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Re: lump sum now vs pension later?

Thanks for agreeing with me, cherijoh :D . A very close approximation could be calculated using today's interest rates and a mortality table, but we don't know what interest rates would be at age 55 for the OP, or if the age 55 lump option would even be available. The pension could be in the hands o...
by Frugal Al
Thu Oct 23, 2014 5:45 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

You mention that you don't really need the money. That being the case my initial hunch is that you should take the lump sum. Annuities provide a nice floor income for retirement security. If you don't need that, then maybe it makes sense to take the lump sum and shoot for the moon. Plus, it will si...
by Frugal Al
Thu Oct 23, 2014 4:50 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

The point of the analysis is to decide whether taking the lump sum is the prudent financial decision (and for most people it isn't). Once the lump is taken, it becomes a moot point -- but it still could have been a bad decision. If anyone would sincerely like help with any of this, I'm happy to pro...
by Frugal Al
Thu Oct 23, 2014 9:30 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

If one wants to use the lump sum opportunity to take on more risk, one can certainly do so. But a financially disciplined investor doesn't just take more risk on the fly. I don't think anyone is suggesting anyone "just take more risk on the fly." The fact is it is very difficult to measur...
by Frugal Al
Wed Oct 22, 2014 3:32 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

Cruncher, Uber, and g$$, I did want to share what does seem to be a reasonable application of a mortality adjusted IRR, and that would be if the the prospective pensioner and spouse had widely disparate health/longevity, and perhaps the necessity to compare term insurance vs survivorship options. Mi...
by Frugal Al
Sat Oct 18, 2014 11:20 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

#Cruncher, as you pointed out, your example exagerates the issue because you've got the entire population dying off within such a short time span in a tight distribution. It's this application of mortality rates, plus any change in applicable segment rates, that would alter the intermediate age PV a...
by Frugal Al
Sat Oct 18, 2014 7:25 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

And I agree with G$$ that we are terrible at guessing our own life expectancy and we are equally bad at guessing the future of the yield curve as well as the level of investment return that we can achieve. Good explanation, ubermax. I'd add that we are equally terrible in guessing at inflation, and...
by Frugal Al
Fri Oct 17, 2014 11:53 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

#ubermax is right that the lump sum is probably not equivalent to the PV of all three annuities. I'll PM you so as not to derail the thread Coming in at the end of a thread, questioning the methodology, and then taking the discussion off-thread already derails the thread. It calls into question the...
by Frugal Al
Fri Oct 17, 2014 6:12 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

#Cruncher, I know you're not addressing me, but I suspect the issue is with the theoretical lump sums that would result at those noted ages. It really doesn't matter what actuarial assumptions produce the annuitization numbers, the numbers are what they are. However, the value of the lump sums imput...
by Frugal Al
Thu Oct 16, 2014 5:15 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: Another Pension Buyout Reference Point

To be honest I didn't check the numbers because cherijoh was not seeking advice. I was taking their word for it, and it looked reasonable to me given the early retirement spif. Granted, it can get a bit tricky when incentives are involved.
by Frugal Al
Thu Oct 16, 2014 12:48 pm
 
Forum: Personal Finance (Not Investing)
Topic: Another Pension Buyout Reference Point
Replies: 5
Views: 820

Re: lump sum now vs pension later?

In other words, the three annuities do look equivalent, but that's just kind of a lucky coincidence. Usually the offer in the plan documents will indicate any incentives that may be applied, so I do think this is more than a coincidence. However, that is not saying that the lump sum equivalent woul...
by Frugal Al
Thu Oct 16, 2014 12:33 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

Jason, although the nominal difference in payments is about $90k, the real value of those dollars is not. The $2159 you receive at age 65 is only worth a bit more in real dollars than the $1080 you'd receive at age 55, at the discount rates we're talking about. Assuming one is employed, after taxes ...
by Frugal Al
Wed Oct 15, 2014 5:36 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: lump sum now vs pension later?

I get satisfaction from devising an efficient way to crunch the numbers to provide one piece of the puzzle. You've done a great job showing the options in a coherent manner, #Cruncher. I still do a lot of calculation on my trusty HP17BII, but I think its days are numbered. Using the Excel spreadshe...
by Frugal Al
Wed Oct 15, 2014 7:02 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: Another Pension Buyout Reference Point

Nice analysis on your pension, Cherijoh. It certainly is a slam-dunk. I have changed my mind a little and think that this analysis could be helpful for those individuals (hopefully few) who want to take the lump sum and invest it in such a way that they do better than their annuity options from the ...
by Frugal Al
Wed Oct 15, 2014 5:19 am
 
Forum: Personal Finance (Not Investing)
Topic: Another Pension Buyout Reference Point
Replies: 5
Views: 820

Re: lump sum now vs pension later?

The "implicit rate of return" and IRR analyses , both equivalent , are nice thoughts and fun spreadsheet exercises but they fall short in two key ways - (1) they are interest only analyses whereas the annuities and lump sum are interest and mortality dependent and (2) they both require tw...
by Frugal Al
Tue Oct 14, 2014 4:13 pm
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: Pension buyout help

They asked me about putting it into IRA's, but I made them aware that they could only put in a maximum amount of $6,500 so it really wouldnt compound. The $6500 limit would not apply to a rollover from a qualified pension plan. As Herekittykitty points out, you haven't provided enough details to pr...
by Frugal Al
Tue Oct 14, 2014 1:34 pm
 
Forum: Investing - Help with Personal Investments
Topic: Pension buyout help
Replies: 6
Views: 237

Re: You will think this is a stupid question

The FED hasn't given any precise information either explicitly or implicitly, therefore one should not try to time the market. There statements have been more on the order of "we believe rates should rise by mid 201X, should and will are two different animals. Personally, I don't think rates w...
by Frugal Al
Tue Oct 14, 2014 1:00 pm
 
Forum: Investing - Theory, News & General
Topic: [unofficial Fed announcements make bond prices predictable?]
Replies: 25
Views: 920

Re: Reverse Mortgages

I've been looking into these recently for my mother. Reverse mortgages aren't quite as bad as they used to be as there were many rules and regulation changes a few years back, most for the better. Still, there is room for improvement. They are expensive and complex, and they should probably be used ...
by Frugal Al
Mon Oct 13, 2014 4:47 pm
 
Forum: Personal Finance (Not Investing)
Topic: Reverse Mortgages
Replies: 21
Views: 2066

Re: Cleaning Up Leaves

EmergDoc wrote:Chainsaw?

Ah, c'mon Doc, you're just trying to drum up business. :wink:
by Frugal Al
Mon Oct 13, 2014 10:07 am
 
Forum: Personal Consumer Issues
Topic: Cleaning Up Leaves
Replies: 40
Views: 3000

Re: lump sum now vs pension later?

It seems that it makes sense to start taking the pension at age 55 There's more to the decision than just the rate of return. This income will be taxable to the OP, so that will be a consideration as well. Also, in the case of married couples, if we're comparing the lump sum with the pension, we re...
by Frugal Al
Mon Oct 13, 2014 10:01 am
 
Forum: Personal Finance (Not Investing)
Topic: lump sum now vs pension later?
Replies: 45
Views: 3887

Re: Pension Lump Sum Offer

It's not uncommon for lump sum limits to be mandated in a buyout offer, especially if plan is marginally funded. Excessive subscription to large offers could send the plan below the necessary funding limits mandated on the plan sponsor allowing them to offer the lump sum. Since the sponsor has put l...
by Frugal Al
Sun Oct 12, 2014 5:03 pm
 
Forum: Personal Finance (Not Investing)
Topic: Pension Lump Sum Offer
Replies: 2
Views: 577

Re: [Decision on] lump sum

Sorry uber, but if one is "running near empty" at age 52, that's even more reason for them to NOT take the lump sum. All we know is what the OP has posted.
by Frugal Al
Fri Oct 10, 2014 1:09 pm
 
Forum: Personal Finance (Not Investing)
Topic: [Decision on] lump sum
Replies: 11
Views: 999

Re: Couch Surfing

She reported that very seldom was there an issue of confused expectations on the part of the hosts, and that setting those expectations in line early was always sufficient. She couldn't have afforded the trip staying in hotels, and hostels would have also been a strain financially. She met wonderfu...
by Frugal Al
Fri Oct 10, 2014 10:54 am
 
Forum: Personal Consumer Issues
Topic: Couch Surfing
Replies: 90
Views: 5225

Re: [Decision on] lump sum

Let the pension ride and shore up your emergency fund. I suspect this pension will be a large part of your retirement income. With little apatite for market risk there's no reason to consider the lump sum, nor early annuitization (unless you question reasonable longevity).
by Frugal Al
Thu Oct 09, 2014 11:09 am
 
Forum: Personal Finance (Not Investing)
Topic: [Decision on] lump sum
Replies: 11
Views: 999

Re: Another pension lump sum scenario

A little bit of "longevity insurance" afforded by an annuity is better than none at all, even if it ends up paying to take the grandkids for ice cream once in a while. Craig, you may have missed it, but the OP isn't necessarily concerned about longevity issues. Not everyone needs to maint...
by Frugal Al
Wed Oct 08, 2014 2:35 pm
 
Forum: Personal Finance (Not Investing)
Topic: Another pension lump sum scenario
Replies: 20
Views: 1601

Re: Pension Buyout Offer

If I earn 7%, the value at age 65 would be $106,852. Assuming good health and average anticipated longevity, there's no compelling reason to take the offer at this time. Depending upon your lookback month you may have a better opportunity in the near future to take the lump sum. I certainly wouldn'...
by Frugal Al
Mon Oct 06, 2014 10:40 am
 
Forum: Personal Finance (Not Investing)
Topic: Pension Buyout Offer
Replies: 5
Views: 565

Re: Pension buyout...take annuity now or later?

Buffett_wannabe wrote: Like most lump sum buyout offers, this one will only buy about 85% of the payment in an individual SPIA or SPDA as simply staying on the plan would yield, so the lump sum seems like a bum deal.

Why would you say that, are you annuitizing it today? How many years/months until age 65?
by Frugal Al
Sat Oct 04, 2014 8:44 am
 
Forum: Personal Finance (Not Investing)
Topic: Pension buyout...take annuity now or later?
Replies: 20
Views: 1454

Re: Yet Another Pension Buyout Scenario

In general these questions are asking the best alternative between early and normal annuities along with consideration of a lump sum ; if it can be shown mathematically that in each of these situations there is one optimal choice, then spare us all the dialogue and demonstrate which one it is ; or ...
by Frugal Al
Thu Oct 02, 2014 7:43 am
 
Forum: Personal Finance (Not Investing)
Topic: Yet Another Pension Buyout Scenario
Replies: 42
Views: 2585

Re: Yet Another Pension Buyout Scenario

Second, despite the ever popular IRR analysis and the "suppose I earn x% over the next Y years" argument , based on the current yield curve and mortality model used for pension funding and lump sum calculations , I don't believe it can be demonstrated mathematically that among your 3 choi...
by Frugal Al
Thu Oct 02, 2014 6:05 am
 
Forum: Personal Finance (Not Investing)
Topic: Yet Another Pension Buyout Scenario
Replies: 42
Views: 2585

Re: Death Benefit from pension - lump sum or lifetime monthl

Reedman, OK, now I understand the name. Musicians help the rest of us enjoy life. You've got it right. Basically, by foregoing the $309k today, you are essentially buying a $1900/month cash flow. The nearly 7.5% effective annual rate is the return that would be necessary to produce that cash flow ov...
by Frugal Al
Wed Oct 01, 2014 2:21 pm
 
Forum: Personal Finance (Not Investing)
Topic: Death Benefit from pension - lump sum or lifetime monthly?
Replies: 19
Views: 1345

Re: Death Benefit from pension - lump sum or lifetime monthl

Bsteiner, I certainly understand many of your points, but Cruncher's numbers are correct for the effective annual rate. Depending upon tax rates (fed, st, loc) there could be an argument to roll the lump sum into an IRA, but that doesn't seem to be an issue at current income levels. The marginal inc...
by Frugal Al
Wed Oct 01, 2014 9:14 am
 
Forum: Personal Finance (Not Investing)
Topic: Death Benefit from pension - lump sum or lifetime monthly?
Replies: 19
Views: 1345

Re: Death Benefit from pension - lump sum or lifetime monthl

It seems like everyone agrees the annuity is a better choice, but what makes it a slam dunk? It's the implicit, nearly guaranteed , rate of return on the $309k, which is well in excess of 7%, that makes this somewhat of a slam dunk. The only fly in the ointment might be the funding levels of the pe...
by Frugal Al
Tue Sep 30, 2014 10:12 am
 
Forum: Personal Finance (Not Investing)
Topic: Death Benefit from pension - lump sum or lifetime monthly?
Replies: 19
Views: 1345

Re: Yet Another Pension Buyout Scenario

Sounds unanimous, keep the pension intact; draw on it at age 65. One of the most important things a parent can do for a child is to adequately fund their own retirement. The fact that you're rationalizing the raiding of the pension/IRA for a car tells me you're not a candidate for a lump sum. For th...
by Frugal Al
Tue Sep 30, 2014 7:18 am
 
Forum: Personal Finance (Not Investing)
Topic: Yet Another Pension Buyout Scenario
Replies: 42
Views: 2585

Re: Death Benefit from pension - lump sum or lifetime monthl

Reedman, I assume you've already verified the beneficiary age differential scheme that the pension plan is using, confirming the lifetime benefit. Different plans can treat non-spouse beneficiaries differently. This is a very nice inheritance for your wife. As the other replies have mentioned, it's ...
by Frugal Al
Mon Sep 29, 2014 11:37 am
 
Forum: Personal Finance (Not Investing)
Topic: Death Benefit from pension - lump sum or lifetime monthly?
Replies: 19
Views: 1345

Re: Why do people buy annuities? Because Its All About Risk

This is a good overview. A bit over most people's head; Far over their heads if they never look up. But readable and understandable if you get take advantage of coffees/informational dinners. Annuities can open a much bigger array of retirement possibilities. YMMV. Sadly for most people, their mile...
by Frugal Al
Sun Sep 28, 2014 8:17 am
 
Forum: Investing - Theory, News & General
Topic: Why do people buy annuities?
Replies: 50
Views: 3985

Re: Will Investment Returns Ever Revert to "Normal"?

Everything is relative. Expecting investment returns to return to normal is just as misguided as thinking we'll forever stay in a low interest rate environment forever. Oh, we may be here for some time, but it will go up...eventually. I don't plan for where we currently are and I don't plan for norm...
by Frugal Al
Sun Sep 28, 2014 7:35 am
 
Forum: Investing - Theory, News & General
Topic: Will Investment Returns Ever Revert to "Normal"?
Replies: 56
Views: 4484

Re: Lump Sum Package With Details

To get $18K a year is the equivalent of appx a $455,000 lump sum (assuming a 4% withdrawal rate), and it comes with the burden of managing the money yourself into your 90s. Even if you were confident you could do that, you aren't likely to be able to grow your $121K payout into even half that amoun...
by Frugal Al
Sat Sep 27, 2014 6:54 am
 
Forum: Personal Finance (Not Investing)
Topic: Lump Sum Package With Details
Replies: 29
Views: 1997

Re: Another pension lump sum scenario

The current interest rate environment means that annuities are really expensive now compared to their historical costs. So your company is probably assuming a more favorable return rate in calculating what value to offer as the lump sum. I think that everyone who has posted lately about a pension b...
by Frugal Al
Fri Sep 26, 2014 10:25 am
 
Forum: Personal Finance (Not Investing)
Topic: Another pension lump sum scenario
Replies: 20
Views: 1601

Re: Hamilton watches, worth the money?

If your Hamilton is anything close to 1 sec/day, it's pure luck. Although it's a perfectly nice watch with a decent mechanical movement, if you purchased it for super accuracy then you purchased it for the wrong reasons--not that it may not be fairly accurate. I used to hack my Breitling against my ...
by Frugal Al
Fri Sep 26, 2014 9:29 am
 
Forum: Personal Consumer Issues
Topic: Hamilton watches, worth the money?
Replies: 262
Views: 13135

Re: Fixed Annuity Question??

Unless your father has anticipated estate tax issues, I find it difficult to understand how a life insurance policy is going to help with taxes on RMDs from a qualified annuity. It sounds like the rep is trying to churn up some commissions. You should be able to transfer these funds to an IRA assumi...
by Frugal Al
Fri Sep 26, 2014 9:18 am
 
Forum: Investing - Help with Personal Investments
Topic: Insurance Agent / Annuity Question??
Replies: 5
Views: 514

Re: Lump sum or monthly check at retirement

I don't know why the letters changed size YDNAL. Obviously we all have an opinion. The OP's daughter is just 35. In my opinion, leaving this money in a structured payout for what could easily be 55 years or more borders on irresponsible. If this were indexed for inflation I'd feel differently. I und...
by Frugal Al
Thu Sep 25, 2014 4:56 pm
 
Forum: Personal Finance (Not Investing)
Topic: Lump sum or monthly check at retirement
Replies: 20
Views: 1395

Re: Lump sum or monthly check at retirment

There is something to be said for a pension which provides guaranteed income for a lifetime if it is anywhere near equivalent in value. People who are not Bogleheads find all sorts of ways to avoid maximizing the lump sum, or squander, make poor decisions, are talked into risky or expensive venture...
by Frugal Al
Thu Sep 25, 2014 4:20 pm
 
Forum: Personal Finance (Not Investing)
Topic: Lump sum or monthly check at retirement
Replies: 20
Views: 1395

Re: Lump sum or monthly check at retirment

...30 years is a veeeery long time, and these exercises are WAGs (wild-ass guesses) as much as pure mathematics.Second, a quick/dirty look tells you: • $35K at 4.8% will double in 15 years (rule of 72). • Why 15 years?.. because I can double $35K twice in 30 years by age 65. • $140K while taking 4%...
by Frugal Al
Thu Sep 25, 2014 3:50 pm
 
Forum: Personal Finance (Not Investing)
Topic: Lump sum or monthly check at retirement
Replies: 20
Views: 1395

Re: Help with company pension lump-sum offer

If the annuity helps you delay SS until age 70, and assuming you live past age 82 or so, I think you'll be happy with your decision.
by Frugal Al
Wed Sep 24, 2014 3:48 pm
 
Forum: Personal Finance (Not Investing)
Topic: Help with company pension lump-sum offer
Replies: 7
Views: 894

Re: Fox Business: If You Have a Company Pension, Consider...

Thanks for posting. I'm glad Ed agrees with me :D . As with most things on the business channels there are some real holes in the thinking that aren't addressed, such as pensions with COLA and/or health insurance subsidies. Still, for the most part, the position is correct; however, it's far from be...
by Frugal Al
Wed Sep 24, 2014 10:22 am
 
Forum: Personal Finance (Not Investing)
Topic: Fox Business: If You Have a Company Pension, Consider...
Replies: 2
Views: 1320

Re: Pension buyout offer

This seems to be a marginal case leaning in favor of waiting for the pension. You'd need about a 5.5% IRR to get to a $63k future value, assuming an SPIA with a reasonable 8% payout rate (65 year-old male). At currently low payout rates the future value would need to be around $75k, resultant of a 6...
by Frugal Al
Wed Sep 24, 2014 5:41 am
 
Forum: Personal Finance (Not Investing)
Topic: Pension buyout offer
Replies: 26
Views: 2636

Re: Pension buyout offer

If I were to use the lump sum to purchase an annuity that would begin payout at age 65, the benefit would be about $300/month. So, this $421/month is much better. I guess i'll ignore their lump sum offer. Perhaps I missed it, but what is your current age? If you're looking at annuities many years i...
by Frugal Al
Tue Sep 23, 2014 6:21 pm
 
Forum: Personal Finance (Not Investing)
Topic: Pension buyout offer
Replies: 26
Views: 2636

Re: Help with company pension lump-sum offer

I agree with mindbogle, this seems like a fairly marginal situation. It looks like the annuitized pension over an average lifespan has an IRR of around 5% nominal. If it wasn't for the pension offer would you buy an annuity today under the same terms? If not, I'm not sure I'd let the pension offer s...
by Frugal Al
Tue Sep 23, 2014 11:56 am
 
Forum: Personal Finance (Not Investing)
Topic: Help with company pension lump-sum offer
Replies: 7
Views: 894

Re: Are SPIA's fairly priced? - A quick and dirty analysis

According to Moshe Milevsky in a 2013 CFA pamphlet authored by him (http://www.cfapubs.org/doi/pdf/10.2470/rf.v2013.n1.1) he notes that as a rule of thumb an SPIA's payout yield is priced against the 10 year treasury at a 3.5% premium (p. 16). While Milevsky says that it's "not a bad rule of t...
by Frugal Al
Mon Sep 22, 2014 11:54 am
 
Forum: Investing - Theory, News & General
Topic: Are SPIA's fairly priced? - A quick and dirty analysis
Replies: 75
Views: 3654
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