My wife will be offered a choice of a monthly pension of ~$48k a year or a lump sum payment of ~500k. She is employed by a large national bank. Which one should we take and why?
kbst
I will have this option as well, and one issue I have considered is that if my wife and I are both killed in an auto accident (as an example) 6 months after I retire, my monthly pension is gone... If, however, I take it as a lump sum, it's mine and my estate's to do with or invest as I will. Another issue is that should you need a large influx of cash, (due to illness, as another example) you won't be able to get it from the monthly payment, but you could tap the lump sum. Mine is a non-cola pension...
There is that option with a lower annual payout ~ 40kDo you have the option of a joint and survivor at 50% payout?
It isn't COLA'ed. She's 59 and will take the pension at 62.Is the pension COLA'ed? What is your wife's age?
There is that option with a lower annual payout ~ 40k
kbst
She's 59 and will take the pension at 62. 2 years after we retire. So the only way we could go wrong with the monthly pension is if inflation is very high?How old is your wife? In general it appears to me the yearly payout is far superior and better than you could get with any annuity assuming your wife is within the 55-65 age bracket. A relatively "safe" 4 percent withdrawl rate on the 500K would result in 20K per year meaning you could/should use that as your retirement income level and increase with inflation and bank the remainder 28K less any taxes in savings for future years.
I calculate on my excel sheet if you assume 4% inflation 40% marginal tax on the amount over the inflated 20K each year that would be available for savings and ability to earn 5.5% on the balance that it will be 23 years before the $48,000 per year will be insufficient to meet the inflated 20K per year demand. At that time the balance assuming 5.5% after tax earnings on the after tax money would be 501K while the balance on the original 500K would be 361K. At a 6.3% after tax return is required for the balances after 23 years are equal, yet you would still be receiving the $48,000 per year from the pension, so I think you can see the 48K is a far greater value.
hope not$48K annual pension? Will she marry me?
She's 59 and will take the pension at 62. 2 years after we retire. So the only way we could go wrong with the monthly pension is if inflation is very high?
kbst
It isn't COLA'ed. She's 59 and will take the pension at 62.
kbst
How wouild you find out what the funded ratio is?Lots of good explanations already mentioned for $48K pension probably the good choice.
Another reason, if she takes the lump, then she and you have to worry about *managing* that lump or paying someone to manage it for you, and making it last the rest of her and maybe your lives.
Assuming the pension is from a large pension fund, it already has the professional management, which by the way is "free of charge", as her $48k pension is net of all fund management expenses.
Unless she is in ill health with very short life expectancy, or she is already 92 or something, the the lump amount promised does not live up to the $48k monthly pension.
One other thought---what is the funded ratio of the pension plan. That is, how fiscally sound is it? Assuming that checks out, go for the monthly. If there are serious questions on the financial well-being of the plan over the longhaul, then consider the lump.
How wouild you find out what the funded ratio is?
kbst
I will have this option as well, and one issue I have considered is that if my wife and I are both killed in an auto accident (as an example) 6 months after I retire, my monthly pension is gone... If, however, I take it as a lump sum, it's mine and my estate's to do with or invest as I will. Another issue is that should you need a large influx of cash, (due to illness, as another example) you won't be able to get it from the monthly payment, but you could tap the lump sum. Mine is a non-cola pension...
We don't really need it all as we will have ~120k income with ~80k expenses after 2 years. We are thinking seriously about taking the 50% surviver option as I'm 12 years younger.I'd take that option, just in case. Do you NEED the entire $40K or $48K to meet expenses?
Lots of options.
There is that option with a lower annual payout ~ 40k
kbst
How wouild you find out what the funded ratio is?
kbst
The pension plan should be issuing annual reports. Go to your HR dept. or to the pension plan administrator and ask.
My wife's one of the few at the company that's grandfathered with the option of a monthly pension due to an earlier merger. That may be why it's slanted in that reguard.I'm looking at my Pension calculations to give some perspective (These could be different due to a QDRO 10 years ago).
Lump Sum = $380K
Single Life = $1,940 per month
100% Survivor = $1,708 per month
So compared to MegaTech your offer of $48K versus $500K is way more slanted towards taking the Annuity; whereas mine is not so much.
t.r.