pension payment options

[mrfeh]

Anybody know of an online tool that shows how different pension payment plans compare to one another (ideally graphically)?

Even better would be one that uses real dollars, and would allow me to specify how investing the proceeds affects the results.

Thanks.

 

[pb4uski]

Many people look up the premium needed for an immediate annuity with the same benefits to get an idea of a fair value for the pension benefit... or inversely, look up the monthly benefit that would result from paying a premium for the proposed lump sum.

In most cases, the lump sum offered is significantly lower than the premium that would be needed to achieve the same level of monthly benefits... often 70-85%.

 

[mrfeh]

Many people look up the premium needed for an immediate annuity with the same benefits to get an idea of a fair value for the pension benefit... or inversely, look up the monthly benefit that would result from paying a premium for the proposed lump sum.

In most cases, the lump sum offered is significantly lower than the premium that would be needed to achieve the same level of monthly benefits... often 70-85%.

Thanks.

I'm not interested in a lump sum payment. I have the option of starting a pension anytime during the next 7 years, with reduced payments the earlier I start. Trying to decide what gives max value.

 

[gauss]

When I have looked at this. I would calculate the year over year discount of starting the pension 1 year earlier and plot the results. ie 1 year earlier 7%, 2 years earlier 15% etc.

I would then compare this curve to an actuarial fair curve such as the one used by Social Security.

In DW's case, the company significantly subsidized ER (ie. only about a 3.5% yearly reduction).

In my case, my dear former employer would really sock it to us so I am delaying the pension draw until age 65.

Note that most employers will have a different curve for an actual retirement, vs a 'quit' that has an associated vested pension benefit.

-gauss

 

[EQMAN]

For me I took it right away. From an emotional perspective I still wanted something that felt like the paycheck, although much lower, I had been receiving. Also potential inflation lower the purchasing power of a non COLA pension was a consideration. Figured the actuaries had it figured out and the NPV would not be that different.

 

[pb4uski]

Thanks.

I'm not interested in a lump sum payment. I have the option of starting a pension anytime during the next 7 years, with reduced payments the earlier I start. Trying to decide what gives max value.

What you could do is to look at the value (required premium) of a SPIA that provides a benefit equal to your pension where the benefits start in a number of years.

So to take a simple example, lets say your choices are $1000/month at age 62 or $1,250/month at age 65 and that you plan to select a 100% J&S and are both currently 60 and live in Florida.

$100,000 premium today would provide a $386 joint life benefit in two years... so that $1,000 benefit is worth $259,067 ($1,000/$386*$100,000).

$100,000 premium today would provide a $446 joint life benefit in five years... so that $1,250 benefit is worth $224,215 ($1,000/$446*$100,000).

So in that hypothetical situation, taking at age 62 would be optimal since it has a higher fair value... a higher premium would be needed to provide the $1,000/month benefit starting at age 62 than for the $1,250/month benefit starting at age 65.

 

[bada bing]

I did quite a bit of study into pension mechanics because over my career I've vested in 4 different mega-corp pension programs. There is no tool like you seek because there is such a wide array of rules and terms for various pension programs. You pretty much have to know how your program works to model it accurately.

The biggest potential difference between private employer pension plans is whether they are cash balance or defined benefit. Both of them are influenced by changes in interest rates, but in very different ways.

If you want a simple rule of thumb to do a quick and dirty evaluation of scenarios, here is one I'd use. I would compare the payment from one year to the next and calculate the percentage increase in benefit amount for each year of deferral. The deferred benefit increase comes from 2 factors: mortality credit and time value of money. Actuarially, you should be getting about 3% per year deferred increase for mortality credit while in your early 60's. Subtracting 3% from the increased benefit percentage offered for a year of deferral will give you an estimate of the investment return built in your pension. This number is probably along the lines of the 30 year treasury rate, but in some cases will be a lot more. That is the number I would use to compare to expected returns for taking and investing the money verses deferring the pension.

A big caveat is that if your pension is a cash value plan, benefit amount estimates for deferral are just that - estimates. They rely on current interest rates for future calculations and the benefit amounts quoted may very well be significantly different from what actually happens. If you believe we are are at historic low interest rates and rates may be significantly higher in the future, a deferred cash balance plan will pay more (maybe a lot more) than current estimates indicate.