Pension Options?

[golfnut]

Just curious what forum members would do here.

Lump sum is approx. $135,000. Yearly payout for life is $8,400 ( joint-no inflation adjustment).

Pretend you are 55 yrs old, married and ready to retire and do not necessary need the yearly payout right away (can hold out to at least 59.5).

Would you take the lump sum and roll it into a 401k (maybe put in Wellesley Fund) or would you take the yearly payout?

Golfnut

 

[harley]

For me, definitely the lump sum. The 6.2% is a nice return now. but after a few years of inflation you could easily be looking at 1-2% or less. If you take the cash, invest it for as long as you can before drawing on it, I think you've got a good chance to beat the draw significantly over the long run. JMO. I've got a moderate risk tolerance.

 

[zinger1457]

I would take the lump sum if I didn't need the money right away. You could get an immediate annuity today for close to that amount and the interest rates are near rock bottom. If you like the idea of having a pension type monthly income you could always purchase an immediate annuity in a few years when interest rates go back up and hopefully your principle has also increased.

 

[Meadbh]

Assuming that the lump sum is a trivial portion of NW, and assuming that it would be tax sheltered until withdrawn, and assuming a balanced portfolio, I would take the lump sum and invest it in a carefully selected MIC, with the income reinvested until required.

OK, flame me. But you did ask.

And why are you asking the same question with a different lump sum in another thread? (Yearly payout or lump sum?)

 

[clifp]

8400 is significantly higher than you can get for 135K lump sign in most places.

The TSP annuity calculator says that you would get $6144. Sticking in a PenFed 7 year CD at 3.5% gives you $4725 and obviously allows the principal to remain in your estate.

$700/month isn't enough to live on but if your investments tank it would seem to be to be a nice back up.

It is is true that you are locking in a annuity at relatively low rates but they aren't particularly low and are much higher than any risk free investment you can get right now.

 

[chinaco]

Depends. Is the Pension stable, fully funded and conservatively managed? Is it safe!

You can compare your pension payout against a commercially available annuity to determine what it would cost to purchase the equivalent today (need to factor in abnormally low interest rates).


The lump sum calculation seems to be defined by the Pension Protection Act of 2006. Looks like to calculate the lump, the yield curve is broken up and the annuity payout discounted.

IRC §417(e) prescribes the interest rate and mortality table that plans must use to
determine the minimum present value of an annuity, and thus the minimum value of a
lump-sum distribution that a participant who elects to take a lump sum is entitled to
receive from the plan. Section 302 of the PPA amended IRC §417(e) to replace the
30-year Treasury bond interest rate with a corporate bond interest rate as the rate to be
used in this calculation.2 The PPA requires plans to use interest rates that will be derived
from a three-segment “yield curve” of investment-grade corporate bonds to determine the
minimum lump-sum value of an annuity.

http://aging.senate.gov/crs/pension9.pdf


IMO - Assuming one is healthy, the annuity would be my choice to cover longevity risk. But it all comes down to the detail and your options. The analysis is more complex than is apparent. You need to consider mortality, comparable investment returns (with a similar risk profile), etc. You are going to try to predict the future on several complex issues.

 

[keegs]

Depends.

Is the Pension fully funded and conservatively managed?

You can compare your pension payout against a commercially available annuity to determine what it would cost to purchase the equivalent today (need to factor in abnormally low interest rates).

IMO - Assuming one is healthy, the annuity would be my choice to cover longevity risk. But it all comes down to the detail and your options. The analysis is more complex than is apparent.

agreed..I'm not sure but 8.4k for life (does joint mean your spouse as beneficiary?) on 138k annuity sounds pretty good, especially if there's no other guaranteed income stream beyond SS... I'd take the annuity.