How do you calculate a lump sum?

[debster]

Hi everyone ... I'm a long time lurker and have learned a lot from all of you (along with lots of laughs! ). In 18 months I'll qualify for two pensions from former employers (I'll be 55) and will probably opt for the lump sum option. The only info I've been given is an estimate of the monthly amount I'd receive (they would be approx. $600/mo. & $450/mo. each) How does that translate into a lump sum? I've tried asking the retirement administrators from the two companies, but they said they can't give me that info until I'm ready to cash in. Is there any rule of thumb for estimating the lump sum? I would sure appreciate some guidance. Thanks!

 

[brewer12345]

It depends on the discount rate they are using and assumptions about mortality. If you want to get an idea of what it would cost you to buy the equivalent on the open market, try www.webannuities.com to get a rough idea.

 

[soupcxan]

Sounds like a good time to learn about Net Present Value!

 

[uncledrz]

brewer gave a good website, another is the vanguard site ( www.vanguard.com)which will also tell you the cost of the income stream from an annuity which is basically what the pension is.
the company won't be able to tell you the lump sum value in 18 months, but ask if they could give you the present lump sum value, which should give a rough idea. Problem is that the discount rate may well change between now and then.

uncledrz

 

[debster]

Thanks for your responses. I checked both web sites you mentioned and was pleasantly surprised at the amount. I appreciate your feedback!