Lump sum vs Pension
Lump sum vs Pension
Hi everyone,
EDIT: Adding that the company is Boeing. Also adding that here are no COLA the $867 is fixed. I'm leaving the company today and am fully vested. The $867 is with 100% survivor benefits for my wife (no survivor benefits the monthly payment is $950).
I'm 41. I have the option of a lump sum or to take a pension when I'm 65, so 24 years away. The lump sum today is 35K. The monthly pension amount is $867 per month or $10,400 per year. I put my numbers into the calculator which is below. I just want to make sure I did this correctly. I pasted the numbers from the spreadsheet below. Sorry I couldn't figure out to paste the image.
From what I'm seeing the lump sum would be a better option. Any advice would be appreciated. Thanks!
Lump sum now PV $35,000
Payment starting now Pmt_now $0 $/payment
Interest rate i 7.00% /yr
number of years until annuity begins n 24 yr
number of payments/year freq 1 /yr
When payments are made for each n type 0 0 = at end, 1 = at start
Future Value FV $177,532.84
Interest generated by Future Value FV(i,n,P) * i $12,427 $/payment
Longevity of future annuity L 25 yr
Constant withdrawal of FV over time L Pmt_future $15,234 $/payment
Spending growth rate (e.g., CPI) g 2.0% /yr
First year (of 25) Trinitystyle withdrawal W(FV,L,i,g) $12,722.36 $/yr
$12,722.36 $/payment
EDIT: Adding that the company is Boeing. Also adding that here are no COLA the $867 is fixed. I'm leaving the company today and am fully vested. The $867 is with 100% survivor benefits for my wife (no survivor benefits the monthly payment is $950).
I'm 41. I have the option of a lump sum or to take a pension when I'm 65, so 24 years away. The lump sum today is 35K. The monthly pension amount is $867 per month or $10,400 per year. I put my numbers into the calculator which is below. I just want to make sure I did this correctly. I pasted the numbers from the spreadsheet below. Sorry I couldn't figure out to paste the image.
From what I'm seeing the lump sum would be a better option. Any advice would be appreciated. Thanks!
Lump sum now PV $35,000
Payment starting now Pmt_now $0 $/payment
Interest rate i 7.00% /yr
number of years until annuity begins n 24 yr
number of payments/year freq 1 /yr
When payments are made for each n type 0 0 = at end, 1 = at start
Future Value FV $177,532.84
Interest generated by Future Value FV(i,n,P) * i $12,427 $/payment
Longevity of future annuity L 25 yr
Constant withdrawal of FV over time L Pmt_future $15,234 $/payment
Spending growth rate (e.g., CPI) g 2.0% /yr
First year (of 25) Trinitystyle withdrawal W(FV,L,i,g) $12,722.36 $/yr
$12,722.36 $/payment
Last edited by rando! on Sat Oct 05, 2019 12:03 am, edited 4 times in total.
Re: Lump sum vs Pension
As a general rule of thumb, every $100/month in pension income is worth $18,000. So $867 would be worth approximately $154,800.
However, a pension can help negate sequence of returns risk and allow you to keep more investments in stocks (as opposed to bonds) because you have the extra pension payments to help in a down market.
I would keep it and not cash because it helps diversify holdings.
Also, how many people offer you a deal where the offeror is on the losing end of the transaction? Somehow, the lump sum offered is benefitting the company (probably by getting the liability off the books).
However, a pension can help negate sequence of returns risk and allow you to keep more investments in stocks (as opposed to bonds) because you have the extra pension payments to help in a down market.
I would keep it and not cash because it helps diversify holdings.
Also, how many people offer you a deal where the offeror is on the losing end of the transaction? Somehow, the lump sum offered is benefitting the company (probably by getting the liability off the books).
Re: Lump sum vs Pension
Yes, if you earn 7%/yr the lump sum would be better.rando! wrote: ↑Thu Oct 03, 2019 9:27 pmHi everyone,
I'm 41. I have the option of a lump sum or to take a pension when I'm 65, so 24 years away. The lump sum today is 35K. The monthly pension amount is $867 per month or $10,400 per year. I put my numbers into the calculator which is below. I just want to make sure I did this correctly. I pasted the numbers from the spreadsheet below. Sorry I coudn't figure out to paste the image.
From what I'm seeing the lump sum would be a better option. Any advice would be appreciated. Thanks!
If you earn 5%/yr the three ways of looking at it are
Code: Select all
Interest generated by Future Value $5,644 $/yr
Constant withdrawal of FV over 25 years $8,009 $/yr
First year (of 25) Trinitystyle withdrawal $6,569 $/yr
In other words, you pays your money and you takes your chance  whichever way you decide. Happy crystal ball gazing!
Re: Lump sum vs Pension
I went to the immediate annuities payout calculator site
and put in $35k at age 41 and collecting in 24 years.
I came out with $358 per month with no survivor balance.
https://www.immediateannuities.com/
You can try various scenarios on your own.
As mentioned, this assumes very strong financials
for the firm backing your pension.
and put in $35k at age 41 and collecting in 24 years.
I came out with $358 per month with no survivor balance.
https://www.immediateannuities.com/
You can try various scenarios on your own.
As mentioned, this assumes very strong financials
for the firm backing your pension.
Re: Lump sum vs Pension
as 6 pack said. some money in a pension, especially if it has col/inflation increases should provide some diversification. also, while this may not apply, a fairly large number of people should just never be given a big junk of money at one time, for multiple reasons.

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Re: Lump sum vs Pension
This is a tough one as you may have gathered by now... The best answer can only be known in hindsight. In my case, I took the lump sum and added it to my Rollover IRA and haven't looked back. I didn't want to worry about the employer going out of business, or relying on the PBGC (government) to pay my pension benefits. Plus, I can invest the funds as I see fit. The diversification argument is sound, but it does expose you to a different set of risks, other than stock market risk.
 bertilak
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Re: Lump sum vs Pension
Isn't the point of diversification to diversify risks?retired@50 wrote: ↑Fri Oct 04, 2019 11:22 amThe diversification argument is sound, but it does expose you to a different set of risks, other than stock market risk.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard.  Squire Omar Barker (aka S.O.B.), the Cowboy Poet

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Re: Lump sum vs Pension
I suppose so. But as I understand it, he's basically betting on the "company" to be there in 24 years, and beyond, throughout his retirement. In other words, this seems like he's taking on firmspecific risk, in hopes of avoiding market risk. If 35K is invested in a total stock market fund for 24 years the money could double 3 times between now and then, giving him 280K upon which to draw, making 867 per month seem kinda small. Just my 2 cents, which is why I took my lump sum payout... Regards,bertilak wrote: ↑Fri Oct 04, 2019 11:44 amIsn't the point of diversification to diversify risks?retired@50 wrote: ↑Fri Oct 04, 2019 11:22 amThe diversification argument is sound, but it does expose you to a different set of risks, other than stock market risk.
 bertilak
 Posts: 6922
 Joined: Tue Aug 02, 2011 5:23 pm
 Location: East of the Pecos, West of the Mississippi
Re: Lump sum vs Pension
I see your point.retired@50 wrote: ↑Fri Oct 04, 2019 12:14 pmI suppose so. But as I understand it, he's basically betting on the "company" to be there in 24 years, and beyond, throughout his retirement. In other words, this seems like he's taking on firmspecific risk, in hopes of avoiding market risk. If 35K is invested in a total stock market fund for 24 years the money could double 3 times between now and then, giving him 280K upon which to draw, making 867 per month seem kinda small. Just my 2 cents, which is why I took my lump sum payout... Regards,bertilak wrote: ↑Fri Oct 04, 2019 11:44 amIsn't the point of diversification to diversify risks?retired@50 wrote: ↑Fri Oct 04, 2019 11:22 amThe diversification argument is sound, but it does expose you to a different set of risks, other than stock market risk.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard.  Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Re: Lump sum vs Pension
Here is the good news! At 41 you are not waiting until retirement is knocking at your door. Many things can and will happen in the intervening years.
A pension with SS will go a long way toward mitigating any issue associated with risks on sequence of returns. It is a return that keeps on giving therefore increasing your diversification.
An item that is worth considering though is the strength and stability of the institution providing your pension. For this you will need to do your due diligence. Also understand your options if you have to change careers. Hopefully you are, or will be, fully vested if this should occur.
For those who have taken a lump sum in the last 10 years and fully reinvested it into the market they have done quite well in their choice.
My crystal ball is quite hazy and my pension is quite assured (Texas Retirement System) and so I took the bird in hand this year when I retired and took the pension this year.
Good luck and keep on investing.
A pension with SS will go a long way toward mitigating any issue associated with risks on sequence of returns. It is a return that keeps on giving therefore increasing your diversification.
An item that is worth considering though is the strength and stability of the institution providing your pension. For this you will need to do your due diligence. Also understand your options if you have to change careers. Hopefully you are, or will be, fully vested if this should occur.
For those who have taken a lump sum in the last 10 years and fully reinvested it into the market they have done quite well in their choice.
My crystal ball is quite hazy and my pension is quite assured (Texas Retirement System) and so I took the bird in hand this year when I retired and took the pension this year.
Good luck and keep on investing.

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Re: Lump sum vs Pension
A better way to diversify risk might be to buy a small rental home somewhere and try to be a landlord for the next 24 years. At least with rental real estate your income stream depends on finding a tenant with the ability to hold down a job and pay rent. In other words, it has nothing to do with the stock market. Regards,bertilak wrote: ↑Fri Oct 04, 2019 12:22 pmI see your point.retired@50 wrote: ↑Fri Oct 04, 2019 12:14 pmI suppose so. But as I understand it, he's basically betting on the "company" to be there in 24 years, and beyond, throughout his retirement. In other words, this seems like he's taking on firmspecific risk, in hopes of avoiding market risk. If 35K is invested in a total stock market fund for 24 years the money could double 3 times between now and then, giving him 280K upon which to draw, making 867 per month seem kinda small. Just my 2 cents, which is why I took my lump sum payout... Regards,bertilak wrote: ↑Fri Oct 04, 2019 11:44 amIsn't the point of diversification to diversify risks?retired@50 wrote: ↑Fri Oct 04, 2019 11:22 amThe diversification argument is sound, but it does expose you to a different set of risks, other than stock market risk.
Re: Lump sum vs Pension
In our workplace the lump sum was popular in recent years due to low interest rates which payout a nicely larger lump sum amount.
There was a retirement plan change for the younger age group 50ish and below so I am not sure if that impacted the choice. But basically it is hard to say now what will be best in the distant future.
There was a retirement plan change for the younger age group 50ish and below so I am not sure if that impacted the choice. But basically it is hard to say now what will be best in the distant future.
Re: Lump sum vs Pension
I might have missed it but I didn't see any inflation factor in your calculations.
It will vary greatly but with with the pension math the "breakeven point" is often if you live something like 10 to 15 years after you start the pension. That would put you at 75 to 80 years old which would be 34 to 39 years from now.
If the $867 per month is not adjusted for inflation then it will not be worth a lot in 34+ years if there is even moderate inflation. If there are some years of high inflation before then it could be a pretty trivial amount.
By taking the pension you would be getting a LOT if inflation risk.
I would just take the lump sum and roll it into an IRA.
Re: Lump sum vs Pension
Do you also need to factor in if the pension has COLA?rando! wrote: ↑Thu Oct 03, 2019 9:27 pmHi everyone,
I'm 41. I have the option of a lump sum or to take a pension when I'm 65, so 24 years away. The lump sum today is 35K. The monthly pension amount is $867 per month or $10,400 per year. I put my numbers into the calculator which is below. I just want to make sure I did this correctly. I pasted the numbers from the spreadsheet below. Sorry I coudn't figure out to paste the image.
From what I'm seeing the lump sum would be a better option. Any advice would be appreciated. Thanks!
Lump sum now PV $35,000
Payment starting now Pmt_now $0 $/payment
Interest rate i 7.00% /yr
number of years until annuity begins n 24 yr
number of payments/year freq 1 /yr
When payments are made for each n type 0 0 = at end, 1 = at start
Future Value FV $177,532.84
Interest generated by Future Value FV(i,n,P) * i $12,427 $/payment
Longevity of future annuity L 25 yr
Constant withdrawal of FV over time L Pmt_future $15,234 $/payment
Spending growth rate (e.g., CPI) g 2.0% /yr
First year (of 25) Trinitystyle withdrawal W(FV,L,i,g) $12,722.36 $/yr
$12,722.36 $/payment
Does the pension also cover your spouse?

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Re: Lump sum vs Pension
Use an spia calculator to calculate cost of that pension at age 65 now.rando! wrote: ↑Thu Oct 03, 2019 9:27 pmHi everyone,
I'm 41. I have the option of a lump sum or to take a pension when I'm 65, so 24 years away. The lump sum today is 35K. The monthly pension amount is $867 per month or $10,400 per year. I put my numbers into the calculator which is below. I just want to make sure I did this correctly. I pasted the numbers from the spreadsheet below. Sorry I coudn't figure out to paste the image.
From what I'm seeing the lump sum would be a better option. Any advice would be appreciated. Thanks!
Lump sum now PV $35,000
Payment starting now Pmt_now $0 $/payment
Interest rate i 7.00% /yr
number of years until annuity begins n 24 yr
number of payments/year freq 1 /yr
When payments are made for each n type 0 0 = at end, 1 = at start
Future Value FV $177,532.84
Interest generated by Future Value FV(i,n,P) * i $12,427 $/payment
Longevity of future annuity L 25 yr
Constant withdrawal of FV over time L Pmt_future $15,234 $/payment
Spending growth rate (e.g., CPI) g 2.0% /yr
First year (of 25) Trinitystyle withdrawal W(FV,L,i,g) $12,722.36 $/yr
$12,722.36 $/payment
Survivor benefits can be quite valuable as well.
Then take cost of spia divided by lump sum now and calculate cagr.
See if that is better than you can do about the same or worse. Figuring a 60 40 portfolio might do 6 per cent a year before inflation. Or 5 say.
Re: Lump sum vs Pension
The two problems with trying to compute the PV of an annuity yourself is that most people use too high of a discount rate (7% is way too high) and no one at age 41 knows how long they will live.rando! wrote: ↑Thu Oct 03, 2019 9:27 pmHi everyone,
I'm 41. I have the option of a lump sum or to take a pension when I'm 65, so 24 years away. The lump sum today is 35K. The monthly pension amount is $867 per month or $10,400 per year. I put my numbers into the calculator which is below. I just want to make sure I did this correctly. I pasted the numbers from the spreadsheet below. Sorry I coudn't figure out to paste the image.
From what I'm seeing the lump sum would be a better option. Any advice would be appreciated. Thanks!
One thing we can see, as others have pointed out, is that if you tried to buy an annuity in the open market with a income equivalent to the pension option then your $35k would get you only about $350 to $445 per month in income. That's about half the value of your pension option which, if nothing else, should reinforce that your calculations are off.
My advice (which I wish I'd followed myself, having taken a lump sum not too long ago) is to take the pension option and not the lump sum. Assuming the (I presume) employer has a high credit rating, the pension is quite obviously the better choice purely on economic grounds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Lump sum vs Pension
Surely you can make an estimate. I would take the medium age M/F in the country and use that as a baseline. Update the estimate based on your health situation today or risk which runs in the family.
Re: Lump sum vs Pension
An estimate can be made, but it's pretty complicated math. In addition to valuing the expected return using average or predicted mortality, you'd need to value the embedded call option associated with the chance of collecting the pension income for longer than the average life expectancy.
So IMO the best and easiest way to estimate the PV of a pension income stream is simply to price a private market annuity that produces the same income stream. In this case, the pension income is worth about twice as much as the lump sum payment making this  to my eyes  an easy decision to make.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Lump sum vs Pension
Thanks everyone. I added a little info to the original post. Sorry I didn't post it originally
Re: Lump sum vs Pension
My gut feeling is that the pension with spousal coverage is a better choice than the lump sum. It’s so far in the future and there are many variables, to say anything definitely. Based on my assumptions, I would select the pension.
Re: Lump sum vs Pension
A straightforward (albeit lengthy) way to estimate the pension's present value (PV) is to use a mortality table to calculate the survivalweightedbenefit (SWB) for every possible age. This implicitly takes into account the chance of living longer than the average life expectancy. There is no need to value this possibility separately.vineviz wrote: ↑Fri Oct 04, 2019 10:20 pmAn estimate [of the pension's present value] can be made, but it's pretty complicated math. In addition to valuing the expected return using average or predicted mortality, you'd need to value the embedded call option associated with the chance of collecting the pension income for longer than the average life expectancy.
To illustrate, according to the SSA 1980 Cohort Life Table, of 94,678 men alive at age 41: 82,993 (87.66%) will still be alive at age 65 and 81,912 (86.52%) a year later at age 66. Applying the average of these two percents against an $11,400 annual pension [1] produces a SWB of $9,928. Repeating this calculation for ages 65 to 115 produces the SWBs in the right column of the table below in rows 8 through 58.
If discounted by 5.111% [2] these SWBs have a PV of about $113,000 at age 64.5 [3]. At the same discount rate this equates to a PV of about $35,000 at age 41. (See cells C3 and C4 below.) This is another way of saying the pension has a probable return of 5.1% on the $35,000 lump sum.
Code: Select all
Row Col A Col B Col C Col D
1 Pmt / mo 950
2 Discount rate 5.111% (determined by trial & error)
3 PV age 64.5 112,922 = NPV(C2, D8:D61)
4 PV now 34,998 = C3 / (1 + C2) ^ (A8  A7  0.5)
Survival
 Alive  Weighted
Age Number % of 41 Benefit
Code: Select all
7 41 94,678
8 65 82,993 87.66% 9,928 = C$1 * 12 * (C8 + C9) / 2
9 66 81,912 86.52% 9,792
10 67 80,737 85.28% 9,645
11 68 79,468 83.94% 9,487
12 69 78,107 82.50% 9,317
13 70 76,656 80.96% 9,137
14 71 75,105 79.33% 8,943
15 72 73,448 77.58% 8,738
16 73 71,691 75.72% 8,521
17 74 69,843 73.77% 8,293
18 75 67,906 71.72% 8,053
19 76 65,862 69.56% 7,800
20 77 63,698 67.28% 7,532
21 78 61,418 64.87% 7,252
22 79 59,032 62.35% 6,958
23 80 56,540 59.72% 6,651
24 81 53,941 56.97% 6,331
25 82 51,216 54.09% 5,993
26 83 48,328 51.04% 5,633
27 84 45,243 47.79% 5,250
28 85 41,956 44.31% 4,844
29 86 38,502 40.67% 4,421
30 87 34,939 36.90% 3,990
31 88 31,339 33.10% 3,559
32 89 27,774 29.34% 3,135
33 90 24,307 25.67% 2,727
34 91 20,992 22.17% 2,340
35 92 17,874 18.88% 1,978
36 93 14,987 15.83% 1,646
37 94 12,359 13.05% 1,347
38 95 10,007 10.57% 1,081
39 96 7,955 8.40% 853
40 97 6,211 6.56% 661
41 98 4,766 5.03% 504
42 99 3,599 3.80% 378
43 100 2,678 2.83% 279
44 101 1,962 2.07% 203
45 102 1,414 1.49% 145
46 103 1,001 1.06% 102
47 104 696 0.74% 70
48 105 474 0.50% 48
49 106 316 0.33% 31
50 107 206 0.22% 20
51 108 131 0.14% 13
52 109 81 0.09% 8
53 110 49 0.05% 5
54 111 29 0.03% 3
55 112 16 0.02% 2
56 113 9 0.01% 1
57 114 5 0.01% 0
58 115 2 0.00% 0
 This is 12 times the $950 single life pension mentioned in the original post.
 The 5.111% rate can be determined either by trial and error or by using the Excel Goal Seek tool.
 Since pensions are paid monthly, I assume the annual amount is paid midyear. Therefore since the Excel NPV function assumes cash flows occur at the end of each year, when applied to cash flows at ages 65.5, 66.5, … 115.5 it produces a present value as of age 64.5.
 Here are the entries on the Alive sheet to produce present values of $34,998 and $35,000 in cells N5 & O5 for the single and 100% joint life pensions:
Code: Select all
Row Col F Col G Col H Col I Col N Col O Row 1 Age $950.00 $867.00 1 Single/Joint monthly  only Pers 1 alive 2 Table Name Sex Years $867.00 2 Joint monthly  only Pers 2 alive 3 Cohort1980 Pers 1 M 41 $867.00 3 Joint monthly  Both alive 4 Cohort1980 Pers 2 F 41 5.111% 5.748% 4 Discount rate 5 24 5 Present Value Row Col F Col G Col H Col I Col N Col O Row