Commutated value of define benefit plan

[chassis]

Quote:

Originally Posted by gauss But isn't the heritability of a lump sum vs a pension really a bit of a red herring? If one truly wanted to leave something to others after one's passing, one could easily buy a life insurance policy or save some of one's pension payments for this purpose. I realize that if one isn't good with financial planning and/or has trouble spending less than your full payment, then this may be problematic, but if this is the case should one really be managing a lump sum? Either way, I dont think these issues effect too many of us on the boards. edited second/third paragraph to reflect that comments were NOT being directly personally to chassis.

I don't see heritability as a red herring. A pension taken as a lump sum is heritable, period. Assuming of course it isn't spent on necessities or frittered away.

I don't see any "should" or "shouldn't" in the management of a lump sum. I hold the view that it is in the best financial (mathematical) interest of the investor to take a lump sum distribution. If the investor does not want to do manage his/her money, does not know how to invest, or is an expert at frittering away money, then the investor has a choice to make on whether or not to take the lump sum.

[Safire]

Can a pension be left to a disabled child as the survivor rather than a spouse (especially if the spouse is fully in agreement with it)?

[pb4uski]

It depends on the plan, but it is rare that would be an option. If it was an option then the monthly amount might be lower due to the joint annuitants lower age.

[Carlos2]

Quote:

Originally Posted by Safire Can a pension be left to a disabled child as the survivor rather than a spouse (especially if the spouse is fully in agreement with it)?

Yes, there are some that allow this.

[Carlos2]

The valid point which street has been making, and many agree with, is that if you take the monthly payments, no survivor benefits and no guaranteed payment period, should you pass away one month later, then you and your heirs get absolutely nothing - the employer/plan keeps everything you would have received.[/QUOTE]


This is not accurate for all plans and certainly not true for mine. If I were to die one month after retirement and had selected the member only option, my wife would get all of MY contributions and interest. She would not get any employer contributions or monthly benefits.

All plans are not the same so we must be careful to not place blanket statements.

[Montecfo]

Quote:

Originally Posted by njhowie True, if we're talking about a 401k or other defined contribution plan which remained with employer. However, I believe that we've (or at least most of us have) been talking about company funded defined benefit plan pensions, not 401k or similar. If you choose to take monthly payments from the company funded pension, at the onset you have to choose either survivor benefits or guaranteed payment period to have anything go to heirs should you pass away early. The valid point which street has been making, and many agree with, is that if you take the monthly payments, no survivor benefits and no guaranteed payment period, should you pass away one month later, then you and your heirs get absolutely nothing - the employer/plan keeps everything you would have received.

I refer to defined benefit pension plans and funds you paid in, either as payroll contribution or purchase of additional years. Those get paid out to heirs if not amortized prior to death.

Your statement is certainly true with respect to the company funded portion, which may be 100 percent, or not.

[meleana]

I had a tiny pension of $29 per month. Lol! I took the $5000 lump sum and put it in my IRA.

Hubby had a $1200 per month pension. He took the $300, 000 lump sum and rolled it into an IRA.

Both of us didn’t know the exact lump sum amounts until we initiated the process to start taking our pensions. Then we were given the option of the lump sum or the monthly payment.

[gamboolman]

I retired from megaoil effective 1-Feb-21.

We had a choice of the NCOLA Pension or Lump Sum

We chose Lump Sum. Primary reason was that we are terrified of Inflation and since the Pension was not cost of living adjusted - we chose the Lump Sum.

Another factor for us is that I had/have lost confidence in the Sr. Mgt ability to run the company the way a Oilfield Company ought to be - but that is a highly subjective personal opinion - but it was a factor for us.

The lower the % rate the more you get in Lump Sum. It can be significant differences from Quarter to Quarter when you plan your actual retirement date.

[freedom2022]

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.

[badatmath]

Note my username badatmath but if you expect to get $1750 a month either way I don't see what you are gaining here. You would get $1750 a month for life doing nothing right? Is your goal to have money left for survivors?

I peeked back through this thread and was surprised some of your options. We did not get offered lump sum and were not allowed to contribute a dime so perhaps I just do not understand.

Also call me cynical but employers don't offer lump sums unless it benefits them. . .

[CRLLS]

Quote:

Originally Posted by freedom2022 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]

Quote:

Originally Posted by freedom2022 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]

Quote:

Originally Posted by Dash man 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]

Quote:

Originally Posted by freedom2022 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]

Quote:

Originally Posted by 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.

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%.