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monthly pension vs. lump sum
Old 11-20-2007, 01:22 PM   #1
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monthly pension vs. lump sum

My wife will be offered a choice of a monthly pension of ~$48k a year or a lump sum payment of ~500k. She is employed by a large national bank. Which one should we take and why?

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Old 11-20-2007, 01:28 PM   #2
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Do you have the option of a joint and survivor at 50% payout?
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Old 11-20-2007, 01:35 PM   #3
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Is the pension COLA'ed? What is your wife's age?
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Old 11-20-2007, 01:53 PM   #4
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How old is your wife? In general it appears to me the yearly payout is far superior and better than you could get with any annuity assuming your wife is within the 55-65 age bracket. A relatively "safe" 4 percent withdrawl rate on the 500K would result in 20K per year meaning you could/should use that as your retirement income level and increase with inflation and bank the remainder 28K less any taxes in savings for future years.

I calculate on my excel sheet if you assume 4% inflation 40% marginal tax on the amount over the inflated 20K each year that would be available for savings and ability to earn 5.5% on the balance that it will be 23 years before the $48,000 per year will be insufficient to meet the inflated 20K per year demand. At that time the balance assuming 5.5% after tax earnings on the after tax money would be 501K while the balance on the original 500K would be 361K. At a 6.3% after tax return is required for the balances after 23 years are equal, yet you would still be receiving the $48,000 per year from the pension, so I think you can see the 48K is a far greater value.
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Old 11-20-2007, 02:01 PM   #5
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$48K annual pension? Will she marry me?
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Old 11-20-2007, 02:10 PM   #6
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My wife will be offered a choice of a monthly pension of ~$48k a year or a lump sum payment of ~500k. She is employed by a large national bank. Which one should we take and why?

kbst
Lots of good explanations already mentioned for $48K pension probably the good choice.

Another reason, if she takes the lump, then she and you have to worry about *managing* that lump or paying someone to manage it for you, and making it last the rest of her and maybe your lives.

Assuming the pension is from a large pension fund, it already has the professional management, which by the way is "free of charge", as her $48k pension is net of all fund management expenses.

Unless she is in ill health with very short life expectancy, or she is already 92 or something, the the lump amount promised does not live up to the $48k monthly pension.

One other thought---what is the funded ratio of the pension plan. That is, how fiscally sound is it? Assuming that checks out, go for the monthly. If there are serious questions on the financial well-being of the plan over the longhaul, then consider the lump.
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Old 11-20-2007, 02:17 PM   #7
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I will have this option as well, and one issue I have considered is that if my wife and I are both killed in an auto accident (as an example) 6 months after I retire, my monthly pension is gone... If, however, I take it as a lump sum, it's mine and my estate's to do with or invest as I will. Another issue is that should you need a large influx of cash, (due to illness, as another example) you won't be able to get it from the monthly payment, but you could tap the lump sum. Mine is a non-cola pension...
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Old 11-20-2007, 02:27 PM   #8
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I will have this option as well, and one issue I have considered is that if my wife and I are both killed in an auto accident (as an example) 6 months after I retire, my monthly pension is gone... If, however, I take it as a lump sum, it's mine and my estate's to do with or invest as I will. Another issue is that should you need a large influx of cash, (due to illness, as another example) you won't be able to get it from the monthly payment, but you could tap the lump sum. Mine is a non-cola pension...
Life is a gamble I agree. One thing DW and I have done to cover this possibility is take out life insurance to cover this as I wil be taking the pension in a couple of years time, and also opting for a 25% survivor benefit as the difference is greater than the life insurance premiums.

In the example in this thread the choice is between $48k/year or $500K lump sum. I'm sure I would take the $48k/year plus take out life insurance. The amount of insurance needed will be dependent on the survivor benefit, which is one of the 1st questions asked.
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Old 11-20-2007, 02:29 PM   #9
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Do you have the option of a joint and survivor at 50% payout?
There is that option with a lower annual payout ~ 40k
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Old 11-20-2007, 02:30 PM   #10
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Is the pension COLA'ed? What is your wife's age?
It isn't COLA'ed. She's 59 and will take the pension at 62.
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Old 11-20-2007, 02:34 PM   #11
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There is that option with a lower annual payout ~ 40k
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I'd take that option, just in case. Do you NEED the entire $40K or $48K to meet expenses?

Lots of options.
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Old 11-20-2007, 02:34 PM   #12
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How old is your wife? In general it appears to me the yearly payout is far superior and better than you could get with any annuity assuming your wife is within the 55-65 age bracket. A relatively "safe" 4 percent withdrawl rate on the 500K would result in 20K per year meaning you could/should use that as your retirement income level and increase with inflation and bank the remainder 28K less any taxes in savings for future years.

I calculate on my excel sheet if you assume 4% inflation 40% marginal tax on the amount over the inflated 20K each year that would be available for savings and ability to earn 5.5% on the balance that it will be 23 years before the $48,000 per year will be insufficient to meet the inflated 20K per year demand. At that time the balance assuming 5.5% after tax earnings on the after tax money would be 501K while the balance on the original 500K would be 361K. At a 6.3% after tax return is required for the balances after 23 years are equal, yet you would still be receiving the $48,000 per year from the pension, so I think you can see the 48K is a far greater value.
She's 59 and will take the pension at 62. 2 years after we retire. So the only way we could go wrong with the monthly pension is if inflation is very high?
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Old 11-20-2007, 02:35 PM   #13
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$48K annual pension? Will she marry me?
hope not
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Old 11-20-2007, 02:36 PM   #14
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She's 59 and will take the pension at 62. 2 years after we retire. So the only way we could go wrong with the monthly pension is if inflation is very high?
kbst
Well, SS is COLA'd to "some extent", and I guess we are assuming your have funds in the market, like 401K's or non-qualified mutual funds as an inflation hedge??
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Old 11-20-2007, 02:37 PM   #15
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It isn't COLA'ed. She's 59 and will take the pension at 62.
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Another thought is what other assets do you and DW have? If you will already be getting sufficient income to live comfortably without a pension for her, that might point you toward lump.

But just from a pure finanacial standpoint of maximizing total dollars to be received, all other things being equal, the $40k with survivorship or the $48k single life monthly pension both look better to me than the $500k lump.
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Old 11-20-2007, 02:37 PM   #16
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Lots of good explanations already mentioned for $48K pension probably the good choice.

Another reason, if she takes the lump, then she and you have to worry about *managing* that lump or paying someone to manage it for you, and making it last the rest of her and maybe your lives.

Assuming the pension is from a large pension fund, it already has the professional management, which by the way is "free of charge", as her $48k pension is net of all fund management expenses.

Unless she is in ill health with very short life expectancy, or she is already 92 or something, the the lump amount promised does not live up to the $48k monthly pension.

One other thought---what is the funded ratio of the pension plan. That is, how fiscally sound is it? Assuming that checks out, go for the monthly. If there are serious questions on the financial well-being of the plan over the longhaul, then consider the lump.
How wouild you find out what the funded ratio is?
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Old 11-20-2007, 02:39 PM   #17
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How wouild you find out what the funded ratio is?
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It should be available from the folks who are running the pension plan, or maybe a quick call to HR.

Most banks are good at putting aside enough to meet their pensioner's ongoing payments.........
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Old 11-20-2007, 02:42 PM   #18
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I will have this option as well, and one issue I have considered is that if my wife and I are both killed in an auto accident (as an example) 6 months after I retire, my monthly pension is gone... If, however, I take it as a lump sum, it's mine and my estate's to do with or invest as I will. Another issue is that should you need a large influx of cash, (due to illness, as another example) you won't be able to get it from the monthly payment, but you could tap the lump sum. Mine is a non-cola pension...
Well, If you also have a $500K or 48K per year option that means with cash of 1 mil. for both of you your safe WR of 4% is 40K/yr. vs. 96K/yr. pension.

I would just save $56K/yr. to pay for unknown things or to build up an estate.
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Old 11-20-2007, 02:43 PM   #19
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I'd take that option, just in case. Do you NEED the entire $40K or $48K to meet expenses?

Lots of options.
We don't really need it all as we will have ~120k income with ~80k expenses after 2 years. We are thinking seriously about taking the 50% surviver option as I'm 12 years younger.
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Old 11-20-2007, 02:43 PM   #20
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There is that option with a lower annual payout ~ 40k
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The difference between the 2 options is $8k/year. Insurance policy to cover you for $500K may well be much less than that, I'd look into that before deciding. With 40k/year, and she dies you get $20k/year. If you get a $500K policy for $4k/year you still get equivalent of $20k/year but you have an extra $4k/year while she is still alive.
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