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Pension too good to be true?
02-29-2008, 05:42 PM
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#1
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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: 16,301
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Pension too good to be true?
I am not relying on a pension, but I do have a small one from a previous employer. WRT the pension, the best time for me to retire is age 61 at which time I will have the option of $901/month for life (no COLA) or a lump sum of $123,500. My intent was always to take the lump sum.
But as I get closer I started looking at it as a nest egg and SWD. Most of what I read suggests a 4%± withdrawal rate (not looking to debate the %) would provide good odds of a monthly income lasting more than 30 years. So a $123,500 lump sum at a 4% withdrawal rate would yield $411/month ($125,000 x .04 / 12 month/yr) at the outset. Assuming 3% COLA increase, it would be 28 years before the monthly amounts would be equal and 48 years before the total payout would tip in favor of the lump sum (I hope I don't live that long frankly). That suggests to me I'd have to be brain dead to not take the $901/month instead of the lump sum, over twice as much per month to start and guaranteed not to run out before I die. What am I missing?
__________________
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: 40% equity funds / 35% bond funds / 25% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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02-29-2008, 05:55 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Aug 2007
Posts: 1,224
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How confident are you that the pension fund will survive and payout as advertised?
DD
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02-29-2008, 05:59 PM
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#3
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Recycles dryer sheets
Join Date: Jan 2006
Posts: 176
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Quote:
Originally Posted by Midpack
What am I missing?
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The $123,500  But seriously, if you are not worried about leaving an inheritance to anyone, the company is a good financial risk (I think PBG probably covers that small an amount), and you have other assets growing to cover inflation, then the pension payments can be a good deal for you. You are benefitting at the expense of your short lived co-workers  Just make sure you are not one of them
__________________
David
I get up at 7 yeah, and I go to work at 9. Got no time for livin yes I'm workin all the time. Seems to me I could live my life a lot better than I think I am. I guess thats why they call me the Working Man.
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02-29-2008, 06:01 PM
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#4
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Moderator
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,475
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Quote:
Originally Posted by Midpack
But as I get closer I started looking at it as a nest egg and SWD. Most of what I read suggests a 4%± withdrawal rate (not looking to debate the %) would provide good odds of a monthly income lasting more than 30 years. So a $123,500 lump sum at a 4% withdrawal rate would yield $411/month ($125,000 x .04 / 12 month/yr) at the outset. Assuming 3% COLA increase, it would be 28 years before the monthly amounts would be equal and 48 years before the total payout would tip in favor of the lump sum (I hope I don't live that long frankly). That suggests to me I'd have to be brain dead to not take the $901/month instead of the lump sum, over twice as much per month to start and guaranteed not to run out before I die. What am I missing?
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The main question is: Do you want to pass anything to your heirs or spend it all yourself? If you don't want to pass anything to your heirs, in your case an annuitized payout such as a monthly pension can beat the pants off of the lump sum.
But on the other hand, if you don't need the money and you want to pass something to your heirs, taking the lump sum and investing it until the day you die might make more sense.
I'd also add that you don't say whether you are married or single, and if you're married, does the pension include survivor benefits? And if it does, is it 50%, 66 2/3%, 100% joint and survivor or something else?
For grins, I went to the BRK Direct site (from Berkshire Hathaway which is AAA-rated and A++ with A.M. Best) to see what the monthly annuity payments would be for a 61-year-old under various scenarios with a $123,500 investment:
EZ quote
* Male and no survivor benefit (born 1/1/1947): $726 per month
* Female and no survivor benefit (born 1/1/1947): $680 per month
* Married with 100% joint and survivor benefit (assuming both born 1/1/1947): $622 per month
Off the cuff, unless you are in poor health and have a terrible family history of longevity, taking the $901 monthly payments would seem a better idea -- IF you have confidence in the pension fund and the company backing it. There's something to be said for the bird in the hand rather than waiting for two in the bush.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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02-29-2008, 06:08 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Mar 2005
Posts: 2,460
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Yeah, this is less about how "good" the monthly payment is; and more about how "bad" the lump sum is. I'ld stick with the monthly payment.
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FIRE'd since 2005
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02-29-2008, 06:09 PM
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#6
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Recycles dryer sheets
Join Date: May 2005
Posts: 295
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Phantom Value
There is a so called "phantom value" to a pension. Meaning, how much cash it would take to give you your pension amount from a guaranteed source such a treasuries? That amount being it's "phantom value".
Mine used to be $660,000. Now all of a sudden it is $800,000.
That is a powerful argument to take the pension, in my mind.
b.
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02-29-2008, 06:09 PM
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#7
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Dryer sheet wannabe
Join Date: Oct 2005
Posts: 23
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Seems like your pension plan is pretty generous. Using IRS mortality tables from last year for lump sum to annuity conversion, the rate applied is almost 6.5%. It is also unreduced for early retirement.
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02-29-2008, 07:36 PM
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#8
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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: 16,301
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Quote:
Originally Posted by success108
Seems like your pension plan is pretty generous. Using IRS mortality tables from last year for lump sum to annuity conversion, the rate applied is almost 6.5%. It is also unreduced for early retirement.
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A subsequent letter mentioned a GATT rate of 6.5%. As for ER, eligibility begins at age 56 at 75% of monthly income and increases 5% each year to age 61 when it hits 100% --- and never goes up from there no matter how much longer I work. And for those who asked, it's just DW and I so we don't care about leaving any inheritance.
__________________
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: 40% equity funds / 35% bond funds / 25% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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