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Neighbor Has A Buyout Offer I Need Guidance
Old 09-24-2017, 07:22 PM   #1
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Neighbor Has A Buyout Offer I Need Guidance

The short story is he can get $223 a month for life starting immediately, he is 50 year old. He can get $519 a month for life at 65, or he can get $38,800 now.

They had other options starting at 55 (this is an early buy out offer). But I already discarded them.

Its from a company he hasn't worked for in years (10-15?). MY thoughts were take the 38K invest it in a direct IRA roll over in a 80/20 mix and at 59.5 he can start drawing on it however he wants. Or whenever he wants.
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Old 09-24-2017, 07:37 PM   #2
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Old 09-24-2017, 07:41 PM   #3
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$223 a month now is my vote. Maybe the buy out if he has a place and safe return to put it.
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Old 09-24-2017, 08:01 PM   #4
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I worked the numbers before, the immediate annuity pays $160 a month for life, which is worse than the company offer of $223. so the early buy out is better. Taking the money now and putting into an annuity and waiting till age 65 to get it is $347 a month, again worse than the company offer of $519. Taking the $38,800 rolling it into a 80/20 fund is the wild card. I think if he puts the 38.8k into the fund and waits till 65 , he could fund his own $519 a month non cola'd. And still have the lump sum sitting for him or his heirs. But I need a recheck.
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Old 09-24-2017, 08:44 PM   #5
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I had to do the math on a lump sum offer of a long frozen pension a year or so ago. For me, the case was similar to what your neighbor was offered - the pension payments were higher than the lump sum put towards a SPIA.

The other factor was diversification of income sources... I love the 3 legged stool model for retirement... one leg of savings/investments... one leg of SS... and one leg of pension... That way if the market tanks you still have 2 other income sources... Or if SS gets modified, you still have the pension and the investments... A little more stability. In my case even a small pension gave me a little more income diversification and stability to my retirement plan... I took the pension/annuity.
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Old 09-24-2017, 10:49 PM   #6
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I think he should take the annuity payment.

Even if he invests the $38,800 and earns 6.1% for the next 15 years without paying tax, he will only get a payment of $512/mo. for life. Not as good as the company offer.
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Old 09-24-2017, 11:07 PM   #7
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Not checked, but I did it on an annual basis...

Starting at 50 and getting $2676 a year until 90 has a NPV of $46,280 at 5%

Starting at 65 and getting $6228 a year until 90 has a NPV of $89,529...

If these are correct then it is easy to pick the best option...

If you go only to 80 it is $42K vs $67K


Start at 65....
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Old 09-25-2017, 07:42 AM   #8
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Originally Posted by Blue Collar Guy View Post
The short story is he can get $223 a month for life starting immediately, he is 50 year old. He can get $519 a month for life at 65, or he can get $38,800 now.

They had other options starting at 55 (this is an early buy out offer). But I already discarded them.

Its from a company he hasn't worked for in years (10-15?). MY thoughts were take the 38K invest it in a direct IRA roll over in a 80/20 mix and at 59.5 he can start drawing on it however he wants. Or whenever he wants.
Go to immediateannuities.com. Calculate the premium today for a SPIA paying $223/month starting in 1 month. Calculate the premium today for a deferred annuity starting in 15 years paying $519/month.

In each case you'll need to compute a payout rate using $100,000 premium and dividing the monthly payment by $100,000. Then take the $223 or $519/month and divide by the applicable payout rate to get the single premium for that monthly amount.

What you are effectively doing is computing the current value of each option... highest value wins assuming that your friend is in good health. You can assess other options available to him, like starting at age 55, similarly. In fact, I suggest that you do so because I know the sweet spot for my plan was to claim at age 60... the annual increase in benefits for waiting from 60 to 61 to 62, et al were less attractive than waiting from 55 to 60.
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Old 09-25-2017, 09:44 AM   #9
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Go to immediateannuities.com. Calculate the premium today for a SPIA paying $223/month starting in 1 month. Calculate the premium today for a deferred annuity starting in 15 years paying $519/month.

In each case you'll need to compute a payout rate using $100,000 premium and dividing the monthly payment by $100,000. Then take the $223 or $519/month and divide by the applicable payout rate to get the single premium for that monthly amount.

What you are effectively doing is computing the current value of each option... highest value wins assuming that your friend is in good health. You can assess other options available to him, like starting at age 55, similarly. In fact, I suggest that you do so because I know the sweet spot for my plan was to claim at age 60... the annual increase in benefits for waiting from 60 to 61 to 62, et al were less attractive than waiting from 55 to 60.
Thank you, Im working the math now for age 50 and then age 55-65, without your example I would not have been able to figure out how to do it.

I shouldnt have discounted the other age group payouts so fast , I think your correct about the sweet spot maybe being 60 or one of the other ages. I need to run the numbers for a definite answer.

He is in reasonably good health , we talked about that seems longevity runs in his family.

Is taking the lump sum and investing it himself with a direct IRA roll over off the table? I was leaning that way in a 80/20 mix, or a 85/15 mix. I didnt see anyone liking that one other than me.

I should add the company is solid, and its a single payer plan, so the pension guarantee insurance would be in effect if the plan does go belly up.
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Old 09-25-2017, 11:05 AM   #10
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Here is the complete option list, at age 50 its $223 a month, then you must wait till age 55 its $285, age 56 its $301, 57 its $322, 58 its $343, 59 its $379, 60 its $415, 61 its $ 446, 62 its $472, 63 its $493, 64 its $509 and lastly at 65 its $519.

Apparently the payout goes from 43% at age 50 then at 55 its 55% , then small incenses and at age 59, 60 and 61 it goes up 7 % per year if you wait, then it slows down with 3 and 2 % increases till age 65.

OK, I ran the current value as per PD4USKI's advice, seems the highest one is at age 61 @ $63,896.

I then took the 38,811 and put it into a 85/15 portfolio, it had a 93.8 % chance of success (7 failures out of 112 ).

Any thoughts?
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Old 09-25-2017, 11:21 AM   #11
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As Rodi said, this pension is but one leg of the stool. If the other two legs are sufficiently large that he doesn't need the pension $$ or investment right away, then a lump sum rolled into an IRA is a good idea. That IRA can grow significantly larger in a 10 year period.

And he'll have to pay taxes on it whenever he starts withdrawing, say at 59.5 years old. But, he'll have to take RMDs and pay taxes starting at age 70.

So what I am saying is he needs to consider his income streams over the next 20 years (age 50 to 70) and the impact to his finances. Social security fits in there as well, and staying in the 15% bracket is pretty tough when you need to take RMDs (if you have a large IRA) and Social Security can be taxed at 85% of its value depending on where his other income is coming from.

It's a puzzle, but not a difficult one to figure out.

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Old 09-25-2017, 11:42 AM   #12
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.....Is taking the lump sum and investing it himself with a direct IRA roll over off the table? I was leaning that way in a 80/20 mix, or a 85/15 mix. I didnt see anyone liking that one other than me.
...
Comparing the lump sum with the premium required to generate $223/month starting now gives you insight as to whether the lump sum offer is "fair".... most lump sum offers are not.... I'm guessing that you'll find that the lump sum is only about 75% or less of the value of the $223/month for life based on the SPIA premium that would be required to replace that $223/month benefit.

For the other, you can also calculate the premium that a 65 yo male would need to pay to get a $519/month benefit.... and then the growth rate that the $38,800 lump sum would need to achieve to provide that benefit. According to immediateannuities.com, a 65 yo male in NY would need to pay $95,580 today to get $519/month for life. Further, $38,800 would need to grow at 6.19% annually for 15 years to grow to $95,580. [=RATE(15,,-38800,95580) = 6.19%].

Will an 80/20 or 85/15 portfolio achieve 6.19%?

This is a Firecalc with $0 spending, $38,800 portfolio in 80/20 and a lump-sum withdrawal of $95,580 at the end of 15 years (in 2032) and 0% inflation. It looks to me like 2/3rds of the time that your friend would end up with at least the $95,580 needed to buy $519/month at age 65. (This assumes that annuity pricing remains constant). I'll concede that I was suprised that it was only 2/3rds given that the historical average rate of return for an 80/20 portfolio is 9.5%.... but I also ran a scenario replacing the 80/20 with Monte Carlo with an average 9.5% return, 20% variability and 0% inflation and got a similar result.

Quote:
FIRECalc looked at the 131 possible 16 year periods in the available data, starting with a portfolio of $38,800 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 131 cycles. The lowest and highest portfolio balance at the end of your retirement was $-52,433 to $279,024, with an average at the end of $45,768. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 16 years. FIRECalc found that 43 cycles failed, for a success rate of 67.2%.
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Old 09-25-2017, 11:47 AM   #13
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....I then took the 38,811 and put it into a 85/15 portfolio, it had a 93.8 % chance of success (7 failures out of 112 ).

Any thoughts?
I think you need to set inflation to zero.
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Old 09-25-2017, 12:26 PM   #14
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I want to thank everyone for all the helpful posts. I learned some new math skills during this thread. Im not ready to take my series 7 exam , but I have a few more talking points.

I will try to relate to them the different options, and let them decide. Nice couple, no children, brought us over a crystal vase when we first moved in. Always says hello to mom , and up until a few months ago, used to ring moms bell to ask if she needed anything from the market.
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Old 09-25-2017, 02:17 PM   #15
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Don't know what the applicable tax regime or tax rate is.

When I had this option I did the calculations on both a pre tax and a post tax basis.
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Old 09-25-2017, 02:30 PM   #16
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.....
For the other, you can also calculate the premium that a 65 yo male would need to pay to get a $519/month benefit.... and then the growth rate that the $38,800 lump sum would need to achieve to provide that benefit. According to immediateannuities.com, a 65 yo male in NY would need to pay $95,580 today to get $519/month for life. Further, $38,800 would need to grow at 6.19% annually for 15 years to grow to $95,580. [=RATE(15,,-38800,95580) = 6.19%].

Will an 80/20 or 85/15 portfolio achieve 6.19%?

.....
Right, this is what I did, but better explained than my earlier post where I said 6.1%.

The issue is that he is ONLY matching by getting his own annuity in 15 years with what the annuity will pay out from the company.

So frankly given the risk, I'd want a bigger payout so he has to earn 7% or 7.5% with the lump sum, which shows that is unlikely as the rate is so high.
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Old 09-25-2017, 02:33 PM   #17
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[QUOTE=brett;1942034]Don't know what the applicable tax regime or tax rate is.

Lol, glad this didn't come up in our discussions. I hardly got thru the first question of his.

I did say if and when you get the monthly payouts you have to pay taxes on it. And at 59 in NY the first 20k is tax free , he just needed to pay federal tax.
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Old 09-25-2017, 03:06 PM   #18
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Here is the part that I'd worry about. If you convince him to take the lump sum and invest it, what will be his reaction when the markets tank? Especially worrisome if he freaks out and sells at the bottom. At least a pension is guaranteed and you get a fresh chance to blow it every month.

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Old 09-25-2017, 03:08 PM   #19
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Don't know what the applicable tax regime or tax rate is.

When I had this option I did the calculations on both a pre tax and a post tax basis.
Taxes shouldn't change the decision unless one does something silly by taking the lump sum as a taxable event,
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Old 09-25-2017, 03:11 PM   #20
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Taxes shouldn't change the decision unless one does something silly by taking the lump sum as a taxable event,
+1, I did suggest that option was the worst one.
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