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WR calculation for Pension
Old 02-20-2011, 07:21 AM   #1
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WR calculation for Pension

Been puzzled for awhile with a spreadsheet that I use to look at retirement options and possible WRs. I can either take pension as annuity or as lump sum. When I compare the WR for the two options, the annuity always looks better (looking solely at initial WR).

Did some quick math taking pension amount and dividing it into the lump sum, this gives me a rate of 6.5%, which probably explains why my WR looks better with the pension option.

Does this just show the shared risk that the annuity assumes, ie - a higher WR is achievable for them since the risk is spread amongst so many people? If we take the lump sum and we don't have a pool of individuals to spread the risk across, then we have to use a lower WR to be safe?

In other words, the pension can "pay out" 6.5% safely, while an individual must be at or under 4%.

I realize that taking the lump means hoping that the company will stay solvent etc.

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Old 02-20-2011, 07:39 AM   #2
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When modeling... it depends on the assumptions. One of the variables is life expectancy.

I would suggest you do several models with different variables for the assumptions (e.g., life expectancy, inflation, etc).

Lump or annuity depends on your situation.... circumstances can always change in the future... the modeling should help you better understand the impact (positive or negative) of those non-determinant situations....

I have a pension and intend to take the annuity (my plan is well funded).

IMO - it reduces my risk by lowering my WR% and ensures that DW and I will have an income payment if we experience investments losses or suffer other adverse life events that may cause certain types of financial impact.... mitigate my risk. Many people get hung up on the real or opportunity cost of risk mitigation (healthy fear)... they often confuse it as a purely investment oriented decision (desire for more).
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