Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Lump sum of 500K or $3500 PM @ age 65
Old 01-11-2017, 08:18 AM   #1
Confused about dryer sheets
 
Join Date: Nov 2015
Posts: 7
Lump sum of 500K or $3500 PM @ age 65

I am still trying to find a lump sum retirement number from my HR (without giving them any hints that I dream ER @ 55). Here is my story:

42 years old and plan to retire at 55. Questions (primarily for planning purpose):

When I retire at 55 and if my employer offers me a lumpsum of 500K (it will be approx. this amount) or a $3500 PM starting at 65 with COLA- which one should I take and why?

Thanks in advance!
__________________

__________________
MN_1021 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-11-2017, 08:37 AM   #2
Recycles dryer sheets
 
Join Date: Oct 2006
Posts: 444
If it were me it would depend on what other retirement investments I would have in addition to the lump sum/pension offer. If I already had a lot of retirement investments I would probably take a lump sum and invest it.

There are certainly other considerations, a COLA is good but how solid is the pension, is it well funded? Are you married and is there a option for her if she outlives you? Do you have children that you want to leave an inheritance? Really need more details.
__________________

__________________
***********
My motto is.... "a dollar saved is better than a dollar earned. I don't pay tax on the dollar I saved."
Tom52 is offline   Reply With Quote
Old 01-11-2017, 09:22 AM   #3
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,461
Quote:
Originally Posted by MN_1021 View Post
I am still trying to find a lump sum retirement number from my HR (without giving them any hints that I dream ER @ 55). Here is my story:

42 years old and plan to retire at 55. Questions (primarily for planning purpose):

When I retire at 55 and if my employer offers me a lumpsum of 500K (it will be approx. this amount) or a $3500 PM starting at 65 with COLA- which one should I take and why?

Thanks in advance!
If we assume you live to 85 (average for someone age 65, a year less for a man and year longer for a woman) and that COLA is 2%. Then if you take the $500k at age 55, invest it and start taking $3500/month from it at age 65 you need to average an annual 3.3% return to equal the income from the pension. If you can give us the lump sum you'd expect at age 65 we could calculate the discount rate on the pension, but as it stands if you think you can get better than 3.3% and are ok without the longevity risk insurance aspect of the pension then take the lump sum. But you should have other funds to span the gap from age 55 to 65.
__________________
Occupy ER <=>
“So we beat on, boats against the current, borne back ceaselessly into the past.”
"The needs of the many outweigh the needs of the few, or the one." - Spock
Current AA: 60% equity funds / 20% Bonds / 15% cash & Stable Value / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 01-11-2017, 09:54 AM   #4
Thinks s/he gets paid by the post
nash031's Avatar
 
Join Date: Jun 2013
Location: Coronado
Posts: 1,296
Lots of factors:

- Do you need the money at 55?
- How long do you expect to live/any immediate medical concerns?
- How would you invest the lump sum?
- What do the rest of your assets look like? Do you have significant monthly income elsewhere or are you relying solely on sale of invested assets to generate income? Social Security?

The longer you live, the more valuable the COLA pension. Obviously, if you have a family history of early demise for your gender, or you have an individual medical condition which might limit your life expectancy, the lump sum becomes more attractive.

Some quick, crude back of the napkin calculations show that someplace around 15 years (age 80) may be the crossover point where the pension becomes more valuable, but as nun pointed out, that depends largely on how the lump sum is invested and the assumptions you make regarding the pension itself. I like to model my (expected) pension as an equivalent annuity and compare value that way, but others like to make it a portion of their portfolio based on their preferred withdrawal rate and see what the equivalence would be.

As nun said, generally the pension provides longevity insurance. If you think you need it, that's the way to go. If not, you can possibly/probably(?) do better with the lump sum.

But it's really an impossible question to answer on limited information, and there's a different answer appropriate for each individual situation.
__________________
"So we beat to our own drummer in the sun;
We ask for nobody's permission to run.
I just wanna live in a world like that;
Now I'm gonna live in a world like that!" - World Like That, O.A.R.
nash031 is offline   Reply With Quote
Old 01-11-2017, 01:36 PM   #5
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 1,042
The pension payout rate is 8.4% of the lump sum. That is better than any annuity you could get and will last for life. Well worth considering.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 01-11-2017, 01:36 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 3,026
My main question is how solid the pension provider is.
A lot can happen to a pension plan over a 30-40 year period.
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is offline   Reply With Quote
Old 01-11-2017, 02:03 PM   #7
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,461
Quote:
Originally Posted by DrRoy View Post
The pension payout rate is 8.4% of the lump sum. That is better than any annuity you could get and will last for life. Well worth considering.
The payout is at age 55 and the pension starts at age 65 so you have to compound the payout to age 65 to do an honest comparison. If we use a number like 5% to compound $500k over 10 years we get $814k and the payout rate then would be around 4.7%......which is sensible.
__________________
Occupy ER <=>
“So we beat on, boats against the current, borne back ceaselessly into the past.”
"The needs of the many outweigh the needs of the few, or the one." - Spock
Current AA: 60% equity funds / 20% Bonds / 15% cash & Stable Value / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 01-12-2017, 03:07 PM   #8
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by nun View Post
If we assume you live to 85 (average for someone age 65, a year less for a man and year longer for a woman) and that COLA is 2%. Then if you take the $500k at age 55, invest it and start taking $3500/month from it at age 65 you need to average an annual 3.3% return to equal the income from the pension. If you can give us the lump sum you'd expect at age 65 we could calculate the discount rate on the pension, but as it stands if you think you can get better than 3.3% and are ok without the longevity risk insurance aspect of the pension then take the lump sum. But you should have other funds to span the gap from age 55 to 65.
This is the way I'd look at it too...run two present value calculations. One will be the lump sum, the other will be a stream of $3,500 payments discounted at some rate...play with the rate or make an assumption.

One other consideration though...I think it's always good to have SOME money set aside that can NEVER run out...in case you live to 105. Maybe it's a small amount so you can at least eat and stay warm...but if you have no other funds that will serve this purpose...maybe this can be it.
__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
Finance Dave is offline   Reply With Quote
Old 01-12-2017, 03:23 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 13,703
Here is a way that I would look at it... if you live to certain ages then what is your "return" and do you expect that you can earn that return investing it yourself. In your case the returns are real returns since the pension benefits are COLA adjusted (assuming that COLA and inflation are about the same).

For the purpose I assumed the worst case... that if you die before you begin benefits that you get nothing (don't know if you are married or not or what the survivorship benefits are if you die before or after benefits begin).

So if the benefits were joint then I would wait and take the pension since I think it is likely that either DW or I will live to our early 90s and I don't think I could beat a 3-4% annual real return over 35 years but it might be a close call.


Age Cash flow IRR
55 (500,000)-100.0%
56 - -100.0%
57 - -100.0%
58 - -100.0%
59 - -100.0%
60 - -100.0%
61 - -100.0%
62 - -100.0%
63 - -100.0%
64 - -100.0%
65 - -100.0%
66 42,000 -20.2%
67 42,000 -14.3%
68 42,000 -10.8%
69 42,000 -8.3%
70 42,000 -6.4%
71 42,000 -4.9%
72 42,000 -3.7%
73 42,000 -2.7%
74 42,000 -1.8%
75 42,000 -1.1%
76 42,000 -0.5%
77 42,000 0.0%
78 42,000 0.5%
79 42,000 0.9%
80 42,000 1.3%
81 42,000 1.6%
82 42,000 1.9%
83 42,000 2.2%
84 42,000 2.4%
85 42,000 2.6%
86 42,000 2.8%
87 42,000 3.0%
88 42,000 3.1%
89 42,000 3.3%
90 42,000 3.4%
91 42,000 3.5%
92 42,000 3.6%
93 42,000 3.7%
94 42,000 3.8%
95 42,000 3.9%
96 42,000 4.0%
97 42,000 4.1%
98 42,000 4.1%
99 42,000 4.2%
100 42,000 4.2%
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
pb4uski is offline   Reply With Quote
Old 01-12-2017, 03:56 PM   #10
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 3,469
Quote:
Originally Posted by MN_1021 View Post
When I retire at 55 and if my employer offers me a lumpsum of 500K (it will be approx. this amount) or a $3500 PM starting at 65 with COLA- which one should I take and why?
depends - what is the employer's lump sum calculation basis and what is the COLA basis?

plans subject to IRC 417e must take into account an estimate of the COLA when a lump sum is paid
__________________

__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Savita Subramanian S&P 500 at 3500 by 2025 : formerly Bogle's 10-Year Forecast eta2020 FIRE and Money 10 11-28-2015 02:04 AM
So, do you feel your age? Act your age? Like your age? vickko Life after FIRE 84 04-10-2010 02:47 PM
Lump sum to invest, DCA in or go lump? Olav23 FIRE and Money 4 03-03-2007 04:22 PM
Lump sum investment Billy FIRE and Money 7 04-17-2004 05:13 PM
Annuity vs Lump Sum Pension moguls FIRE and Money 5 05-26-2003 03:09 PM

 

 
All times are GMT -6. The time now is 07:03 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.