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Pension Options
Old 06-12-2009, 11:44 AM   #1
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Pension Options

Need guidance on deciding between the following (no COLA) pension options:

$50,200 per year for life, or
$60,400 lump sum plus $46,000 for life.

Based on employer financial strength, future prospects, etc. I consider the pension very secure, but realize there are no guarantees.

The pension will not be the only income source in retirement. There will also be a rolled-over 401K of about $700,000 and Social Security and approximately $200,000 after-tax investments.

Assume retiring right now. What factors should I be considering to decide between these pension options?

Thanks.
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Old 06-12-2009, 11:48 AM   #2
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So the marginal is $4,200 a year for $60,400 = 7%. How old are you? My gut reaction is take the $$$ upfront.
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Old 06-12-2009, 11:49 AM   #3
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Originally Posted by sophie79 View Post
$50,200 per year for life, or
$60,400 lump sum plus $46,000 for life.

...

Assume retiring right now. What factors should I be considering to decide between these pension options?
Basically you are buying another $4,200 in annual income for about $60,000. Since you are fairly certain the pension and your employer are secure, that wouldn't enter much into this decision as it may for people who work for companies like Enron and GM.

Your age, health and genetics may influence this decision. Is a non-COLA'd lifetime $4200 annual income stream worth $60,400 in current dollars?
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Old 06-12-2009, 02:57 PM   #4
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Quote:
Originally Posted by sophie79 View Post
Need guidance on deciding between the following (no COLA) pension options:

$50,200 per year for life, or
$60,400 lump sum plus $46,000 for life.

Based on employer financial strength, future prospects, etc. I consider the pension very secure, but realize there are no guarantees.

The pension will not be the only income source in retirement. There will also be a rolled-over 401K of about $700,000 and Social Security and approximately $200,000 after-tax investments.

Assume retiring right now. What factors should I be considering to decide between these pension options?

Thanks.
I guess it depends on your age and longevity estimates. You can probably get better than $4,200/yr. on an annuity depending upon your age. Check out Vanguard for an estimate.
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Old 06-12-2009, 03:02 PM   #5
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Let's say age: 62.
Health: average.
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Old 06-12-2009, 03:06 PM   #6
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I just looked at an SPIA from Berkshire Hathaway to put in the information for a female born on 1/1/1947 with no survivor income. The idea is to see how much income you can buy in an immediate annuity costing $60,400:

EZ quote

With a $60,400 investment, it currently says you can get $353 a month for life -- that's $4,236 a year for life, which is VERY close to the $4,200 a year extra you'd get by not taking the lump sum. So it sounds like your pension plan did its homework from an actuarial standpoint.

There may not be a clear-cut right or wrong answer. If you took the smaller pension with a lump sum, what would you expect to do with the money?
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Old 06-12-2009, 03:19 PM   #7
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Another thing to think about is, if you were concerned about your employer being around to pay up, or that your full pension amount is not covered by the government, an annuity might help you diversify. Most states cover up to $100,000 in annuities (and some more). However, you will have to do some investigating to get answers to the above.
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Old 06-12-2009, 07:02 PM   #8
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I'd take the $50,000 per year, and live on the $46,000 plus other income at least for the first few years- say until Medicare kicks in.

Try running the scenarios in FireCalc and see what that does for you.

And don't forget about planning for the taxes!
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Old 06-13-2009, 11:56 AM   #9
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Would it be better if he did not take the lump sum because of taxes? Sophie79 what tax bracket are you in?
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Old 06-13-2009, 12:06 PM   #10
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Without analysis my gut reaction is to take the higher pension. Bizlady has a good suggestion. And taxes could be a consideration either way.
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Old 06-13-2009, 12:14 PM   #11
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Would it be better if he did not take the lump sum because of taxes? Sophie79 what tax bracket are you in?
Most people would do a direct rollover to their IRA.
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Old 06-13-2009, 12:26 PM   #12
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Another thing to think about is, if you were concerned about your employer being around to pay up, or that your full pension amount is not covered by the government, an annuity might help you diversify. Most states cover up to $100,000 in annuities (and some more). However, you will have to do some investigating to get answers to the above.
This is well worth considering imho. Ziggy already indicated that you can probably get an annuity to provide the $4,200 difference so a bit of diversification is well worth looking into.
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Old 06-13-2009, 03:32 PM   #13
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Yet another strategy to consider (nothings ever easy). If you do not need the additional income, you could take the lump sum and roll it directly into your IRA and buy TIPS (try to get 2.5% real). This would protect that amount from inflation (which many believe is going to rear its ugly head in the future). Then at some point when rates are higher buy an annuity to bolster your pension. When I say "annuity" my recommendation would be a SPIA.
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Old 06-15-2009, 01:02 PM   #14
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I just looked at an SPIA from Berkshire Hathaway to put in the information for a female born on 1/1/1947 with no survivor income. The idea is to see how much income you can buy in an immediate annuity costing $60,400:

EZ quote

With a $60,400 investment, it currently says you can get $353 a month for life -- that's $4,236 a year for life, which is VERY close to the $4,200 a year extra you'd get by not taking the lump sum. So it sounds like your pension plan did its homework from an actuarial standpoint.
Great analysis. I would take the $$ upfront and either invest or buy annuity.

Even if the annuity plus lower pension is equal - there's a "diversification value" to splitting the income streams.

Call me a pessimist, but I think these DB pensions have more risk than people believe.
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