I finally got the email that tells me I can take a lump sum instead of waiting until 65 to get my pension. This was a nice surprise from an older job.
Age: 43: $16,353.94, or $63.85/month for 100% joint+survivor annuity.
Age: 60: $42,206.85, or $192.90/month
Age: 65: $55,418.89, or $275.49/month
The "biggest" annuity comes out to $3300 a year. Not life-changing, but maybe an ecomony vacation. =) Truthfully, if I take 4% out of the lump sum @age 65, I could get $2200 a year and likely never eat into the principal. That tells me the lump sum is the proper option at age 65, and it's not even worth it to consider the annuities for earlier.
So, do I take the lump sum at 65 or now? I would have to average a 5.7% return from now until then to break even. That sounds about fair.
Therefore, from a "simiplification" argument, I should just get rid of the pension and roll the lump sum into an ira today.
What do the rest of you think?
Penson -- critique my analysis vs. lump sum
Re: Penson -- critique my analysis vs. lump sum
I'm deliberating on the same thing, ryman. either $23,000 in a year or $39,000 in eleven years. I'm leaning toward taking the lump sum as soon as possible because I would rather invest it myself and... I don't trust that it'll still be around if I wait.
Re: Penson -- critique my analysis vs. lump sum
I agree with panine, a bird in the hand is worth 2 in the bush
But I would want to know more about the solidity of where the money is held if I did not take lump sum for a more fair comparison.
Lafder
But I would want to know more about the solidity of where the money is held if I did not take lump sum for a more fair comparison.
Lafder
Re: Penson -- critique my analysis vs. lump sum
Stability:
Huge player in the tech field. Almost as big as they get, so as stable as you can get -- for the tech field. =)
But that is a good consideration. There is a downside risk of no $$ on 20 years that I was not taking into account.
If I look at ranges of over 20 years historically, I find it more likely than not that I get more than 5% CAGR from the S&P500. I have no idea going forward whether or not that will hold, but I am more certain taking the lump sum now is the proper thing to do.
Huge player in the tech field. Almost as big as they get, so as stable as you can get -- for the tech field. =)
But that is a good consideration. There is a downside risk of no $$ on 20 years that I was not taking into account.
If I look at ranges of over 20 years historically, I find it more likely than not that I get more than 5% CAGR from the S&P500. I have no idea going forward whether or not that will hold, but I am more certain taking the lump sum now is the proper thing to do.
Re: Penson -- critique my analysis vs. lump sum
It sounds like you want an annuity (rather than leaving it to your heirs, for example), since you are calculating a withdrawal rate. Given that, the decision is pretty simple. Take your lump sum and see how much annuity you can buy with that lump sum. I already know what the answer will be: keep the pension. I say this confidently because of adverse selection in annuity buyers, and also, the people offering you this choice aren't stupid. Exception would be if you know something about your life expectancy that would make it shorter than average.
Re: Penson -- critique my analysis vs. lump sum
I'm absolutely don't want an annuity -- I want a legacy. I calculate a withdrawal rate (4%) to identify the equivalent "safe" WR should I choose to live off the lump-sum instead of purchasing an annuity. Since it is a minor portion of my overall retirement expenses, it makes sense to lump it in with my entire portfolio and "estimtate" the "extra" income it would provide. In this case, the 4% SWR is not too far from what I would get if in annuitized with the pension. No doubt the pension is better than any annuity I could buy, but that's not the question I was asking. It is tangibly better than I expect to do on my own? Certainly not. But I wanted to do the math to make sure.bberris wrote:It sounds like you want an annuity (rather than leaving it to your heirs, for example), since you are calculating a withdrawal rate. Given that, the decision is pretty simple. Take your lump sum and see how much annuity you can buy with that lump sum. I already know what the answer will be: keep the pension. I say this confidently because of adverse selection in annuity buyers, and also, the people offering you this choice aren't stupid. Exception would be if you know something about your life expectancy that would make it shorter than average.
To me the quesiton is whether or not to take the lump sum now or wait until 65. And it looks like the right risk-adjusted answer is to take today, even if the answer is actuarially neutral.
Re: Penson -- critique my analysis vs. lump sum
My timing might be a bit off but about 25 years ago the same could be said for companies like DEC, Burroughs, Compaq, Atari, and a lot others.ryman554 wrote:Huge player in the tech field. Almost as big as they get, so as stable as you can get -- for the tech field. =)
If you take the lump sum and invest it and it only grew to be $33,000 (to make the math easy) when you are 65 then you could withdraw the maximum amount of $3,300 a year for ten years(assuming no more investment growth) until you are 75. That is the point where taking the pension would have been a better choice. Realistically the invested lump sum might grow more and continue growing after you are 65 so the break-even point is likely when you will be much older.
With even moderate inflation in 32+ years when you are 75+ years old and hit the breakeven point, the inflation adjusted value of the $275 a month will be pretty low so if taking the lump sum turns out to be a mistake then the consequences would be pretty small.