Help me think about lump sum vs pension

[CRLLS]

Is the 1k/month a single life payout or 100% survivor benefit? Not that it makes a difference in this case. Based on the numbers given, easily take the pension.

IMO, the only way to compare between the two when they are close is to compare similar scenarios. That means 100% survivor option against expected gains on a lump sum. Include life expectancy on your personal health situation, any COLA involved and don't forget to include any estate planning situation for your heirs. There are other situations to consider too. I think these are the basics.

 

[chassis]

You miss the point....your algorithm offers results after the fact.
My point is you can’t know the future.
To estimate the future requires assumptions about the future.

@Gallaher you knew the answer all along, didn't you?

Don't bother with calculating the pension annuity PV and comparing it to the administrators lump sum offer. It will spare you exercising a couple of brain cells.

 

[chassis]

You miss the point....your algorithm offers results after the fact.
My point is you can’t know the future.
To estimate the future requires assumptions about the future.

@Gallaher you knew the answer all along, didn't you?

Don't bother with calculating the pension annuity PV and comparing it to the administrators lump sum offer. It will spare you exercising a couple of brain cells.

My advice stands - take the lump sum and invest it yourself. You will be richer for doing this.

 

[jldavid47]

I'm going to help you think this out in a different way. Don't think about the returns, think about the risks and how those risks fit into other probable income streams. Specifically longevity risk, anti-longevity risk and inflation risk.

I had a similar decision to make six years ago and took the lump sum and I'll explain why. We were also in a situation where we didn't need all the cash flow from my monthly pension as my wife was still working.

At the time I was 61 years old and had been receiving a pension from my former employer for 14 years (yes since age 47 - I got an early retirement package I couldn't refuse). The pension was not adjusted for inflation and never would be. My wife had a 50% survivor benefit in case I died first which is statistically likely as I am three year older than she is. The lump sum offer was 15.9x my annual pension.

Now, keeping the pension looks like a sure 6.3% return on the lump sum but it isn't that easy.
(a) The 6.3% return is not compounded.
(b) It gets cut in half for my wife when I die and disappears when she dies.
(c) Any significant return of inflation will rapidly reduce the buying power.

If I happened to die sooner (anti-longevity risk) she is much better off with a growing lump sum than with a stagnant 50% pension. If inflation rears it's ugly head (as it appears it is) then the lump sum can be invested in ways to protect against inflation risk. The pension had no such protection.

I calculated that the breakeven point (given modest returns on the lump sum) was about age 83 for me. But what would that monthly pension be worth 22 years down the road? Probably not much.

To balance mitigating anti-longevity risk by taking the lump sum, the decision was made to wait to take social security for as long as possible. The original plan was to wait until age 70 for me, but my wife got an early retirement offer last year she couldn't refuse so I ended up taking it at age 66.5. That helps balance out the risk of living too long (I wish lol). FWIW, given our cash flow situation we are living completely off of Social Security at the moment and my lump sum is growing tax deferred.

My point here is that the decision of whether or not to take the lump sum should not be made in a vacuum. It needs to be made as part of a larger retirement savings and cash flow strategy. Map out those strategies while you are still relatively young and figure out what works best for your situation.

 

[street]

I'm going to help you think this out in a different way. Don't think about the returns, think about the risks and how those risks fit into other probable income streams. Specifically longevity risk, anti-longevity risk and inflation risk.

I had a similar decision to make six years ago and took the lump sum and I'll explain why. We were also in a situation where we didn't need all the cash flow from my monthly pension as my wife was still working.

At the time I was 61 years old and had been receiving a pension from my former employer for 14 years (yes since age 47 - I got an early retirement package I couldn't refuse). The pension was not adjusted for inflation and never would be. My wife had a 50% survivor benefit in case I died first which is statistically likely as I am three year older than she is. The lump sum offer was 15.9x my annual pension.

Now, keeping the pension looks like a sure 6.3% return on the lump sum but it isn't that easy.
(a) The 6.3% return is not compounded.
(b) It gets cut in half for my wife when I die and disappears when she dies.
(c) Any significant return of inflation will rapidly reduce the buying power.

If I happened to die sooner (anti-longevity risk) she is much better off with a growing lump sum than with a stagnant 50% pension. If inflation rears it's ugly head (as it appears it is) then the lump sum can be invested in ways to protect against inflation risk. The pension had no such protection.

I calculated that the breakeven point (given modest returns on the lump sum) was about age 83 for me. But what would that monthly pension be worth 22 years down the road? Probably not much.

To balance mitigating anti-longevity risk by taking the lump sum, the decision was made to wait to take social security for as long as possible. The original plan was to wait until age 70 for me, but my wife got an early retirement offer last year she couldn't refuse so I ended up taking it at age 66.5. That helps balance out the risk of living too long (I wish lol). FWIW, given our cash flow situation we are living completely off of Social Security at the moment and my lump sum is growing tax deferred.

My point here is that the decision of whether or not to take the lump sum should not be made in a vacuum. It needs to be made as part of a larger retirement savings and cash flow strategy. Map out those strategies while you are still relatively young and figure out what works best for your situation.

A great view from the other side of the story. I also will add that if you don't use the spousal options then if you die the pension stops. Lump sum doesn't work for everyone and isn't always the best option. In my case it has already passed what I would have gotten in a pension in a life time. Mine has grown 200% in 5 years and I have control and that is a big deal to me.