Commutated value of define benefit plan

[CRLLS]

Hi all,

I have two options:
1. Lump sum: $380,000
2. Joint survivor monthly pension: $1,750 for my life time / $1,100 for my spouse when I pass away
The pay out or pension will start next year.

I am inclined to choose a lump sum payment. Based on family history, 80 years old is probably the realistic estimate of my life time.
I understand the overall financial plan for retirement must be planned including all assets. However, I want to limit the discussion on these two options assuming I will have enough money for retirement. I don’t plan to retire next year.
I did simple calculation:
Every year I take out $21,000 (12*$1,750) and invest the rest of the money with 3.5 % return, I will have get 24 years.
First year: take out $21,000 and invest $329,000 ($380,000 - $21,000)
Second year: take out $21,000 and invest $319,515 ($329,900(1+ 3.5%)-$21,000)
I will be 57 years old next year. So, with only 3.5% return the lump sum payout will last until I am 81 years old.
Can someone please comment on this calculation?
Did I miss anything?
Thanks in advance.

When I run a quick calculation, you will run out of $ in 26-27 years.

Looking at immediateannuities.com you can get a joint 100% life policy at 1875/mo. Seems like a better plan IMO.

Using the trinity study, a 30 year outlook would yield 1267/mo but in year 12(assuming 3% COL raise), it would equal your base 1750/mo and increase annually from there.

So many ways to look at it, depending on those things you don't want to discuss in this thread.

 

[pb4uski]

Hi all,

I have two options:
1. Lump sum: $380,000
2. Joint survivor monthly pension: $1,750 for my life time / $1,100 for my spouse when I pass away
The pay out or pension will start next year.

I am inclined to choose a lump sum payment. Based on family history, 80 years old is probably the realistic estimate of my life time.
I understand the overall financial plan for retirement must be planned including all assets. However, I want to limit the discussion on these two options assuming I will have enough money for retirement. I don’t plan to retire next year.
I did simple calculation:
Every year I take out $21,000 (12*$1,750) and invest the rest of the money with 3.5 % return, I will have get 24 years.
First year: take out $21,000 and invest $329,000 ($380,000 - $21,000)
Second year: take out $21,000 and invest $319,515 ($329,900(1+ 3.5%)-$21,000)
I will be 57 years old next year. So, with only 3.5% return the lump sum payout will last until I am 81 years old.
Can someone please comment on this calculation?
Did I miss anything?
Thanks in advance.

There is a better way to calculate how long $380,000 could pay $1,750 a month at 3.5% interest. Use Excel's NPER formula.

=NPER(3.5%/12,-1750,380000)/12 = 28.7 years, so if you are 57 now the account would be drained when you are 85.7.

According to immediateannuities.com an $1,100 monthly benefit for a SPIA issued to a 57yo couple would cost $220,735 and a $650 monthly benefit for a 57yo male would cost $116,941, so it would cost $337,676 to buy SPIAs that replicate your pension benefits (assuming that your DW is 57).

 

[Surewhitey]

I've wondered the same thing. In your case why would you not use 4.5 or 5%? Right now treasuries are about this in 10-30yr.

That would give you ~$19k annually never touching the principal.

 

[Music Lover]

Everyone I know that has had the option in recent years has chosen the lump sum.

Obviously, it depends on what the lump sum is compared to the expected monthly benefits.

My lump sum would have given me the equivalent of about 10 years of pension income. It was a fed govt COLA pension, so I took the pension and retired at 54. I'm now 61 so have collected for 7 years. Family history suggests that I'll make it to at least mid-80's barring any unforeseen circumstances.

It was an easy decision for me.

 

[finnski1]

Hi all,

I have two options:
1. Lump sum: $380,000
2. Joint survivor monthly pension: $1,750 for my life time / $1,100 for my spouse when I pass away
The pay out or pension will start next year.

I am inclined to choose a lump sum payment. Based on family history, 80 years old is probably the realistic estimate of my life time.
I understand the overall financial plan for retirement must be planned including all assets. However, I want to limit the discussion on these two options assuming I will have enough money for retirement. I don’t plan to retire next year.
I did simple calculation:
Every year I take out $21,000 (12*$1,750) and invest the rest of the money with 3.5 % return, I will have get 24 years.
First year: take out $21,000 and invest $329,000 ($380,000 - $21,000) $359,000
Second year: take out $21,000 and invest $319,515 ($329,900(1+ 3.5%)-$21,000)
I will be 57 years old next year. So, with only 3.5% return the lump sum payout will last until I am 81 years old.
Can someone please comment on this calculation?
Did I miss anything?
Thanks in advance.

Think you got less years than Pb4uski because of this error in red above?

 

[Teacher Terry]

Personally I would take the pension especially because it has a survivor pension. You never know how long you will live.

My aunt didn’t get a knee replacement at 80 because she didn’t expect to live much longer because of health problems. She lived until 96 and said that was a big mistake because of all the pain and eventually she couldn’t walk. No one knows how long they will live.

 

[brett]

IMHO there is NO right answer.

There is only the right answer for the person involved. So many variables from health and longevity through to a persons financial, cash flow, and spending habits. Not to mention the DB itself...indexed, joint, guaranteed payout period, etc.

Many believe the 'right' mix consists of 'three stools' approach consisting of annuity/pension like products, investment income, ss, etc.

For a number of personal (and tax) reasons I selected one pension annuity. I consider the value (changing of course based on age/changing CV values, to be part of the fixed income allocation of our investments.

On another I had no choice but to take the CV option paid in three installments over 26 months (three tax years).

I enjoy good health and have longevity in family. An associate decided on a CV purely on the basis of his health and his projected longevity.

 

[freedom2022]

Thank you all for responding.

Thanks to pb4uski and CRLLS for your calculation.
Good catch finnski1. Thanks.

 

[CRLLS]

Personally I would take the pension especially because it has a survivor pension. You never know how long you will live.

My aunt didn’t get a knee replacement at 80 because she didn’t expect to live much longer because of health problems. She lived until 96 and said that was a big mistake because of all the pain and eventually she couldn’t walk. No one knows how long they will live.

I'm a bit curious as to why you would choose the pension when the annuity is 7% higher to start. I am pretty sure that both the annuity and the pension are treated the same tax wise if the pension is rolled over to an IRA and the annuity is bought with IRA money. Further, the joint annuity gives 100% to the surviving spouse, a better deal than the pension of 66%.