rental market in your area. You have to specifically target where the renters want to rent. You have to find below market houses. That usually means fixer uppers. You apply capital there and/or sweat equity.

You have to price your property correctly or you won't get any applicants which is why you needed a below market cost. Renters have to been carefully checked out to minimize the number of deadbeats and vandals.

You have to chase down non-payments. You have to keep up with maintenance issues and pet restrictions. Most laws favor tenants so non-payments could drag out for months is a tenant knows how to pull the legal strings.

After each tenant a certain amount of maintenance needs to be done. After 15 or 20 years, the property is probably in need of a major make over.

Don't let anyone kid you. Being a landlord is work, work, work. There are assets to protect that can rise and fall in value with the local market. There is cash flow to maintain which requires a steady stream of tenants. Maintenance happens.

Rental investing doesn't have to hard work or difficult. I would never have done it if it was as you describe it. You can do it on a small scale and do nicely. In 1997 I bought a two family house in a good neighbourhood close to several colleges and high tech industries. I live in the upstairs apartment and rent out below. That way I can keep an eye on the place and only have to deal with a single renter. It has always been occupied, never a late check, the maintenance isn't hard and now that the mortgage is paid off the rental income covers half of my expenses.

 

[nun]

I assume that you're talking abut the table on post #33 of this thread? If so, it is simply an Excel spreadsheet using the =RATE function within Excel that calculates the interest rate implicit in a time zero negative cash outflow for the premium paid and positive cash inflows for the monthly benefits for a given number of years.

RATE function works, or you can just compound some starting principal at an interest rate and make annual withdrawals for a number of years and see when the pot goes to zero for various combinations of the variables. There are also lots of annuity and present value type calculators on line that will give you the present value of a stream of payments over a number of periods for a given interest rate.

 

[Brat]

Investing a lump sum in a Vanguard fund such as Dividend Appreciation, High Dividend, Wellesley Income, Lifestrategy Income, or in an REIT such as Realty Income Corp (you really need to check the 'horse's mouth' of any REIT as some are really mortgage investment firms and we all know how well that worked out) may be a better long term choice.


The minus of this approach is that if you can't keep it in an IRA it isn't protected from attachment (bankruptcy). Annuities are typically treated as a pension and protected. A lot depends on your state laws.