Lump Sum Vs. Monthly Pension

[Big_Hitter]

53

this site doesn't do 50% JS they quote 100% and straight life - you can interpolate those to get a reasonable estimate of what it would take to purchase the $2400 a month immediate annuity - I was getting something over $600K to purchase an equivalent annuity using 57M/53F an immediate start date - did the packet quote a relative value to the immediate annuity?

https://www.immediateannuities.com/information/annuity-rates-step-1.html

 

[Big_Hitter]

53. After some thought I'm thinking the interest rate on that form would be analogous to expected inflation, and interestingly enough the calculated value seems to track to using the expected draw down rate of 7% as well. e.g. entering an Interest Rate of 7% and a payment amount of 28k/year calculates a lump sum value of 400k. Coincidence? I think not! (sorry, movie quote, name that movie )

there is a chance, rather large, that the lump sum is based on the accrued benefit payable at age 65 rather than actuarially equivalent to the immediate annuity - that would be apparent in the relative value disclosures. Lump sums under corporate DB plans are not required, by law, to include any early retirement subsidies

 

[Big_Hitter]

It may be worth calling the plan administrator and asking them, explicitly, how the lump sum is calculated. When I was offered a buyout 2 years ago, the immediate annuity I was entitled to in 3 months was worth significantly more than the lump sum I was offered. However, plan sponsors are only required to show relative values on the annuity starting date. YMMV

 

[Big_Hitter]

53. After some thought I'm thinking the interest rate on that form would be analogous to expected inflation, and interestingly enough the calculated value seems to track to using the expected draw down rate of 7% as well. e.g. entering an Interest Rate of 7% and a payment amount of 28k/year calculates a lump sum value of 400k. Coincidence? I think not! (sorry, movie quote, name that movie )

yes, that's a complete coincidence

lump sum values aren't calculated using a finite end to retirement, a little piece of you dies each year until you are 100% gone - the lump sum is a mathematical expectation over your lifetime

 

[cat4ever]

there is a chance, rather large, that the lump sum is based on the accrued benefit payable at age 65 rather than actuarially equivalent to the immediate annuity

I'm not quite sure this answers your question, but the quote I gave above was for taking the lump sum at age 57. I also included above the quoted sum if I wait until 65. To me, of those two options taking it at 57 is a new brainer as the growth is only between 2 and 3% per year from 57 to 65.

 

[Big_Hitter]

it's the difference between an immediate annuity calculation and a deferred annuity calculation - the law only requires that the LS be at least actuarially equivalent to the annuity payable at your nrd, not what is payable immediately

 

[jim584672]

That seems like a generous lump for that annuity amount.

 

[Out-to-Lunch]

That seems like a generous lump for that annuity amount.

Gosh, I thought just the opposite.

 

[jim584672]

Gosh, I thought just the opposite.

I have a pending pension and the lump is like half of what the OPs is (relatively).

 

[cat4ever]

What people often do is to compare their lump sum and payout numbers at immediateannuity.com. However, they don't offer 50% joint life online so you would probably have to get a quote from an agent...

I do have a 100% joint life option, which pays $2180. Using the above site, $403,000 only buys a $1421 100% joint life pension, so it looks like pension wins that round pretty convincingly, $2180 to $1421. Heck even for a single life annuity it only buys $1667.

 

[pb4uski]

this site doesn't do 50% JS they quote 100% and straight life - you can interpolate those to get a reasonable estimate of what it would take to purchase the $2400 a month immediate annuity - I was getting something over $600K to purchase an equivalent annuity using 57M/53F an immediate start date - did the packet quote a relative value to the immediate annuity?

https://www.immediateannuities.com/information/annuity-rates-step-1.html

I interpolated a $403k premium today as a $24,441/year 50% joint life fixed annuity starting in 8 years at 65.

$403k premium, 8 year deferral, 57yo/M, 53 yo/F in MO.

100% joint life = $1,858/month, 57yo/M = $2,406/month, 53yo/F = $2,025/month

[($2,406+$2,025)/2 + $1,858]/2 = $2,036.75/month for 50% joint life or $24.441/yr vs $28,416 provided from plan.

I interpolated a $487k premium today as a $23,037/year 50% joint life fixed annuity starting at 65.

$403k premium, no deferral, 65yo/M, 61 yo/F in MO.

100% joint life = $1,764/month, 65yo/M = $2,215/month, 61yo/F = $1,936/month

[($2,215+$1,936)/2 + $1,764]/2 = $1,919.75/month or $23,037/yr vs $28,416 provided from plan.

So it looks like the plan is providing a more than fair benefit in relation to the lump sum.

 

[pb4uski]

I do have a 100% joint life option, which pays $2180. Using the above site, $403,000 only buys a $1421 100% joint life pension, so it looks like pension wins that round pretty convincingly, $2180 to $1421. Heck even for a single life annuity it only buys $1667.

That 65% value is pretty close to what my lump sum was valued at. IOW, it would take them ~$618k to buy a $2,180/month single life benefit for a 65yo/M and they are offering you $403k.

IMO a ripoff... but many people see that big figure and jump for it.

 

[Out-to-Lunch]

I have a pending pension and the lump is like half of what the OPs is (relatively).

So, to set me straight, do I understand this correctly: they are offering you something like a 14% payout (nominal) on your lump sum? (They are offering the OP something like 7% nominal).

In your shoes, I would take the annuity!

 

[cat4ever]

So, to set me straight, do I understand this correctly: they are offering you something like a 14% payout (nominal) on your lump sum? (They are offering the OP something like 7% nominal).

In your shoes, I would take the annuity!

Actually the OP numbers were:

A) Lump Sum of $680,000
B) Monthly Pension of $2200

Which is a payout of only 3.9%/year. That value is much closer to the immediateannuities estimate ($2400 for single life) which makes for a much more enticing lump sum.

 

[Out-to-Lunch]

So, to set me straight, do I understand this correctly: they are offering you something like a 14% payout (nominal) on your lump sum? (They are offering the OP something like 7% nominal).

In your shoes, I would take the annuity!

Actually the OP numbers were:

A) Lump Sum of $680,000
B) Monthly Pension of $2200

Which is a payout of only 3.9%/year. That value is much closer to the immediateannuities estimate ($2400 for single life) which makes for a much more enticing lump sum.

Ahh, I see. I thought jim was comparing his situation to cat4ever, but he explicitly said OP. Sorry about that.