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Pension Decision You Decide
Old 05-02-2013, 10:32 AM   #1
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Pension Decision You Decide

I am getting ready to make a big decision and FIRE ! Mega Corp is offering the following choice with various options from A to C. I am familiar with many of the pros and cons of each choice and have pretty much decided. Which one would you choose? Just doing a sanity check before I make the big leap. Married age 57 DW age 60 children have flown coop. Thanks for your advise.


A. Mega Corp Lump Sum $549,154

Immediate Annuity for Lump Sum: 31032 5.65%

B. Mega Corp Single Life Annuity (no joint survivor) $34632

Immediate Annuity for Lump Sum to receive $34632: $7,352,242 5.65%

C. Mega Corp 100% Joint Life Annuity with 5% Inflation Protection: $24936

20 Year Term Life Policy for $5,000,000 cost $1510…if I went with option B.

Am I correct that the 5% inflation protection only kicks in if inflation is greater than 5%? I will confirm with HR.
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Old 05-02-2013, 11:21 AM   #2
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Choice B along with the Term Policy is the way to go. Then either be really nice to DW or hide all the kitchen knives...
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Old 05-02-2013, 11:38 AM   #3
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I believe "5% inflation protection" means your annual benefit increases by the lesser of the CPI or 5% -- basically one that provides a COLA but not more than 5% in a year.
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Old 05-02-2013, 02:09 PM   #4
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Obviously your choice will depend on your overall financial situation.

DH retired 3 years ago and he had a somewhat similar choice - either a lump sum of just over a million or a single life pension or pension with survivorship (no COLA). In our case, we had no difficulty at all choosing to take the lump sum. Our reasons:

1. While the company was in good shape in its pension fund, retirement is for a long time and the company could always go under.
2. Yes, there is the PBGC. However, if he took a single life pension he was above their max guarantee amount. If he took the 100% survivor option (he is older than me by several years), then the PBGC would only grant a 50% survivor option. So we didn't like any of that. And, of course, who knows how solvent the PBGC would be over the long term.
3. While DH and I both had 401ks, if we took the pension we would likely have to spend down much of the 401ks in the short terms since due to kids still at home we would have high expenses for about 6 years after DH retired. Also, we had some one time expenses that we were going to have that would require some lump sums. The pension wouldn't cover all that so we would have to take from the 401ks and then we would end up when the kids are gone with not a lot of financial reserves left. And we didn't like that.

So - for us - we felt the lump sum was the better way to go. On the other hand, I sometimes see people here where the pension is not that essential and is just a nice to have on top of extensive 7 figure portfolios. In that situation, I might easily have made a different decision.
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Old 05-02-2013, 04:01 PM   #5
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I agree most likely the 5% cola is the annual limit of the amount the pension can increase due to inflation in any given year and that is the choice I would reccomend. Over a 30-40 year probable retirement that will be very handy and will provide 13.6% more than the lump sum would provide with a 4% withdrawl rate. By year 30 at an average 3% inflation the pension would provide 60K per year.
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Old 05-02-2013, 04:06 PM   #6
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Quote:
Originally Posted by Katsmeow View Post
Obviously your choice will depend on your overall financial situation.

DH retired 3 years ago and he had a somewhat similar choice - either a lump sum of just over a million or a single life pension or pension with survivorship (no COLA). In our case, we had no difficulty at all choosing to take the lump sum. Our reasons:

1. While the company was in good shape in its pension fund, retirement is for a long time and the company could always go under.
2. Yes, there is the PBGC. However, if he took a single life pension he was above their max guarantee amount. If he took the 100% survivor option (he is older than me by several years), then the PBGC would only grant a 50% survivor option. So we didn't like any of that. And, of course, who knows how solvent the PBGC would be over the long term.
3. While DH and I both had 401ks, if we took the pension we would likely have to spend down much of the 401ks in the short terms since due to kids still at home we would have high expenses for about 6 years after DH retired. Also, we had some one time expenses that we were going to have that would require some lump sums. The pension wouldn't cover all that so we would have to take from the 401ks and then we would end up when the kids are gone with not a lot of financial reserves left. And we didn't like that.

So - for us - we felt the lump sum was the better way to go. On the other hand, I sometimes see people here where the pension is not that essential and is just a nice to have on top of extensive 7 figure portfolios. In that situation, I might easily have made a different decision.
PBGC Benefit Payment Options, Annuities for Trusteed Pension Plans

I think if you have chosen 100% survivor PBGC also grants that, at least that's how I take it from their web site. It depends on if you have already selected that option.
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Old 05-02-2013, 04:21 PM   #7
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Seems like it would only take about 6 years for increasing C to provide more purchasing power than decreasing B with 3% inflation.
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Old 05-02-2013, 04:44 PM   #8
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Assuming the interpretation of the 5% inflation protection of the above posters is right (sounds reasonable, but before deciding you definitely need to check), then option "C" is the equivalent of a 4.5% withdrawal rate (very nice!), but without the upside that one might get if the return on the lump sum turned out to be higher than inflation + 4.5% (extremely unlikely in any case).

There is a remote risk that inflation might exceed 5% for many years in row at some point in your lifetime (), but on the other hand, your longevity greatly exceeding the average life expectancy does not create a financial risk .

So, assuming that your Megacorp plan is a solid one and the above interpretation of the inflation protection (check!) is the correct one rather than your initial interpretation, then option C is the one I would pick.
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Old 05-02-2013, 05:12 PM   #9
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One thing I considered when choosing our pension options was the lifeexpectancies of DW and myself based on family history. Men in my family live to about 75, women in hers average over 90, and she had two aunts who made it over a hundred. Having no knowledge of your family medical history makes it a bit difficult to choose

What are her benefits if she outlives the 20 year insurance policy? I'm curious, also, anoit the $1510 premium. is that annual?

For our situation, I'd go for option B, depending on the payout should DW exceed the maturity of the insurance policy.

If you can survive on the lower initial payout of C, then do so and invest the difference. ($8000 per year after insurance premium?)
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Old 05-02-2013, 05:23 PM   #10
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To the OP: have you tried this http://www.immediateannuities.com/ and compared options?
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