Discount Rate Change in 2012?

[Ratherbfishn']

I'm facing a decision to remain in a company funded pension plan or take the current lump sum amount and roll it into a 401k or some other retirement plan (IRA?). If the latter choice is selected, the company will match up to 6% of my contribution. As it is, I put 8% in to our 401k, but with no contribution. If I elect to remain with the pension, things remain as is on the 401k side.

Looking at scenarios for future returns, the ultimate figures at retirement remain relatively equal, presuming a conservative 7-8% return rate. Question is, I have heard a pension's lump sum pay out is somehow calculated on the discount rate of T-bills (3%?). Further, I have heard that in 2012 that calculation will change, to then be based on the discount rate of Corporate Bonds, which I understand is considerably higher. If so, the figure the company is projecting, based on the current T-bill rate, is over estimated, perhaps considerably, if the calculation will later change to Cop Bonds.

Anyone know if this T-bill to Corp Bond discount rate change thing is true? Is it something I should be considering?

Secondly, which do you think would be better....I'm 40, so 25 years to retirement. The pension lump sum is $36,600. The company projects its value, lump sum payout at age 65, to be $937,600 (or $6,000/month in an annuity). I currently put 8% into the 401k, about $750 per month (currently a value of $65,600). Should I keep the pension and my 8% 401k contribution, or take the pension lump sum to invest on my own (IRA?) and then get the 6% match from the company on the 401k side?


FYI, I understand there are some beneficiary limitations to the pension. I die before I receive the pension, by wife gets only about 45%. If I retire, take an annuity, then die, my wife gets 0, zip, notta. Thus, for her sake, presuming she outlives me, the pension may not be a good idea?

Thank you for any thoughts or suggestions!

 

[MasterBlaster]

Lump sum payouts through 2012

The pension protection act of 2006 stipuates that lump sum pension payouts be based on the 30-year corporate bond rate rather than the 30-year US government bond rate. Right now we are in the trasition schedule per the following:

​

30 year Treasury rate corporate bond rate
2007 100% 0%
2008 80% 20%
2009 60% 40%
2010 40% 60%
2011 20% 80%
2012 0% 100%

By 2012 your lump sum pension will be entirely based upon Corporate bond rates. Note that since corporate bond rates are generally a couple of percent higher that this will seriously cut down your lump sum. It really depends on what rates are when you retire and how old you are.

If you have a crystal ball and can predict rates in 2012 here is a calculator to compute your lump sum:

https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_cal

you can read about the legislation here

Pension Payouts Are Shrinking - Kiplinger.com

and here

The Shrinking Lump - Forbes.com

Do a search on lump sum pensions after 2012 and you'll get even more sites to go read about it.

 

[MasterBlaster]

Regarding the effects on a spouse with your pre-mature demise

Not having access to your plan I can't really comment.

I do know that for the plan that I am in should I go early - the wife will get what she would have coming had I selected the joint-annuity with 50% left to the wife. Once I am vested then she would get what I had coming in a 100% joint annuity. But that's my plan - not yours. You need to find out exactly what the deal is.

The bottom line is... If you go early she (perhaps) would have been better off with a lump sum. Check out the calculator linked to above.

 

[CitricAcid]

Just doing some calculations based off of the pension is tough... do they include future raises or promotions in their calculation because the lump sum at 65 seems pretty high to me.

They will offer up to 6% to match your contributions. I am going to assume 7% return (could be changed higher or lower, but will just use for some conservative calculations).

The extra 6% they put in will be about $565 a month. Just the match growth of 7% at $565 a month for 25 years is $460,000 or so. Then, taking the $36,600 pay out and growing at 7% for 25 years is $199,000, meaning you would have a combined amount of $659,000 for the 401k as opposed to the pension. This does not include future pay raises, promotions or contributions which would probably favor the 401k more, and it is tough to know whether the pension fund will still be 100% secure and that the company will still be around. It just seems the lump sum payment at age 65 is very high compared to the amount you would get from the 401k.