Curmudgeon
Recycles dryer sheets
- Joined
- Oct 17, 2016
- Messages
- 255
I've researched the general topic of cash vs pension, but I think the specifics here make it unique:
My current age is 54, I was recently laid off, my employer has granted me a tiny pension which has several options for how to take it. The baseline guarantee for the pension is $1414 per month, non-COLA, once I reach age 65. That amount will never change, regardless of what inflation etc. does before or after that date. All other options are derived from that base using actuarial estimates of inflation, life expectancy, etc.
One option is to cash out now; the current cashout value is around $127K. If I work backwards from $1414 at age 65 to a $127K NPV, it comes out to around 5% annual interest. I don't think we'll see an average of 5% inflation over the next 11 years, so it seems like they're giving me a bit of a haircut on the cashout. Indeed, I called Fidelity and asked them how much it would cost me today to purchase an annuity that would pay $1414 at age 65, and they quoted me around $190K. So I would definitely get shortchanged if I took the cash.
On the other hand, the pension is non-COLA, and so waiting 11 years (over which, I'm guessing, we will probably see higher inflation than what we've seen over the last decade) could mean taking a pension with a significantly reduced real value.
So, the question is, do I take a haircut today, or wait 11 years and hope that inflation doesn't give me the haircut over time? (I'm not really looking for a "do this/that" answer, just trying to understand what methods I should be using to evaluate this choice.)
If I expect inflation to remain constant, I think the obvious answer is to wait and take it at age 65 (or later). There's no place I could invest $127K today that would give me a guaranteed $1414/mo annuity in 11 years (5% APY with 0 risk). On the other hand, if inflation goes up, it's quite possible that an investment of $127K today would get me better than $1414/mo, in constant dollars.
My current age is 54, I was recently laid off, my employer has granted me a tiny pension which has several options for how to take it. The baseline guarantee for the pension is $1414 per month, non-COLA, once I reach age 65. That amount will never change, regardless of what inflation etc. does before or after that date. All other options are derived from that base using actuarial estimates of inflation, life expectancy, etc.
One option is to cash out now; the current cashout value is around $127K. If I work backwards from $1414 at age 65 to a $127K NPV, it comes out to around 5% annual interest. I don't think we'll see an average of 5% inflation over the next 11 years, so it seems like they're giving me a bit of a haircut on the cashout. Indeed, I called Fidelity and asked them how much it would cost me today to purchase an annuity that would pay $1414 at age 65, and they quoted me around $190K. So I would definitely get shortchanged if I took the cash.
On the other hand, the pension is non-COLA, and so waiting 11 years (over which, I'm guessing, we will probably see higher inflation than what we've seen over the last decade) could mean taking a pension with a significantly reduced real value.
So, the question is, do I take a haircut today, or wait 11 years and hope that inflation doesn't give me the haircut over time? (I'm not really looking for a "do this/that" answer, just trying to understand what methods I should be using to evaluate this choice.)
If I expect inflation to remain constant, I think the obvious answer is to wait and take it at age 65 (or later). There's no place I could invest $127K today that would give me a guaranteed $1414/mo annuity in 11 years (5% APY with 0 risk). On the other hand, if inflation goes up, it's quite possible that an investment of $127K today would get me better than $1414/mo, in constant dollars.