need advice on early pension payments

[skiracer]

I can begin to receive $346 per month beginning May 1,2011 at age 55
or I can wait until age 62 and receive $813 per month
How do i calculate which is the best option (s)

ski racer

 

[MasterBlaster]

SKIRacer:

This isn't a trivial exercise. You need to assume a discounted rate of return and a mortality model. You can go here and play around with their calculator: https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=cash_flow

The concept is to translate a pension annuity stream into a net present value which can be compared to other options. Also, Since the bigger one starts 7 years later it must be discounted back to age 55 from 62.

There are some rules of thumb though. For a non-cola pension, multilpy the (ANNUAL = monthly X 12) pension payment by 16X to get a net present value. For a COLA'd pension use 25X.

 

[skiracer]

MB
ok so I take $346/mo x 12 = $4,152 (this is a non-cola pension)

you loose me with the 16x .please show me how to do this ..please

 

[ronin]

If you don't need the money to live on, waiting until 62 is the better option (assuming you live out to the median life expectancy of approx 80/81). Longevity in the family genes? Medical issues that might cut it short?

 

[MasterBlaster]

MB
ok so I take $346/mo x 12 = $4,152 (this is a non-cola pension)

you loose me with the 16x .please show me how to do this ..please

OK lets ballpark it, subject to the discount rate/mortality/ballpark accuracy issues.

The present value of your ($346/mo) pension using the 16x formula is

12X346X16 = 66432

The present value when you are 65 years old, of the $813 pension is

12X 813X16 = 156096.

But that value needs to be discounted at (lets say for example) 5% per year. IE. How much money do I need now that compounds at 5%/yr will give me 156096.

using a 5% discount rate for 5 years I get that the present value of the income stream at 62 is ~$111k

So based only on this little analysis the 62 year old $813 looks better.

But there are issues which the rules of thumb miss. The 55 year old gets 7 more years of income than the 62 year old. The 55 year old gets an extra 7 years X 12 months/year X 346 ==> $29064 extra.

So when you add the $29064 to the $66432 present value of the 55 year old pension I get $95496. So based on this simplistic ballpark analysis I have calculated a small advantage in the 62 year old/$813 pension ($111k versus $95k).

If I used different discount rates I would get different numbers. Also note that the 16x lump sum ballpark number is just that - a ballpark number. It ignores prevailing interest rates and future interest rates and most importantly mortality effects- How long you will live to collect.

Note that inflation and taxes have not been considered. Also note that there is some real possibility of you never living to 62 years old.

I now suspect that the two pensions are actuarially equivalent given the parameters of your pension plan. It is just taking your lumps different ways.

 

[skiracer]

I was looking at the fact that I would have received $30,000 before I would receive the first payment of $836.
at $836 it would be another 3-years before it would be = to the $30,000

 

[skiracer]

MB
Is the 16x factor represent years or is it just a factor ?

 

[MasterBlaster]

16X is the [-]wild-ass-guess [/-] ballpark approximation factor of the present value of a annual stream of payments. But to answer your question directly, it is just a factor. There is no estimate on how long you will collect with this approach.

That calculator I linked to gives a much better value than this little back-of-the envelope approach.

 

[BigNick]

I was looking at the fact that I would have received $30,000 before I would receive the first payment of $836.

That's the even-more-ballpark way to do it, which is what I use.

Everything which follows ignores inflation, so caveat emptor:

at $836 it would be another 3-years before it would be = to the $30,000

I don't think you've done the calculation right. Don't forget, if you retire at 55, you will still get $346/month at 62. So the higher pension of $813 (or $836? I'll go with the numbers from your first post) is only $467/month more, or $5,600/year. That will take 5.4 years to catch up with the $30,000 head start.

But wait, there's more! That $30,000 could also generate close to $100/month in income, if invested in something which returns 4%/yr. So the higher pension at 62 is only closing the gap at $367 a month, or $4,400/year. You won't be "better off overall" until just shy of your 69th birthday. Do you want to have more money at 55 or at 69? That's the main question.

 

[skiracer]

Ok here's another question ..the $346 amount is if I elect not to have any survivor benefit for my spouse..I have these options:
50% survivor benefit reduces the $346 to $314
75% survivor benefit " " to $300
100% " " " to $287

your thoughts on this decision?

 

[2B]

Your pension is discounted approximately 6% for every year before age 62 you take it. You might have an option to let it continue to increase until age 65. The question I would ask is "do you need the money?" A 6% increase is far better than you would get if you started comparing it to buying a SPIA in the current interest rate environment which is what you really are doing. If you don't need the money now and your health is good, I'd wait.

As for spousal survivor benefits, this can go a long way in making the "little woman" happy. The benefits are calculated on her mortality table data and all of the commercial pensions I've dug into are pretty fair. If her health is good, go for 100% and make her happy. If you don't like her that much, go with no survivor benefits.

 

[soupcxan]

If you're 55 now and you'll live to 80, the first option makes 300 monthly payments of $346 which is worth $59k today discounted at 5%. If you wait 7 years then you get 216 payments of $813 which is worth $115k at 5% in 7 years - discount that back to today and it's $82k. So the second option is more valuable by $22k.

If you discount this at 2%, the benefit of waiting to take the larger payment goes up even more to $46k. But that assumes things about the risk of waiting and your alternative investment options.

 

[Independent]

The best way to do this is to put the pension into the context of all your assets. It probably matters whether this is just gravy in your plans or whether it's basic living expenses. Mechanically, that means putting everything into something like FireCalc and run it twice, once with the pension @55 and once with the pension @62.

For a simple comparison "in a vacuum", I'd just look at the crossover ages. If you die young, your heirs will prefer the @55 option. If you live longer, they will prefer the @62 option. The question is putting a number on "young" or "longer". So I did a simple crossover analysis and got this:

Int Years Age
0% , 12 , 67
3% , 13 , 68
6% , 15 , 70
9% , 18 , 73

For example, 146 months of $346 is $50,516 which is essentially equal to (146-84) months of $813, which turns out to be $50,406. So the crossover at 0% interest is 12 years and 2 months. The other interest rates take a little more work.

Since I'd expect to live beyond age 73 and earn less than 9%, I'd defer to 62.

 

[BigNick]

Since I'd expect to live beyond age 73 and earn less than 9%, I'd defer to 62.

That also assumes that the value - as in, the fun you get out of it - of an inflation-adjusted dollar to you at 73 will be the same as the value of that dollar today.

Another factor is that at $346 or $813 we're (hopefully) not talking about the OP's entire retirement income, but some kind of cherry on the cake.

Still, and although I'm normally heavily in favour of taking the money now, the hit you take by not deferring is pretty substantial. It makes me wonder how the actuarial tables were drawn up. On my company scheme where the default retirement age is 60, $813 of benefits at age 60 would be about $560 seven years earlier - more than 60% higher than what the OP is being offered here. I wonder if the age 55 payout is negotiable?

 

[jdw_fire]

OK lets ballpark it, subject to the discount rate/mortality/ballpark accuracy issues.

The present value of your ($346/mo) pension using the 16x formula is

12X346X16 = 66432

The present value when you are 65 years old, of the $813 pension is

12X 813X16 = 156096.

But that value needs to be discounted at (lets say for example) 5% per year. IE. How much money do I need now that compounds at 5%/yr will give me 156096.

using a 5% discount rate for 5 years I get that the present value of the income stream at 62 is ~$111k

So based only on this little analysis the 62 year old $813 looks better.

But there are issues which the rules of thumb miss. The 55 year old gets 7 more years of income than the 62 year old. The 55 year old gets an extra 7 years X 12 months/year X 346 ==> $29064 extra.

So when you add the $29064 to the $66432 present value of the 55 year old pension I get $95496. So based on this simplistic ballpark analysis I have calculated a small advantage in the 62 year old/$813 pension ($111k versus $95k).

If I used different discount rates I would get different numbers. Also note that the 16x lump sum ballpark number is just that - a ballpark number. It ignores prevailing interest rates and future interest rates and most importantly mortality effects- How long you will live to collect.

Note that inflation and taxes have not been considered. Also note that there is some real possibility of you never living to 62 years old.

I now suspect that the two pensions are actuarially equivalent given the parameters of your pension plan. It is just taking your lumps different ways.

so you discount the age 62 pension (B) to what it is worth at age 55 and then you value the age 55 pension (A) to that it is worth at age 62 and then compare those 2 numbers? doesnt sound right to me. seems to me either value them both at age 55 or at age 62 and then compare them. i.e. using your numbers at age 55 pension A is worth $66,432 and pension B is worth ~$111K OR at age 62 pension A is worth $95,496 and pension B is worth $156,096

 

[MasterBlaster]

so you discount the age 62 pension (B) to what it is worth at age 55 and then you value the age 55 pension (A) to that it is worth at age 62 and then compare those 2 numbers? doesnt sound right to me. seems to me either value them both at age 55 or at age 62 and then compare them. i.e. using your numbers at age 55 pension A is worth $66,432 and pension B is worth ~$111K OR at age 62 pension A is worth $95,496 and pension B is worth $156,096

The model (16X) is flawed. There is no age-discriminant per the age of the pensioner in the 16X model. The 62 year old gets 7 years less pension payments than the 55 year old.

Clearly though, what one needs to do is to calculate the present value of each income stream and then compare them apples-to-apples. And that's what was attempted.

Again, Use the linked calculator for an EXACT figure. These ballpark estimates are just that.

 

[jdw_fire]

The model (16X) is flawed. There is no age-discriminant per the age of the pensioner in the 16X model. The 62 year old gets 7 years less pension payments than the 55 year old. i agree, so maybe the better of the 2 approaches that i showed would be the latter i.e. using the values of both A and B at age 62.

Clearly though, what one needs to do is to calculate the present value of each income stream and then compare them apples-to-apples. i agree, however, that PV calculation needs to be to the same date for both. And that's what was attempted. i disagree, so i pointed out what i saw as a flaw in your approach. you compared the value of A at age 62 to the value of B at age 55, which made it an apples-to-oranges comparison. that is why i posted what i posted.

Again, Use the linked calculator for an EXACT figure. These ballpark estimates are just that. i agree

comments embedded

 

[MasterBlaster]

jdw_fire:

I will not get in a pissing match here. And that's why I am reluctant to reply to these pension comparison threads.

However, I believe that you are mistaken. I pointed out that an income stream starting at age 62 was ~$156k. But the present value of that stream at age 55 was only ~$111k using the 5% discount rate.

But that need be discounted since (presumably) the pensioners lifespan is the same - either way. I realize that this is not entirely true due to survivors bias but can be ignored for this discussion.

I then went on to ballpark the error in the present value of the 62 year old pension relative to the 55 year old pension at $29k.

You can do the present value calculation and comparison either way, at 55 or at 62. The numbers will adjust and the apples to apples comparison of present values can be made.

The question you should ask yourself is ... How does your approach consider and account for the longer payout period of the 55 year old pensioner ?

 

[jdw_fire]

jdw_fire:

I will not get in a pissing match here. And that's why I am reluctant to reply to these pension comparison threads.

However, I believe that you are mistaken. I pointed out that an income stream starting at age 62 was ~$156k. But the present value of that stream at age 55 was only ~$111k using the 5% discount rate.

But that need be discounted since (presumably) the pensioners lifespan is the same - either way. I realize that this is not entirely true due to survivors bias but can be ignored for this discussion.

I then went on to ballpark the error in the present value of the 62 year old pension relative to the 55 year old pension at $29k.

You can do the present value calculation and comparison either way, at 55 or at 62. The numbers will adjust and the apples to apples comparison of present values can be made.

The question you should ask yourself is ... How does your approach consider and account for the longer payout period of the 55 year old pensioner ?

my approach (picking the 1 for age 62) values both the pensions at age 62 (as if both started at age 62) and then added in your number for the value of the payments from pension A for the years 55 - 62.

OR at age 62 pension A is worth $95,496 and pension B is worth $156,096

see below for where i got your number for values at that age.

OK lets ballpark it, subject to the discount rate/mortality/ballpark accuracy issues.

The present value of your ($346/mo) pension (pension A) using the 16x formula is

12X346X16 = 66432

The present value when you are 65 (this should actually be age 62 and this is pension B) years old, of the $813 pension is

12X 813X16 = 156096. (so, per your post, $156.096 is the PV of pension B at age 62)

... (in here you went on to bring the value of pension B to a PV at age 55 but since here i am using the values of both A and B at age 62 i am leaving it out)

But there are issues which the rules of thumb miss. The 55 year old gets 7 more years of income than the 62 year old. The 55 year old gets an extra 7 years X 12 months/year X 346 ==> $29064 extra.

So when you add the $29064 to the $66432 present value of the 55 year old pension I get $95496. (so $95,496 is the value of pension A at age 62)

...

btw, no pissing involved here, i am just thinking that you, in your original post, accounted for the difference in starting dates of the 2 pensions twice, 1st you discounted 1 cash flow (pension B) which by itself accounts for the different starting dates. then you added all the payments recieved from pension A till the start date for pension B to the PV calculation of pension A, which by itself would have accounted for the discrepancy of starting dates without discounting pension B. either discount pension B or plus up pension A to account for the difference in starting dates but dont do both, that in essence double discounts pension B

 

[MasterBlaster]

i didn't read all of your post.

But, Lets beat this thing to death...

Why the 16X model doesn't work so well. It doesn't account for different collection spans. Therefore some sort of correction need be added to compare

lets suppose the 62 year old lives to 82. That's 20 years of pension he gets. We estimated the presnt value of his pension at 62 to be around $156k. And we discounted it back to 55 estimeted at $111k.

The 55 year old also lives to 82 which is 27 years of pension. Here the 16X model underestimates relative to the 62 year old (16X model) by 7 years. The $29k extra was an attempt to correct the model.

This is a correction above and beyond, the 16X discounted cash flow.

 

[jdw_fire]

i didn't read all of your post.

But, Lets beat this thing to death...

Why the 16X model doesn't work so well. It doesn't account for different collection spans. Therefore some sort of correction need be added to compare

lets suppose the 62 year old lives to 82. That's 20 years of pension he gets. We estimated the presnt value of his pension at 62 to be around $156k. And we discounted it back to 55 estimeted at $111k.

The 55 year old also lives to 82 which is 27 years of pension. Here the 16X model underestimates relative to the 62 year old (16X model) by 7 years. The $29k extra was an attempt to correct the model.

This is a correction above and beyond, the 16X discounted cash flow.

maybe you should have read all my post. let me now show you why you dont have to discount twice (of course you will need to read this post). first, you are correct about the need to correct for time but all i am saying is you dont need to correct twice (in fact doing so makes the comparison incorrect). i will show you with both of the ways i said you could account for the difference in when the payments start. it is conceptually easier to explain by comparing the value of the 2 pensions at the age of 62. to get the value of all the payments going forward for each pension at the age of 65 we use the same formula (i.e. 16x). thats fair, right? those values, as pointed out by you, are

The present value of your ($346/mo) pension using the 16x formula is

12X346X16 = 66432

.... the $813 pension is

12X 813X16 = 156096.

value of pension A = $66,432
value of pension B = $156,096

any problem so far? remember we are determining the value of these pensions at age 65. but what about all those payments already made? well seems like they need to be added to the above values. i will again use your numbers.

The 55 year old gets 7 more years of income than the 62 year old. The 55 year old gets an extra 7 years X 12 months/year X 346 ==> $29064 extra.

so making that addition we get
value of pension A = $66,432 + $29,064 = $95,496
value of pension B = $156,096 + 0 = $156,096
(which i said in my 1st post and showed in my 3rd post, the 1 you didnt read.) remember these are the values of both pensions at age 62

now if you want the values of both pensions at age 55 you need to discount the values of both pensions soo using your work in that area too

But that value needs to be discounted at (lets say for example) 5% per year. IE. How much money do I need now that compounds at 5%/yr will give me 156096.

using a 5% discount rate for 5 years I get that the present value of the income stream at 62 is ~$111k

we see that discounting a cash flow value from the value it has age 62 to its value at age 55 (7 years) using your assumed discount rate of 5% we can multiply its value at age 62 by ~0.711 ($156,096*0.711=~$111,000). there is the value of 1 pension but the value of the other 1 at age 62 also needs to be discounted (we need to be consistant) so it becomes $95,496*0.711=~$67,898. now this last paragraph is a convoluted way of arriving at the value of pension A at the age of 55 but i did this to be consistant. it does show that the 16x formula isnt consistant with a 5% discounting but that isnt really the point.

the point i am trying to make is when you discounted pension B using 5% you got the value of pension B at age 55 (and that is all you needed to do because you already had the value of pension A at age 55) but when you added all the payments made from pension A to the 16x formula for that pension you had the value of pension A at age 62 (not age 55). in essence you double discounted and as such you were comparing apples to oranges. you need to pick 1 date to which you calculate the value of both pensions, not compare values at different dates.

and oh btw, instead of beating this to death how bout you read my posts before commenting on them?

 

[MasterBlaster]

I believe that you are still mistaken.

The value of the 55 year old pension at age 55 was $66k. If I was given that cash and invested it at 5% for seven years until 62 it would be worth around $92k.

Previously we estimated that at 65 the higher pension was worth $156k.

But there was a problem in that our 16X present value model didn't take into account that the 55 year old would collect for maybe 27 years and the 62 year old would collect for 20 years. Therefore direct present value comparisons corrected to either a 55 year old or a 62 year old aren't valid.

I estimated the correction for the extra payments to the 55year old at $29k when he was 55. But that money invested at 5% for 7 years until he is 62 would be worth ~$40k.

Therefore the present value of the lower pension at 62 years old is (($66k)/.71) + ($29k/.71) = $133k

The higher pension at 62 had a (at 62) present value of $156k and wins the little ballpark analysis. Still they are close enough and my analysis has been simple.

Therefore I suspected that per the rules, discount rates, and mortality models of the OPs pension plan they were probably actuarily equivalent.

 

[jdw_fire]

I believe that you are still mistaken. no, it is you who is mistaken, you are correcting the value of pension A to its value at 62 but you also are also correcting the value of pension B to its value at age 55. apples and oranges

The value of the 55 year old pension at age 55 was $66k. If I was given that cash and invested it at 5% for seven years until 62 it would be worth around $92k.

Previously we estimated that at 65 the higher pension was worth $156k.

But there was a problem in that our 16X present value model didn't take into account that the 55 year old would collect for maybe 27 years and the 62 year old would collect for 20 years. Therefore direct present value comparisons corrected to either a 55 year old or a 62 year old aren't valid.

I estimated the correction for the extra payments to the 55year old at $29k when he was 55. But that money invested at 5% for 7 years until he is 62 would be worth ~$40k. so now to try and make your point you are changing the numbers? i used your numbers to show you that your method was wrong, why muddy the waters by changing the numbers?

Therefore the present value of the lower pension at 62 years old is (($66k)/.71) <-this is totally inappropriate, it should not be divided by anything + ($29k/.71) <-and this is where you are mudding the waters = $133k <-this is now very incorrect

The higher pension at 62 had a (at 62) present value of $156k and wins the little ballpark analysis. Still they are close enough and my analysis has been simple.

Therefore I suspected that per the rules, discount rates, and mortality models of the OPs pension plan they were probably actuarily equivalent. nope

how bout instead of making your wild claims and changing the parameters, you go through my explanation and show me where there is an error in my method (you wont be able to, if the numbers are wrong remember i used your numbers). try doing that to my explaination of the value of both pensions at age 62.

 

[MasterBlaster]

lets keep this Civil !

I haven't changed the numbers. Go read my first ballpark post.

I believe what has confused you is that the error correction for the longer payment regarding the 16X model is almost identical to the delta increase from the $66k present value at 55 to the present value at 62. Both are worth about $29k but refer to two separate and very different things.

 

[Zero]

Here is another way of evaluating, it assumes the money is saved and earns 4% per year. Not inflation indexed so the comparison is valid. Assumes zero inflation.

Looks like the breakeven point is age 68. Do note that at age 83, you will have collected about 50% more money = $100k +