lump sum

[nun]

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.

Is Your Pension Still Safe?
How Safe Is Your Pension Plan - Consumer Reports
http://www.dol.gov/ebsa/newsroom/fsbankruptcy.html

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.

 

[Bikerdude]

is this financial advisor credentialed?

He may be but I bet he's not acting as a fiduciary.

 

[Joe0401]

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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[Midpack]

I am 57. My pension lump sum would be $364,000 or I can get a monthly payout of $2,700.

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...

 

[nun]

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

 

[pb4uski]

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
Age	n	IRR
57	0
58	1	-98.32%
59	2	-80.78%
60	3	-60.37%
61	4	-44.87%
62	5	-33.78%
63	6	-25.77%
64	7	-19.86%
65	8	-15.39%
66	9	-11.93%
67	10	-9.21%
68	11	-7.02%
69	12	-5.25%
70	13	-3.79%
71	14	-2.57%
72	15	-1.55%
73	16	-0.68%
74	17	0.06%
75	18	0.70%
76	19	1.25%
77	20	1.73%
78	21	2.15%
79	22	2.53%
80	23	2.85%
81	24	3.14%
82	25	3.40%
83	26	3.63%
84	27	3.84%
85	28	4.03%
86	29	4.20%
87	30	4.35%
88	31	4.48%
89	32	4.61%
90	33	4.72%
91	34	4.82%
92	35	4.92%
93	36	5.00%
94	37	5.08%
95	38	5.15%
96	39	5.22%
97	40	5.28%
98	41	5.34%
99	42	5.39%
100	43	5.44%

 

[nun]

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.

 

[pb4uski]

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
Age	n	IRR
57	0
58	1	-346.4%
59	2	-154.1%
60	3	-89.1%
61	4	-58.1%
62	5	-40.5%
63	6	-29.4%
64	7	-21.9%
65	8	-16.6%
66	9	-12.6%
67	10	-9.6%
68	11	-7.3%
69	12	-5.4%
70	13	-3.9%
71	14	-2.6%
72	15	-1.6%
73	16	-0.7%
74	17	0.1%
75	18	0.7%
76	19	1.2%
77	20	1.7%
78	21	2.1%
79	22	2.5%
80	23	2.8%
81	24	3.1%
82	25	3.4%
83	26	3.6%
84	27	3.8%
85	28	4.0%
86	29	4.1%
87	30	4.3%
88	31	4.4%
89	32	4.5%
90	33	4.6%
91	34	4.7%
92	35	4.8%
93	36	4.9%
94	37	5.0%
95	38	5.0%
96	39	5.1%
97	40	5.2%
98	41	5.2%
99	42	5.3%
100	43	5.3%
101	44	5.3%
102	45	5.4%
103	46	5.4%
104	47	5.5%
105	48	5.5%
106	49	5.5%
107	50	5.5%
108	51	5.6%
109	52	5.6%
110	53	5.6%
111	54	5.6%
112	55	5.6%
113	56	5.7%
114	57	5.7%
115	58	5.7%
116	59	5.7%
117	60	5.7%
118	61	5.7%
119	62	5.7%
120	63	5.8%
121	64	5.8%
122	65	5.8%
123	66	5.8%
124	67	5.8%
125	68	5.8%
126	69	5.8%
127	70	5.8%
128	71	5.8%
129	72	5.8%
130	73	5.8%
131	74	5.8%
132	75	5.8%
133	76	5.8%
134	77	5.8%
135	78	5.9%

 

[nun]

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.

 

[meierlde]

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.

 

[almost there]

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.

 

[Sittingduck]

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.

 

[nun]

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?

 

[Sittingduck]

Sorry - critical piece of information.... I am 58

 

[ReadySkiDaddy]

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).

 

[golfnut]

Invest monies in the Wellesley fund thru Vanguard. Good solid conservative (approx. 35% equities/65% bonds) mutual fund, low expenses. Been around over 40 yrs. Probably has averaged 7% annually since inception.

That's what I did with my pension lump sum ($135,000) back in 2011.

 

[2B]

The worry I have is that this pension is so far above the usual rates. Who is running this pension? My state pension has an interest rate of 5.5% which goes up to an equivalent of 7% if I get a 3% annual COLA....I can't imaging getting much better than that anywhere......so 7.9% as interest sounds very rich to me.

The reason the payout looks so good is that the lump sum being offered as the alternative is so bad. This is fairly typical with pension buyout offers. The company wants to get out of the longterm financial obligation. They know many people will jump at the lump sum. They make a low ball offer. If the OP wanted to buy an annuity with the same payout, they would pay a lot more than the lump sum offer.

I got offered a pension buyout on one of my small pensions. I think the cash offer was for about 70% of what it would take to buy an equivalent annuity. As much as I hate insurance companies and annuities, it seemed like a much better deal to keep the pension. If it had been in the 90% range, I would have taken it. You would think a "fair" buyout offer would be better than a commercial annuity since there is no commission or operating expense to be paid.

 

[nun]

The reason the payout looks so good is that the lump sum being offered as the alternative is so bad. This is fairly typical with pension buyout offers. The company wants to get out of the longterm financial obligation. They know many people will jump at the lump sum. They make a low ball offer. If the OP wanted to buy an annuity with the same payout, they would pay a lot more than the lump sum offer.

I got offered a pension buyout on one of my small pensions. I think the cash offer was for about 70% of what it would take to buy an equivalent annuity. As much as I hate insurance companies and annuities, it seemed like a much better deal to keep the pension. If it had been in the 90% range, I would have taken it. You would think a "fair" buyout offer would be better than a commercial annuity since there is no commission or operating expense to be paid.

Most companies will have to use the IRS segmented interest rates when calculating a buy out....the OP's original number did look far to low to be correct and when they looked again they found that it was actually a lot higher implying an interest rate of around 3.9% which is in line with what would be expected.

 

[pb4uski]

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).

Immediate annuities are about as simple as it gets, certainly not smoke and mirrors. The customer pays a one-time premium and receives a promise from the insurance company to pay them $x per month for their life, or $y per month for their joint life or $z per month for a stated period of time depending on the benefit option chosen. It could not get much more simple. You know what you are giving up and what you will get in return.

About the only thing that you said that makes sense is that the insurance company comes out the winner. That is usually true in that they price the contract to earn a profit by taking a spread on the investment income from investing premiums and mortality is quite predictable. But the contract holder can be a winner too if they live long in that they would get a return that is much higher than long interest rates at the time the immediate annuity is purchased and have little risk. Contract holders who die early leave money on the table that effectively goes to other contract holders who live long.

I have no idea where you get the idea of 15-20%. The insurers wish it was that profitable.

That said, I would agree that just taking the same money and putting it into a solid balanced fund and setting up automatic withdrawals is a better play, albeit with more risk. For those who are risk-averse the immediate annuity can be a good option.

 

[Midpack]

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.

Could I suggest you look at the black & white table in post #29 above and answer each row/question for yourself. You've provided the info that's most important to answer the first (most important IMO) question, but there may be more to it than just the numbers.

The questions are meant to be in order of priority, but you may weight them differently, your call.

 

[Midpack]

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).

I am NOT a fan of annuities by any means, but not all annuities are created equal, so your generalization may not apply. With annuities you're always paying for the privilege, but some are ripoffs and others not as much. You have to look at each case.

Sometimes people are offered annuity monthly payouts that are far more valuable than the lump sum option they're offered, for whatever reason the institution does not want to pony up a lump sum so they make the monthly payout offer clearly better for the recipient.

"Avoid annuities" may not apply in that situation...

Most people would consider immediate annuities one of the few that CAN be a "better deal." Variable annuities are more often considered "smoke and mirrors."

 

[nun]

Sorry - critical piece of information.... I am 58

Ok, for a single life annuity given your numbers the payout rate is 10% and your interest rate if you live to 84 will be 9.3%, and 7% if you live to 75.

Those numbers do not seem sensible to me. Either the lump sum is too low or the pension amount is too high. This is doubly true as you say your pension has a survivor benefit. If the offer is correct it's amazing. I would check again.

 

[nun]

Invest monies in the Wellesley fund thru Vanguard. Good solid conservative (approx. 35% equities/65% bonds) mutual fund, low expenses. Been around over 40 yrs. Probably has averaged 7% annually since inception.

That's what I did with my pension lump sum ($135,000) back in 2011.

That's good advice....I own psst Wellesley.....but that would not stop me from having a pension or annuity. Annuities are not investments, they are insurance, so to compare them with Wellesley is not very useful.

 

[nun]

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).

Annuities should be considered as part of your financial plan, but they are more like insurance than an investment. They provide knowable income streams and that can be useful in falling markets and if you have dependents. Today's rates make the income they generate quite low, but do not discount them all, some pensions have higher rates than commercial annuities and it is foolish to discount them entirely without doing the math and knowing someone's particular circumstances.

 

[almost there]

As all the experts are here on this, I thought I would throw mine out there.
I kept this with the Utility Co when I left as it had a 5.25% return.
For 2015 it will grow at 5%. Most everyone else rolled it into their IRA.
But I like the safe return. I can project it out into the future, but here is what it looks like if I were to take it today at 53. Non COLA. / Un Cola.
This was a huge part of the retirement plan when I joined the Co in 84.
Then it was whittled down through the yrs. based on age rather than yrs of service. Or a combination of both. Point systems etc.

Cash balance $267,959.14

annuity option.
Spouse`s Pension: $1,329.84 / $664.92
75% Contingent Annuity: $1,241.54 / $931.16
100% Contingent Annuity: $1,214.68 / $1,214.68

I have talked about this here in the past, still undecided as to which way to go.
How does this look compared to most? About average? Below average?
Thanks!