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Megacorp Pension Options vs. Inflation Expectations
10-30-2014, 08:21 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Sep 2013
Location: Ventura County
Posts: 1,433
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Megacorp Pension Options vs. Inflation Expectations
One of the ways I'm whiling away my ever so slow OMY is by considering how to take the pension I will get from Megacorp upon my, hopefully soon, ER at age 55. The main question is whether to take a straight Single Life Annuity (constant payments for life), or the "Accelerated Income" option which offers increased payment of roughly 1.14 x the SLA amount for the 7 years from 55 to 62, but decreases thereafter to about 89% of the SLA amount.
Neither version is COLA'd so the relative merits depend strongly on inflation. Doing a quick calculation it looks like the break-even time between the two options as a function of inflation is as follows (assuming a constant inflation rate over the entire period):
0% 16 yrs (i.e. the Single Life Annuity provides a greater total after age 71)
2% 18 yrs
4% 21 yrs
6% 27 yrs
8% Infinity (i.e. the SLA never catches up)
I'm generally big on the concept of delayed gratification and both parents lived past 90, so I'd always assumed I'd just take the constant Single Life Annuity, but realistically assuming inflation around 4% gives me a break-even age of 82. So I'm wondering whether I should more seriously consider taking the Accelerated Option.
Other relevant info: I expect pension to be about 60% of my income initially at 55, but decline as inflation takes hold and spending from my nest egg grows - and then decline still further when I take SS at 70. Since the pension is most important in the early years of my retirement this also seems to argue for the accelerated option, but my delayed gratification instincts are quite strong and I remain unsure of the best course.
I imagine this sort of thing has been discussed to death around here over the years and I wonder what the consensus is.
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10-31-2014, 06:34 AM
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#2
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Full time employment: Posting here.
Join Date: Nov 2008
Posts: 728
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Take whatever helps you sleep good at night. All of us are living longer than our parents, on average. Yet, I've lost two friends to cancer below the age of 60 recently. You're protecting yourself by holding off SS until 70, that's smart and you've done well to be able to afford to do it. SS also is a good inflation hedge, if you remember the 80's when interest rates and inflation went sky high. So, I'd think that mathmatically it's a wash.....that's the way their accountants would set it up.....so, sleep good, congratulations on having good options and the ability to retire at a fairly young age.
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10-31-2014, 06:42 AM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,374
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Not sure if their is a right answer but the impression that I had is that the accelerated option is designed for people who could not retire early without it.
One thing to do might be to look at how each option changes your success rate in QLP, Firecalc or other similar retirement planning tools.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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10-31-2014, 08:14 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,304
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I've never looked, but I've never come across an option like that, obviously meant to smooth the transition to Soc Sec starting at age 62. Assuming you've done the calcs correctly (no reason to believe otherwise), I can see how it would be tempting to somewhat front load the pension in case longevity isn't as expected, but knowing I'd be getting 89% thereafter would give me pause. Who knows what the cost of living will actually be in 20-30 years. I am planning for the worst later in our plan, (fortunate and) willing to live on much less than we can supposedly afford early on based on all retirement income calculators.
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No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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10-31-2014, 08:21 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Jun 2013
Location: Bonita (San Diego)
Posts: 1,795
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Why not take the accelerated pension, use 100% (or whatever you need) prior to SS, and save/invest the balance (14%) for the 7-10 years (or until you need it)? Might close the 89% gap, depending on how long you live, and leave you better off with a little bit of inflation protection.
__________________
"So we beat to our own drummer in the sun;
We ask for nobody's permission to run.
I just wanna live in a world like that;
Now I'm gonna live in a world like that!" - World Like That, O.A.R.
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10-31-2014, 09:25 AM
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#6
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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: 17,265
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Quote:
Originally Posted by Midpack
I've never looked, but I've never come across an option like that, obviously meant to smooth the transition to Soc Sec starting at age 62. Assuming you've done the calcs correctly (no reason to believe otherwise), I can see how it would be tempting to somewhat front load the pension in case longevity isn't as expected, but knowing I'd be getting 89% thereafter would give me pause. Who knows what the cost of living will actually be in 20-30 years.
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+1
By smoothing the transition to SS at 62, it assumes one will take SS benefits at 62. That is decision is highly personal as one can see from the various discussions on this site. But, if you do not plan on taking SS at 62, you should take that into account. Make sure taking that option does not force you into permanently reducing your SS benefit for the rest of your life. OTOH, if you are in the 'take it at 62' group, then you could do some interesting things with the extra money.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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11-01-2014, 07:44 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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I think the relevant number is the investment returns you expect to get on the money, rather than the inflation rate.
The math is the same if you plan to use fixed income investments. But, I think it's better to try to guess your returns (which may be somewhat fixed if you put the money in long bonds) than prices.
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