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Pension Lump Sum Offer
Old 10-14-2012, 09:46 AM   #1
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Pension Lump Sum Offer

I have just received a lump sum offer for a vested pension with a former employer. I have not started this pension yet so the actual payment will increase by approximately 5% every year I delay.

I am solidly in the "one year more" group. I've been FI since 2003 but I continue to soldier on because I make a profane amount of money for doing next to nothing and having no stress. The cash inflow lets DW and I spend without concern on pricey vacations. My only problem is dragging her away from the grandkids.

Here are the specifics. I am only using the single life annuity figures because the company assumed that our spouse's age was the same as the employees' so the numbers given for joint annuities don't reflect my reality. They did say that the joint annuities shown are 97% actuarially accurate. The joint figures matched well with the single life annuity I checked.

I'd like to know if people agree with my conclusion.

Lump sum offer: $163,149.02

Current single annuity: $1,154.43/mo or 13,853.16/yr (non-COLA)

Going to an online SPIA site, it would cost $224,507 for the same income stream. The company offer is 72% of this amount.

Both DW and I have excellent health. Longevity in her family is uniformly very high whereas my family history is highly variable.

As much as I dislike annuities, it seems to be in my financial best interest to turn it down. Agree? Disagree? Why? Did I leave out any relevant information?
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Old 10-14-2012, 10:21 AM   #2
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Agree, the pension seems the better deal based on what you provided and the 5% annual increase while you wait to draw is nice.

The other thing to consider is how well funded and financially strong the pension plan and sponsor are. Is the plan covered by the PBGC?
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Old 10-14-2012, 06:29 PM   #3
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I agree with you that the annuity is the way to go.

My only suggestion is that it looks like you don't need the money now and since your payments go up 5% per year, you may want to consider waiting several years before starting this pension since getting a guaranteed 5% return today is pretty good when the Fed has announced that they will be keeping interest rates low through mid 2015.
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Old 10-14-2012, 09:06 PM   #4
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The other thing to consider is how well funded and financially strong the pension plan and sponsor are. Is the plan covered by the PBGC?
I'd say it might be the only thing.
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Old 10-15-2012, 05:44 AM   #5
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It is PBGC guaranteed and it is well within the coverage limits. I definitely don't need the money now and it isn't a significant part of my retirement cash flow. The extra cash now wouldn't change any actions on my part except inclusion in my asset allocation.

The only negative to not taking it now (cash or annuity) is that if I die DW gets 50% of the single annuity amount. The plan was to go with 100% continuation which will reduce the payout to about 85% of the single annuity.
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Old 10-15-2012, 07:20 AM   #6
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If you delay the monthly payments for 5 years and collect the higher payments 5 years from now it will take over 18 years to make up the difference between the higher payments and the amount of money you would've collected for those 5 years you delayed. That means it will take over 23 years from now for you to break even.

I don't know how old you are but it seems to me that you if you are going to take the annuity, you should start collecting it immediately.
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Old 10-15-2012, 07:49 AM   #7
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I assume this is in the US.
ERISA rules determine the interest rates used to calculate such lump sums from a defined monthly pension figure.
My company uses the rate measured in august ( reported in Sept).
In january 2013 my lump sum is increasing by 15%+ based on a decline in this rate.
You should check out your figures for 2013 before comparing to the annuity market.
With the new figures my lump sum is close to the amount required to buy an annuity to cover the pension. IF I ever buy an annuity with the lump sum $ it will be when the rates are much higher than they are now.
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Old 10-15-2012, 08:44 AM   #8
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Originally Posted by Ken11 View Post
I assume this is in the US.
ERISA rules determine the interest rates used to calculate such lump sums from a defined monthly pension figure.
My company uses the rate measured in august ( reported in Sept).
In january 2013 my lump sum is increasing by 15%+ based on a decline in this rate.
You should check out your figures for 2013 before comparing to the annuity market.
With the new figures my lump sum is close to the amount required to buy an annuity to cover the pension. IF I ever buy an annuity with the lump sum $ it will be when the rates are much higher than they are now.
Good information!!! You have explained the reason for the company's current actions. My conversion is at their discretion and I do not have the ability to convert later without a new offer. Those of us qualified (whatever that means) are being given the option to take a lumpsum as a one-time opportunity. The window closes November 16. In the writeup, there are repeated references to IRS guidelines and other government documents. There is no mention of changes at the end of the year.

My annuitized benefits amount to an 8.49% payout based on their lumpsum offer. The annuity quote I got on line is closer to 6%. I suspect that if that 8.49% were generally available to buy from them. They would be overwhelmed.
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Old 10-15-2012, 08:51 AM   #9
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Originally Posted by utrecht View Post
If you delay the monthly payments for 5 years and collect the higher payments 5 years from now it will take over 18 years to make up the difference between the higher payments and the amount of money you would've collected for those 5 years you delayed. That means it will take over 23 years from now for you to break even.

I don't know how old you are but it seems to me that you if you are going to take the annuity, you should start collecting it immediately.
You bring up the same argument that can be used on when someone should take social security. My delay is basically to benefit my DW who by statistics and family history is expected to significantly outlive me. I'm still getting a regular check every two weeks and the annuity is only something to be taxed at my maximum marginal rate. Based on my expected longevity, I would be already taking the annuity and I should probably take the lump sum.

Thanks for your comment.
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