Pensions vs. Portfolios...My first poll!

[martyb]

Just wondering, with all the Net Worth discussions & valuation differences between "regular" portfolios vs pensions etc., if folks had an option to take one or the other, but not both, which would it be? I'm expecting to be in the COLA pension category, but if I could swap it in for $1 million, I might be tempted, even though what I read on this board indicates they are similar, except for passing down to children when you check out. It's my first poll, so if it sucks, well......sorry!

 

[Martha]

I like certainty but I don't think there is any anywhere. But if the pension was a federal pension and was COLA'd, I'd take the pension. Looks like I am in the minority.

 

[Spanky]

The choice is obvious since the net present value of a $40K COLAed pension is $805,624.67 which is less than $1 million now. This is based on 3% inflation, rate, cost of capital of 7%, 40 years. It would take about 96 years to break even.

If inflation were higher or cost of capital were lower, the breakeven would be quicker. Let's say inflation is 4% while cost of capital remains the same, the breakeven will be 45 years.

 

[FIRE'd@51]

The choice is obvious since the net present value of a $40K COLAed pension is $805,624.67 which is less than $1 million now. This is based on 3% inflation, rate, cost of capital of 7%, 40 years. It would take about 96 years to break even.

If inflation were higher or cost of capital were lower, the breakeven would be quicker. Let's say inflation is 4% while cost of capital remains the same, the breakeven will be 45 years.

Yes, very good point. I couldn't reply on that thread (looks like only moderators can). The optimal choice is age-related. If you use the actuarial tables on the SS web site and calculate the SWR using long-term TIPS rates, the break-even point occurs if you can start your withdrawals at age 40. As you age the SWR's will increase - at age 50 the SWR is 4.8%, at age 55 it is 5.4%, and at age 62 it is 6.5%. At age 70 it is 8.9%. Of course my numbers are based upon actuarial averages and include no longevity insurance. However, the same age effect would be present if the SWR's were calculated using the Vanguard annuity calculator - only the SWR's would be somewhat lower due to the fees associated with purchasing the annuity.

So, to have real meaning, the poll question should be posed (if you use my numbers) something like "If you were 55 would you trade $1 million for annual COLA'd income of 54K (or whatever number the Vanguard annuity calculator says)?".

I also think it would be more interesting if the question specified that you had no other sources of income, as this eliminates those who would use the annuity to diversify their portfolios.

I bet we'd see a lot more respondents choosing the COLA'd annuity if these changes were made.

 

[yakers]

That was what I was thinking. I would swap $40k of my COLAd pension for $1M becasue that is a good value, no one is offoring that deal. And it would allow me to 'deannuitize' some of my pension cash flow to maybe do better estate planning to leave more to the kids.

 

[REWahoo]

[Moderator note: This thread was locked inadvertently and has now been unlocked. The replies from a separate thread have been merged with the original topic.]

 

[haha]

Can anyone help me find the page at Vanguard where single payment inflation adjusted annuities are quoted? I checked it before but can’t seem to find it now.

I think at my age I would get more from the annuity than from a reasonable SWR, but I would like to check.

Ha

 

[FIRE'd@51]

Can anyone help me find the page at Vanguard where single payment inflation adjusted annuities are quoted? I checked it before but can’t seem to find it now.

I think at my age I would get more from the annuity than from a reasonable SWR, but I would like to check.

Ha

http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote

 

[tryan]

The wad has enough risk tied to it that a 40k pension sounds pretty good ... but maybe the grass is always greener in the other pasture.

 

[haha]

Thanks, Fd@51.
Ha

 

[mickeyd]

This is an interesting academic topic. Since I have never heard of a COLAd plan that gave the option to lump sum the amount, and I could be wrong here, it would be interesting to see if such a plan exists.

Taking $1M rather than a non-COLAd plan is a no-brainer, but the COLA part of a plan really adds value since it appears to be quite a good inflation hedge for the future. This inflation hedge has to have some kind of intrinsic value that is variable depending on the potential recipient. (I may value the safety more that you do, for example.)

I know that I would tend to retain the $40k income stream because it provides a good basis for my plan and may allow me more flexibility in my overall AA and other investments. That said, I would be tempted to grab the $1M and assume that I can invest it more efficiently than the pension plan, thus ending up on top.

 

[tryan]

Since I have never heard of a COLAd plan that gave the option to lump sum the amount, and I could be wrong here, it would be interesting to see if such a plan exists.

A friend works for American Airlines ... they offer the pilots an option to lump sum out of the pension plan. Nearly all take the lump sum. Don't know if it's Cola'd.

 

[bbuzzard]

I vote conditional yes. First, the pension has to be federal, state, county government. Second, I would only agree to "pensionize" half of my stash at most. Third, they have to be willing to offer me the pension at 45! Number 3 Seems unlikely.

 

[bbuzzard]

I suspect of this was offered to the American public at large, 95% of them would take the million dollars, and the price of luxury cars, luxury homes, boats and luxury vacations would soar through the roof in the next three months. Maybe the stock market would also soar based on consumer demand?

 

[macnjus]

3 factors at play here, age, credit quality and porfolio structure. Age is discussed above, as has been credit quality. As far as the portfolio structure, if the credit were solid and the individual young enough, then the pension would be a nice addition to a portfolio in which some annuity type of investment were desired. Depending on age, this could be a very good payout for an inflation-adjusted annuity.