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Lump Sum Vs. Monthly Pension
07-30-2020, 11:54 AM
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#1
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Confused about dryer sheets
Join Date: Jul 2020
Location: Bronx
Posts: 4
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Lump Sum Vs. Monthly Pension
If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?
A) Lump Sum of $680,000
B) Monthly Pension of $2200
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07-30-2020, 11:58 AM
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#2
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,587
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How secure should we assume the monthly pension is?
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07-30-2020, 12:04 PM
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#3
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Confused about dryer sheets
Join Date: Jul 2020
Location: Bronx
Posts: 4
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A Verizon pension. Pretty secure (as of now) It is funded at 90%.
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07-30-2020, 12:19 PM
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#4
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Full time employment: Posting here.
Join Date: Apr 2014
Location: Houston
Posts: 957
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https://www.calculatorsoup.com/calcu...calculator.php
Determine the present value of the annuity using online calculators such as above. Vary assumptions to meet your comfort zone. I’d probably take the lump sum and invest it ... that’s what I did when I retired. Our annuity was quite reasonable vs the lump sum (IMO) but it wasn’t adjusted for inflation and I couldn’t leave any of it for our kids when I died. Long term investor so that’s well within my comfort zone.
__________________
"Learn everyday, but especially from the experiences of others. It's cheaper! " - John Bogle
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07-30-2020, 12:19 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Mar 2012
Posts: 3,925
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$2200/month with $680,000 principal comes to an annual withdrawal rate of about 3.88%. If you could generate 3.88% annually, when you pass on, you'd still have the $680,000, whereas you'd have nothing from the pension. There's also the possibility that you pass early, possibly even before the breakeven point at about 76 years old.
Also, do they include annual COLA adjustment or is it just $2200/month until you expire?
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07-30-2020, 12:34 PM
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#6
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Dryer sheet wannabe
Join Date: Jun 2020
Posts: 17
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I'd be inclined to say, it depends.
How comfortable are you with managing your investments?
What is your tolerance for risk?
Will the $2,200 per month be sufficient for your retirement plan?
Answers to those questions will probably guide you to your answer.
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07-30-2020, 12:51 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Apr 2008
Posts: 1,992
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Quote:
Originally Posted by verizon1990
If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?
A) Lump Sum of $680,000
B) Monthly Pension of $2200
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Nice lump sum. If the pension starts at 50 instead of the typical 55+, that makes it tougher to decide.
When I was offered a pension buyout, I was offered $249,000 for a pension (50% survivor) that paid out $2,300+/mo starting at age 55 (maxing at $2,600 by age 60). The buyout would have been paid at age 53.
As you might imagine, I took the pension. If I had been offered at least $400,000, I would have taken the lump sum, even if the pension was still more attractive, for reasons stated by @njhowie. Then again, we had cash on hand to balance out not having the monthly pension.
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07-30-2020, 01:42 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,587
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Quote:
Originally Posted by verizon1990
If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?
A) Lump Sum of $680,000
B) Monthly Pension of $2200
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Given those assumptions, I would say take the pension.
The folks I know who had good corporate jobs and are now near poverty in retirement all cashed in their pensions for lump sums.
I think they were not very financially sophisticated and let financial advisors do what they wanted with the money because they thought the advisors knew best.
-gauss
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07-30-2020, 06:12 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Aug 2017
Posts: 2,040
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I would advise a person with nothing else to take a pension. Not sure they have the ability to invest on their own if that is the ONLY thing they have. But will you (eventually) get Social Secuirty? Married? Kids? Lot of considerations.
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07-30-2020, 06:33 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Aug 2014
Location: Chicago West Burbs
Posts: 2,996
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Immediateannuities.com says $2,340 per mo for joint life at age 50.
In Illinois, pensions are not taxed. I am not sure about annuities. Something to consider. I would check how your state taxes the two.
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07-30-2020, 06:59 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Dec 2018
Location: DuPage County IL
Posts: 2,697
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what happens to the pension when you cast off the mortal shell? if it disappears then it's a no brainer...take the lump sum. i myself might take the lump sum anyway as you can likely get a better ROI.
__________________
Rich
Ham Radio, Sport Pilot, RVer
FIRE: 8/11/2005, age 55y,1d
Dispatcher, then shift supv, then administrator for a regional 9-1-1 call center
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07-30-2020, 07:40 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2012
Posts: 6,098
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If you have no other savings, are willing to put the bulk of it into equities, and are disciplined enough to not panic when the market acts as it has during the pandemic, the lump sum would be a better choice.
edited to add: The pension ending when you die would also be a reason to consider the ump sum.
__________________
FIREd date: June 26, 2018 - "This Happy Feeling, Going Round and Round!" (GQ)
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07-30-2020, 07:58 PM
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#13
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Recycles dryer sheets
Join Date: Jan 2012
Location: LI
Posts: 100
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My husband (retired Verizon guy) and I had to make that choice in 2010. We took the lump sum, rolled it over into the market and pretty much haven't touched it since. (excluding a small 72t we were forced to take to show income for a small mortgage) We will probably start tapping into it when he is 61 or 62.
He was 48 and the pension was just around 30k. It was a no brainer for us and has grown very well. We can easily generate the pension amount at around 2% and still not get into the principal.
We also know other guys who blew through the money and would have been better off with the pension.
I think the answer financially is take the lump sum, but only if you're a person who is disciplined and can tolerate some volatility. If you can't be both of those things, then take the pension.
Also look into your retiree medical insurance and see what it will cost you. The guys who retired in 2010 were some of the last ones to retire with fully paid for medical, dental and vision coverage. Not sure how much they have to contribute now.
Best of luck!!
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07-31-2020, 12:39 AM
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#14
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Full time employment: Posting here.
Join Date: Jul 2014
Posts: 859
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Quote:
Originally Posted by lauradrops
I think the answer financially is take the lump sum, but only if you're a person who is disciplined and can tolerate some volatility. If you can't be both of those things, then take the pension.
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+1
Unless the OP expects to fall in the top left section of the chart below, the lump sum - if properly invested and managed - is highly likely to be the better choice.
See row 101, etc., in the case study spreadsheet to verify.
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07-31-2020, 05:47 AM
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#15
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Full time employment: Posting here.
Join Date: May 2007
Posts: 880
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Like others have said, I think it depends on whether or not you can manage the lump sum. If you enjoy personal finance, can invest wisely, keeping cost low (e.g. Vanguard, Schwab or Fidelity) and control spending then take the lump.
If don't enjoy personal finance and plan on hooking up with Edward Jones then take the monthly payments.
__________________
"It is better to have a permanent income than to be fascinating". Oscar Wilde
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08-03-2020, 07:24 AM
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#16
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Confused about dryer sheets
Join Date: Sep 2018
Posts: 7
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For me this would be an easy pick -- lump sump without a doubt. Roll it to an IRA, select something in the stable value investments area that traditionally gets in the 4-6% range and take the same withdrawals as the pension would have given you.
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08-03-2020, 07:39 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by gauss
The folks I know who had good corporate jobs and are now near poverty in retirement all cashed in their pensions for lump sums.
-gauss
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corporate pension plans that allow for unlimited lump sums have very high take rates; that's one reason why there is a positive correlation between lump sum distributions and poverty, as I've posted before
the OP needs to make a personal decision, and we must assume that the $2200 a month is an annuity equivalent of $660,000, whether a deferred or immediate - OP what is the "relative value" of the lump sum to the immediate annuity - is that annuity for your life only or a joint and survivor pension with your spouse? Is the $2200 a month, immediate or deferred? I assume immediate.
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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08-03-2020, 08:32 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,134
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Quote:
Originally Posted by Big_Hitter
corporate pension plans that allow for unlimited lump sums have very high take rates; that's one reason why there is a positive correlation between lump sum distributions and poverty, as I've posted before
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Is that because the lump sum was not reflective of the actual value of the pension? Or did the lump sum folk give into the temptation to spend the money on things like a new boat, motor home, fancier liquor cabinet with fancier liquor, etc?
Or, perhaps, both?
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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08-03-2020, 09:50 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by Chuckanut
Is that because the lump sum was not reflective of the actual value of the pension? Or did the lump sum folk give into the temptation to spend the money on things like a new boat, motor home, fancier liquor cabinet with fancier liquor, etc?
Or, perhaps, both?
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I believe it is due to mortality salience
no one wants to think about his or her own death although we all die - taking the lump sum avoids it
https://www.plansponsor.com/thoughts...pany.%E2%80%9D
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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08-03-2020, 09:52 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by Chuckanut
Is that because the lump sum was not reflective of the actual value of the pension? Or did the lump sum folk give into the temptation to spend the money on things like a new boat, motor home, fancier liquor cabinet with fancier liquor, etc?
Or, perhaps, both?
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https://www.early-retirement.org/for...ums-82584.html
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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