Pension Lump Sum Determination
Pension Lump Sum Determination
My (frozen) pension offers a monthly benefit for life or a lump sum option. I am inclined to take the latter but as I calculate the annuitized value of the lump sum, it falls far short of the pension monthly payout. Are there any regulations that govern the lump sum calculations of public company pensions? It appears my (former) company is trying to strongly discourage lump sums...
You only live once...
My understanding is that the lump sum offered must be at least an amount calculated by Treasury Department rules specifying mortality tables and discount rates to be used. These would be revised periodically (annually?).
I have the impression from casual reading on the subject that most pension plans today provide a better benefit from the annuity payout than from the lump sum. Default risk is, of course, a concern.
I have the impression from casual reading on the subject that most pension plans today provide a better benefit from the annuity payout than from the lump sum. Default risk is, of course, a concern.
Depending on the type of company and type of pension, you will have very different results and calculations. In many cases (sounds like this is one of them), a lump sum is return of your own contributions and growth and not the employer portion and therefore the benefit is far greater to leave it in the system than to take it out.
And, yes, they of course have a vested interest in keeping the money in the plan becuase the size of the assets is what ensures stability.
And, yes, they of course have a vested interest in keeping the money in the plan becuase the size of the assets is what ensures stability.
No, that should not ever happen. The lump sum is required to be the present value of the annuity; there is just limited flexibility in how it is calculated.gassert wrote:In many cases (sounds like this is one of them), a lump sum is return of your own contributions and growth and not the employer portion and therefore the benefit is far greater to leave it in the system than to take it out.
This may apply to return of unvested pension amounts or dollar amounts less than a threshold value, perhaps $5000.gassert wrote:Depending on the type of company and type of pension, you will have very different results and calculations. In many cases (sounds like this is one of them), a lump sum is return of your own contributions and growth and not the employer portion and therefore the benefit is far greater to leave it in the system than to take it out.
And, yes, they of course have a vested interest in keeping the money in the plan becuase the size of the assets is what ensures stability.
The company wants to keep your pension(frozen)? I'd LUMP SUM IT OUT ASAP IMO to VG or Fido.....What if they go belly up? Federal insurance on it if they have it only pays [i about 50% of the benifit IIRC .Good luck!
Last edited by bolt on Mon Jun 23, 2008 10:01 am, edited 1 time in total.
Re: Pension Lump Sum Determination
There are very specifi rules relating to how the lump sum is calculated. Interest rates used to be the 30 years treasury rate but recent legislation changed this to the average corporate rate which significantly reduces the lump sum. I don't know if this change has been implemented yet  suggest you Google to check it out. The lifetime used in the calculation comes from published mortality tables.Midpack wrote:My (frozen) pension offers a monthly benefit for life or a lump sum option. I am inclined to take the latter but as I calculate the annuitized value of the lump sum, it falls far short of the pension monthly payout. Are there any regulations that govern the lump sum calculations of public company pensions? It appears my (former) company is trying to strongly discourage lump sums...
There is no wiggle room for your employer in this calculation. I believe that there are websites that will do the calculation for you for a fee as a check.
The exact details are:
 Male age 61, single life
 Monthly benefit $1526/mo ($18,312/yr) with no inflation/COLA.
 Lump sum $245,773 based on current GATT rates (I did not write down what they used).
Online calculators tell me it should be anywhere from $245K to $511K.
If anyone knows of a definitive site or resource, I'd be most grateful.
 Male age 61, single life
 Monthly benefit $1526/mo ($18,312/yr) with no inflation/COLA.
 Lump sum $245,773 based on current GATT rates (I did not write down what they used).
Online calculators tell me it should be anywhere from $245K to $511K.
If anyone knows of a definitive site or resource, I'd be most grateful.
You only live once...
This lump sum looks about right. If you assume a life expectancy of 82 years and a discount rate of 5% you get about $246K for the lump sum. The 30 year treasuty is now 4.7% and the corporate rate is about 1% higher and I think they use a blended rate for the next 5 years.Midpack wrote:The exact details are:
 Male age 61, single life
 Monthly benefit $1526/mo ($18,312/yr) with no inflation/COLA.
 Lump sum $245,773 based on current GATT rates (I did not write down what they used).
Online calculators tell me it should be anywhere from $245K to $511K.
If anyone knows of a definitive site or resource, I'd be most grateful.
As for the 'best' approach  you could invest $245K in high quality 20 year corporate bonds and get a return on nearly 7% at the present time  equivalent to about $17K in interest per year and you would still have the principal. If you want ;ess risk you can get 6.2% with Fannnie Mae (AAA) giving you over $15K per year in interest and again you still have the principal at maturity.
Taking the lump sum is usually the right answer because you can invest at a higher rate with minimal risk than the discount rate used in the derivation.
LH I'm not going to get into it with you since I respect your contribution and I dont think have ever disagreed, but you are not correct. Especially in the public field a traditional DB plan will only offer a lump sum equal to EE payments and assumed growth, without availability to ER contrubtions and the corresponding benefit.
As the term "frozen" likley means it's a differnet situation than I described (who knows what someone means by frozen), then my initial statement is probbaly not applicable in this case (who knows), but it's still an acurrate statement
As the term "frozen" likley means it's a differnet situation than I described (who knows what someone means by frozen), then my initial statement is probbaly not applicable in this case (who knows), but it's still an acurrate statement
Sorry my original post was not clearer on several counts. By frozen, I meant the company stopped further contributions to our DB pensions in 1994. So my years of service since do not count towards a future benefit, same for all of us at this company.gassert wrote:LH I'm not going to get into it with you since I respect your contribution and I dont think have ever disagreed, but you are not correct. Especially in the public field a traditional DB plan will only offer a lump sum equal to EE payments and assumed growth, without availability to ER contrubtions and the corresponding benefit.
As the term "frozen" likley means it's a differnet situation than I described (who knows what someone means by frozen), then my initial statement is probbaly not applicable in this case (who knows), but it's still an acurrate statement
You only live once...

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 Joined: Sun Dec 16, 2007 12:25 pm
Your exact details are inexact as to DOB and when you want to start benefits. But anyway, I took a guess and Vanguard quoted only $228K to buy a single life SPIA that pays $1526/mo. Try it yourself at Vanguard lifetime income..... https://personal.vanguard.com/us/accoun ... ontent.jspMidpack wrote: The exact details are:
 Male age 61, single life
 Monthly benefit $1526/mo ($18,312/yr) with no inflation/COLA.
 Lump sum $245,773 based on current GATT rates (I did not write down what they used).
Online calculators tell me it should be anywhere from $245K to $511K.
If anyone knows of a definitive site or resource, I'd be most grateful.
JW

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 Joined: Sun Aug 05, 2007 11:13 am
 Location: San Diego
I saw a hypothetical (well, hypothetical to me) question at another board.
If currently age 31, what's the evaluation between taking an immediate lump sum of $37000, or sticking with a pension wroth $902 a month starting at age 55?
The future nature threw me off. Best I could come up with was "inflating" the $37k for 24 years at an assumed riskfree rate, then figuring what a SPIA would cost for a 55 year old. I was probably doing something wrong though.
If currently age 31, what's the evaluation between taking an immediate lump sum of $37000, or sticking with a pension wroth $902 a month starting at age 55?
The future nature threw me off. Best I could come up with was "inflating" the $37k for 24 years at an assumed riskfree rate, then figuring what a SPIA would cost for a 55 year old. I was probably doing something wrong though.
It has a annual % increase? right? what about the dollar and a COfLivingIncrease.... just thinkng out loud n postin~ Good luck.Easy Rhino wrote:I saw a hypothetical (well, hypothetical to me) question at another board.
If currently age 31, what's the evaluation between taking an immediate lump sum of $37000, or sticking with a pension wroth $902 a month starting at age 55?
The future nature threw me off. Best I could come up with was "inflating" the $37k for 24 years at an assumed riskfree rate, then figuring what a SPIA would cost for a 55 year old. I was probably doing something wrong though.
I see two problems with this. 1) If someone is going to invest $37,000 for 24 years, they wouldn't (shouldn't) invest it in a risk free manner and 2) current SPIA rates aren't future SPIA rates.If currently age 31, what's the evaluation between taking an immediate lump sum of $37000, or sticking with a pension wroth $902 a month starting at age 55?
The future nature threw me off. Best I could come up with was "inflating" the $37k for 24 years at an assumed riskfree rate, then figuring what a SPIA would cost for a 55 year old. I was probably doing something wrong though.
What you are doing, though, will still give you a ballpark as a beginning guesstimate which is really all that can be done since the calculation has to be done on assumptions.
The actuarial approach to Easy Rhino's problem is to choose an appropriate mortality table and a discount rate (or rates) commensurate with the lowrisk of the pension. (The pension's likely insured by the PBGC for the full amount, even if the company fails to fulfill its obligation, and the company obligation is closer to a corporate bond anyway.)LynnSwann wrote:I see two problems with this. 1) If someone is going to invest $37,000 for 24 years, they wouldn't (shouldn't) invest it in a risk free manner and 2) current SPIA rates aren't future SPIA rates.If currently age 31, what's the evaluation between taking an immediate lump sum of $37000, or sticking with a pension wroth $902 a month starting at age 55?
The future nature threw me off. Best I could come up with was "inflating" the $37k for 24 years at an assumed riskfree rate, then figuring what a SPIA would cost for a 55 year old. I was probably doing something wrong though.
What you are doing, though, will still give you a ballpark as a beginning guesstimate which is really all that can be done since the calculation has to be done on assumptions.
Once those are chosen, just sum the actuarial present values (i.e. probability of survival to pymt * pymt * discount factor) of each of the individual payments. The greater of that number and $37,000 would tell you the answer.
As Lynn Swann's response indicates, most people are asking a somewhat different question. Whether consciously or not, they're looking to trade up risk. So they're asking "how much can I make" rather than "what's it worth".
The two mathematical flaws I see in the last few posts are: no assumption of mortality between age 31 and 55 and the suggestion that the discount rate used should be based on investment returns, rather than pension risk.
Harold you are correct. However, I think that it really depends on the question behind the question. In other words is someone looking at this from an actuarial perspective or an investment perspective. From an actuarial perspective, the numbers should be the same. However, if an investor looks at the payout and sees that they need to get a 4.5% return to end up with the same payout, they may decide that it's worthwhile to take on the added investment risk.The two mathematical flaws I see in the last few posts are: no assumption of mortality between age 31 and 55 and the suggestion that the discount rate used should be based on investment returns, rather than pension risk.
As for the mortality, it may or may not be an issue. Lots of pensions have a death benefit. Unfortunately, the death benefit gets paid into the pension instead of getting paid out as life insurance.