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Pension too good to be true?
Old 02-29-2008, 05:42 PM   #1
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Pension too good to be true?

I am not relying on a pension, but I do have a small one from a previous employer. WRT the pension, the best time for me to retire is age 61 at which time I will have the option of $901/month for life (no COLA) or a lump sum of $123,500. My intent was always to take the lump sum.

But as I get closer I started looking at it as a nest egg and SWD. Most of what I read suggests a 4% withdrawal rate (not looking to debate the %) would provide good odds of a monthly income lasting more than 30 years. So a $123,500 lump sum at a 4% withdrawal rate would yield $411/month ($125,000 x .04 / 12 month/yr) at the outset. Assuming 3% COLA increase, it would be 28 years before the monthly amounts would be equal and 48 years before the total payout would tip in favor of the lump sum (I hope I don't live that long frankly). That suggests to me I'd have to be brain dead to not take the $901/month instead of the lump sum, over twice as much per month to start and guaranteed not to run out before I die. What am I missing?
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Old 02-29-2008, 05:55 PM   #2
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How confident are you that the pension fund will survive and payout as advertised?

DD
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Old 02-29-2008, 05:59 PM   #3
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What am I missing?
The $123,500 But seriously, if you are not worried about leaving an inheritance to anyone, the company is a good financial risk (I think PBG probably covers that small an amount), and you have other assets growing to cover inflation, then the pension payments can be a good deal for you. You are benefitting at the expense of your short lived co-workers Just make sure you are not one of them
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Old 02-29-2008, 06:01 PM   #4
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But as I get closer I started looking at it as a nest egg and SWD. Most of what I read suggests a 4% withdrawal rate (not looking to debate the %) would provide good odds of a monthly income lasting more than 30 years. So a $123,500 lump sum at a 4% withdrawal rate would yield $411/month ($125,000 x .04 / 12 month/yr) at the outset. Assuming 3% COLA increase, it would be 28 years before the monthly amounts would be equal and 48 years before the total payout would tip in favor of the lump sum (I hope I don't live that long frankly). That suggests to me I'd have to be brain dead to not take the $901/month instead of the lump sum, over twice as much per month to start and guaranteed not to run out before I die. What am I missing?
The main question is: Do you want to pass anything to your heirs or spend it all yourself? If you don't want to pass anything to your heirs, in your case an annuitized payout such as a monthly pension can beat the pants off of the lump sum.

But on the other hand, if you don't need the money and you want to pass something to your heirs, taking the lump sum and investing it until the day you die might make more sense.

I'd also add that you don't say whether you are married or single, and if you're married, does the pension include survivor benefits? And if it does, is it 50%, 66 2/3%, 100% joint and survivor or something else?

For grins, I went to the BRK Direct site (from Berkshire Hathaway which is AAA-rated and A++ with A.M. Best) to see what the monthly annuity payments would be for a 61-year-old under various scenarios with a $123,500 investment:

EZ quote

* Male and no survivor benefit (born 1/1/1947): $726 per month
* Female and no survivor benefit (born 1/1/1947): $680 per month
* Married with 100% joint and survivor benefit (assuming both born 1/1/1947): $622 per month

Off the cuff, unless you are in poor health and have a terrible family history of longevity, taking the $901 monthly payments would seem a better idea -- IF you have confidence in the pension fund and the company backing it. There's something to be said for the bird in the hand rather than waiting for two in the bush.
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Old 02-29-2008, 06:08 PM   #5
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Yeah, this is less about how "good" the monthly payment is; and more about how "bad" the lump sum is. I'ld stick with the monthly payment.
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Phantom Value
Old 02-29-2008, 06:09 PM   #6
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Phantom Value

There is a so called "phantom value" to a pension. Meaning, how much cash it would take to give you your pension amount from a guaranteed source such a treasuries? That amount being it's "phantom value".

Mine used to be $660,000. Now all of a sudden it is $800,000.

That is a powerful argument to take the pension, in my mind.

b.
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Old 02-29-2008, 06:09 PM   #7
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Seems like your pension plan is pretty generous. Using IRS mortality tables from last year for lump sum to annuity conversion, the rate applied is almost 6.5%. It is also unreduced for early retirement.
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Old 02-29-2008, 07:36 PM   #8
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Seems like your pension plan is pretty generous. Using IRS mortality tables from last year for lump sum to annuity conversion, the rate applied is almost 6.5%. It is also unreduced for early retirement.
A subsequent letter mentioned a GATT rate of 6.5%. As for ER, eligibility begins at age 56 at 75% of monthly income and increases 5% each year to age 61 when it hits 100% --- and never goes up from there no matter how much longer I work. And for those who asked, it's just DW and I so we don't care about leaving any inheritance.
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Target AA: 60% equity funds / 35% bond funds / 5% cash
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