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More Lump Sum/Annuity Questions: Detailed and General
Old 01-30-2018, 04:47 PM   #1
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More Lump Sum/Annuity Questions: Detailed and General


I have the following options with respect to my pension with MegaCorp. I am 60 years old and in good health.

1) Next month: Take lump sum of $209,181
2) Next month: Receive $1087.97/month for life
3) In 5 years, take lump sum of $266,771
4) In 5 years, receive $1551.14/month for life

In either of the lump sum options I will roll over to an IRA to avoid immediate taxation. IRA to be be invested in 60/40 VTSAX/VBTLX to maintain current AA.

We don't really need the income at this point, as we are living off of taxable portion of portfolio until we take SS.

Analysis I've done:
1) Determined the growth rate of waiting 5 years for a lump sum: 4.98%

2) Determined the rate of return of the earlier annuity: 5.24%. For example 5.24% makes the present value of the annuity payments equal to the lump sum. Time horizon = 35 years.

3) Determined the rate of return of the later annuity: 5.72%. For example 5.72% makes the present value of the annuity payments equal to the lump sum. Time horizon = 30 years.

4) Priced the earlier annuity on, and found that I would get $1,001/month (vs. $1,088 from MegaCorp)

I guess the risk in any option except #1 is the solvency risk of the pension plan. Is there a way to evaluate that?

I am leaning toward waiting for five years and then deciding on lump sum/annuity at that time. In the meantime I will get nearly 5% growth, tax free, guaranteed (as long as the pension fund holds out).

Anything else I am missing or failing to consider?

Is there a calculator that folks use for these types of decisions, or do you decide more on gut feel?

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Old 01-30-2018, 05:41 PM   #2
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Clark Howard has a formula to do the financial analysis between lump or pension. My pension was small, but CH's formula made it clear that the 100% joint survivor option was a slam dunk.

I have some, but minimal concern of pension solvency.

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Old 01-30-2018, 08:29 PM   #3
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I am 1 year younger and have what appears to be an almost identical pension.
Worth ~$200K today
Balance grows at the better of 5% or the 30 treasury rate
Can be annuitized any time after leaving company

I am still working and still getting payroll credits growing the cash balance in
addition to the interest rate credits.

A couple of aspects of my pension that bring up more options. Yours might be

1. I can leave the balance in growing with the interest rate up until age 70.5, or I can choose to take the lump sum or annuity any time after leaving the company.
2 If I choose the annuity, it will be calculated at the interest rates at the time I make the election
3. The cash value is part of my estate if I expire before taking the pension.

Because of how my pension is structured and my personal finance plan, my current plan is to wait until age 70.5. I will choose that because:

1. I can use the years between retirement and 70.5 to do Roth conversions. Additional pension income would hamper that. A rolled over lump sum would be additional deferred money needing conversion.
2. Just a guess, but annuity rates will be better in the future as interest rates rise.
3. My pension is currently in good shape. Current audit was 125% funded. It is audited annually and the option to lump sum out can't be closed without advance warning.
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Old 01-31-2018, 06:07 AM   #4
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In a similar situation (except 100% amount to survivor) a couple of years ago, I went with choice #4. In my case 2 years ago, I also thought the payment amount would increase beyond what was offered 2 years ago just because interest rates would rise. That has turned out to be true. YMMV.
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Old 01-31-2018, 06:37 AM   #5
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Originally Posted by Trooper View Post
I guess the risk in any option except #1 is the solvency risk of the pension plan. Is there a way to evaluate that?
That's the key factor IMHO. You should be receiving an annual funding notice about the pension plan that gives you information about it.

Private pension plans are required to file a financial report called a Form 5500 every year with the federal government. The Form 5500 provides information regarding the plan's financial condition, investments, and operations.

If you are a participant in a private pension plan, you have the legal right to request the most recent Form 5500 from your plan administrator. Participants can also find a less recent copy of the Form 5500 on a web site called
How Well-Funded is Your Pension Plan?
I thought growing old would take longer.
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Old 01-31-2018, 10:10 AM   #6
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Originally Posted by Trooper View Post
I guess the risk in any option except #1 is the solvency risk of the pension plan. Is there a way to evaluate that?
In addition to the post above ...

Remember that the Pension Benefit Guaranty Corporation insures pensions. It's a gov't program, so there is some political risk, but it's an additional layer of protection.

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