Results of my experiment after one year

[nun]

At the beginning of 2015 (at age 54) I took a lump sum payment from a pension. The amount was $35k. The pension would have paid $5.6k per year starting at age 65.

I decided to do a long term experiment to see if taking the lump sum ended up as the best choice. So I deposited the money in Vanguard Balanced Fund (60/40 AA) VBINX, and sat back. I worked out that an average of 6% gain each year would support the same income as the pension to age 83.

After the first year the lump sum choice is lagging a bit.

Jan 2015 - $35k
Jan 2016 - $34k

so about a 3% loss.....Let's see what 2016 has in store.

[Sunset]

It would have been better to take the pension annuity.
I calculate $3,828 using 35K to buy an immediate annuity that starts in 11 years assuming age 54 for a female.

Guess we will watch this thread for 9 more years to find out the answer

[nun]

Quote:

Originally Posted by Sunset It would have been better to take the pension annuity. I calculate $3,828 using 35K to buy an immediate annuity that starts in 11 years assuming age 54 for a female. Guess we will watch this thread for 9 more years to find out the answer

I'm not comparing the pension to an annuity I could buy, I know that the company pension is a better deal, but whether a 60/40 index portfolio will beat the pension. Just looking at the historical average returns of VBINX getting 6% return looks like a good bet.

https://personal.vanguard.com/us/fun...FundIntExt=INT

I have enough income from pensions to cover my expenses already and will get SS checks from the US and the UK at age 66, so I decided to cash in this small pension and do the experiment. When I hit 65 I will take $5.6k a year from the account to continue the experiment and see when it runs out. If I get to 83 with money left or I die with money still in the account the lump sum will have won, although I'm trying to avoid the dying early bit.

The 9 year mark is a milestone......but the experiment hopefully continues past that.

[hesperus]

Quote:

Originally Posted by nun Just looking at the historical average returns of VBINX getting 6% return looks like a good bet.

past performance, as you know, is not a guarantee of future performance. I think a 6% estimated annual gain is very high. I also would have taken the guaranteed pension, and invested that every year instead.

[Big_Hitter]

great experiment, looking forward to the results

[Rickt]

Quote:

Originally Posted by Big_Hitter great experiment, looking forward to the results

+1

[highlow65]

a safe 6% is very tempting, but of course it is your choice and it seems you will be fine either way, good luck

[nun]

Quote:

Originally Posted by hesperus past performance, as you know, is not a guarantee of future performance. I think a 6% estimated annual gain is very high. I also would have taken the guaranteed pension, and invested that every year instead.

The 6% annual gain required just drops out of compounding the $35k for 11 years and then taking $5.6k/year after that and making the account be zero at age 83.....for the commercial single life deferred annuity I could buy with the $35k the rate that drops is 3.5%, which is a lot less attractive.

I agree that 6% looks optimistic right now, but there are many retirees that have been persuaded to take the lump sum with the expectation that they can do better than the pension or keep up with inflation. That looks like a good possibility for the commercial annuity at 3.5%, but I'm doubtful that it will beat the company pension. So rather than keeping the small pension I decided to do the experiment. It was a very conscious decision as I have more than enough pension income already and my plan was to be at least 70% in stocks once I had expenses covered by pensions anyway. So a $35k experiment seemed interesting.

We'll see if your advice to take the pension income and invest it works out better than investing the lump sum right now........that's the whole point of this experiment. My prediction is that the pension will win, VBINX will come second and the deferred SPIA will be last. We just have to wait 30 years for the result.

[Lsbcal]

Just think of how much better off you'll be if you drop dead. Or rather you're heirs.

Just kidding of course. But why do this exercise? I'd rather focus energy on future plans. No time for regrets.

You could use VPW to analyze this in the past.

[Sunset]

Quote:

Originally Posted by nun .....We'll see if your advice to take the pension income and invest it works out better than investing the lump sum right now........that's the whole point of this experiment. My prediction is that the pension will win, VBINX will come second and the deferred SPIA will be last. We just have to wait 30 years for the result.

Now we have a reason to stay with the forum, you should ask them for a commission.

[Willers]

I'll look forward to your yearly updates on this. I commend you for doing this with real money. It will be entertaining to watch. I hope I'm still alive to see the final verdict.

[nun]

Quote:

Originally Posted by Lsbcal Just think of how much better off you'll be if you drop dead. Or rather you're heirs. Just kidding of course. But why do this exercise? I'd rather focus energy on future plans. No time for regrets. You could use VPW to analyze this in the past.

I decided to take the lump sum because it was a fairly small amount and I have more than enough annuity type income already.....I am overweighted in that area having an employer pension and two SS checks. The exercise is out of academic interest. Its fine to look at past results and use something like VPW, but I though that I'd do the real world experiment for my retirement years.

[Lsbcal]

Good idea Nun. Sounds like a good exercise for others to see here.

[nun]

Quote:

Originally Posted by Lsbcal Good idea Nun. Sounds like a good exercise for others to see here.

Yes, the time scale for a substantial result is an issue though.....

After six months the VBINX lump sum option was doing well, up 3% so on track to match the pension and blowing away the commercial deferred lifetime annuity, but after a year -3.5% return is way behind the 6% needed to match the pension and the 3.5% return to match the deferred annuity. Still it's early......very early.

[nun]

....of course you might also say that the lump sum in VBINX is ahead of the pension and the deferred annuity because I have $34k right now. If I can get 3.5% average return from VBINX I'll have to live to 83 for the annuity to be a better deal and I'll need to be 77 before the pension beats out the lump sum.

[DrRoy]

It is definitely interesting to run and watch the experiment in real time. Since most WR recommendations are in the 3-4% range these days, I would guess the odds are below 50% of it working. Have you tried to run the scenerio in Firecalc?

[nun]

Quote:

Originally Posted by DrRoy It is definitely interesting to run and watch the experiment in real time. Since most WR recommendations are in the 3-4% range these days, I would guess the odds are below 50% of it working. Have you tried to run the scenerio in Firecalc?

Yes I have.

A 60/40 portfolio (Total Market with Long Interest chosen and 60% equity) of $35k invested for 11 years has an 100% chance of producing $3.8k (the commercial annuity) for the next 18 years and a 76% chance of success producing $5.6k (the pension). Those look like good odds, I'm just a bit pessimistic about the returns of 60/40 portfolio in the next 10 years, but we'll see.

[dixonge]

At one point I was thinking about w/drawing and using a similar-sized lump sum since I wasn't yet vested. But the difference is that my non-vested amount grows at 7% each year, paid annually by the pension company. Hard to justify a withdrawal, unless forced to. In the meantime, circumstances changed and I'm now finishing out my vesting, so it's a moot point.

[nun]

Quote:

Originally Posted by dixonge At one point I was thinking about w/drawing and using a similar-sized lump sum since I wasn't yet vested. But the difference is that my non-vested amount grows at 7% each year, paid annually by the pension company. Hard to justify a withdrawal, unless forced to. In the meantime, circumstances changed and I'm now finishing out my vesting, so it's a moot point.

I bought into another COLAed pension recently. I used $282k to buy $19600 annual income starting at age 55.....that will be later in 2016 for me. The chances that a 60/40 portfolio would provide the same income out to 83 are 30% and the pension also has an early death benefit.

So choosing the COLA'ed pension was a no brainer, but when a 60/40 portfolio has a 76% chance of being as good as my other far smaller pension ($5.6k starting at 65) out to age 83, I decided to take the lump sum and run the experiment to see if it ended up being a good decision. Factored into that was also that at age 66 I expect to receive approximately $40k in SS checks so I don't really need more pension/annuity type income.

[Backdraft57]

How goes the experiment nun?

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