Delaying pension benefits - what would you do?

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ABS
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Delaying pension benefits - what would you do?

Post by ABS »

I will be turning 65 in a few months and will be eligible for a pension, 100% J & S, amount $2640/month. If I wait till 66 it increases to $2903/month. My spouse will not have any pension from her job. I am figuring the break even point to be 11 years, based on the following:

Retiring at 65 cumulative benefits after 11 years: $2640X12X11 = $348,480
Retiring at 66 Cumulative benefits after 10 years: $2903X12X10 = $348, 360

If I do not have an issue with cash flow and assuming life expectancy till 85, would I be better off delaying taking my benefit?

Please critique; your feedback is appreciated.
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Peter Foley
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Re: Delaying pension benefits - what would you do?

Post by Peter Foley »

There are many different factors to consider with regards to delaying for a year. Here are but two. Others can add more.

1. Does pension + SS benefits cover most of your living expenses?
2. Do you have substantial tax deferred savings that you could draw on for the year? The thought here is that you might create a low tax rate year where some tax deferred withdrawals may be taxed a low rate.

Yes to both of these would have me leaning towards a delay, but there may be other important factors to consider.
itstoomuch
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Re: Delaying pension benefits - what would you do?

Post by itstoomuch »

You and BHs, won't like this :annoyed ,
Run two accounts: An Account balance and another discounted Income Account balance. This is similar to pension plans, notably PER s, GWLB deferred annuities/SPIAs/CDs/IRAs and deciding to take SS now or later :twisted: .
Ymmv :oops:
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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#Cruncher
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Re: Delaying pension benefits - what would you do?

Post by #Cruncher »

ABS wrote:... assuming life expectancy till 85, would I be better off delaying taking my benefit?
Yes. By forsaking $31,680 (12 * 2640) for one year, you'll get $3,156 (12 * 2903 - 31680) more per year for 19 years (85 - 66). This represents a very good return of 7.4%. [1] The likely return is even higher if your wife is no older than you and you're both in average or better health. [2]
  1. As computed with the Excel RATE function:

    Code: Select all

    7.4% = RATE(19, 3156, -31680, 0, 0)
  2. For example, the joint life expectancy of a male / female couple each age 66 is 23.24 years according to the SSA 2013 Period Life Table as computed with my longevity estimator. Over 23 years instead of 19 the return increases to 8.4%.

    Code: Select all

    8.4% = RATE(23, 3156, -31680, 0, 0)
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ThePrune
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Re: Delaying pension benefits - what would you do?

Post by ThePrune »

+1 I agree with #Cruncher's strictly financial analysis.

From a Risk Control perspective:
(1) Do you have any reason to believe that future pension payments would be at risk of severe reduction or termination? (Example: a public pension paid by Illinois). If so, it might be a reason to start the pension sooner and retain you personal investment funds.

(2) If your pension is covered by the Pension Benefit Guaranty Corporation, you appear to be well within the dollar limits for full protection.
Investment skill is often just luck in sheep's clothing.
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Re: Delaying pension benefits - what would you do?

Post by ralph124cf »

If you delay longer, does the pension continue to increase?

Ralph
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ABS
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Re: Delaying pension benefits - what would you do?

Post by ABS »

Ralph,
Yes sir, it does. I have requested the amounts for 68 and 70 and will post them when I get it.
#cruncher,
Thank you for your analysis. I'll re-run it with the additional information I receive for 68 and 70.
ThePrune,
I am confident about the stability of my pension plan.
Peter Foley,
My SS strategy is to collect spousal benefits next year after I turn 66 and then wait for my own benefits until I turn 70.
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ABS
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Re: Delaying pension benefits - what would you do?

Post by ABS »

I have my corrected pension payment at age 65 and also my estimates for ages 66, 68 and 70. Using #cruncher's guidance I came up with the following rates of return if I choose to delay collecting my benefit (life expectancy of 20 years):

Monthly payment at age 65: $2628

Delaying to age 66: Payment $2903, return 8.08%
68 Payment $3578, return 9.46%
70 Payment $4470, return 11.14%

Assuming my calculations are correct, and I can manage without the need for the payments till age 70 am I on the right path if I wait to collect till reach 70? My projected return for the rest of my portfolio is 5 to 7%.
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#Cruncher
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Re: Delaying pension benefits - what would you do?

Post by #Cruncher »

ABS in previous post wrote:I have my corrected pension payment at age 65 and also my estimates for ages 66, 68 and 70. ...

Code: Select all

Monthly payment at age 65:   $2628
Delaying to age 66:  Payment $2903, return  8.08%
                68   Payment $3578, return  9.46%
                70   Payment $4470, return 11.14%
The return for delaying to age 66 is correct, ABS, but the other two are overstated. You appear to have calculated them as follows:

Code: Select all

 8.07% = RATE(19, 12 * (2903 - 2628), -1 * 12 * 2628, 0, 0)
 9.46% = RATE(17, 12 * (3578 - 2628), -3 * 12 * 2628, 0, 0)
11.15% = RATE(15, 12 * (4470 - 2628), -5 * 12 * 2628, 0, 0)
This works in the first case because the age 65 pension is forsaken for only the year preceding the start of the delayed pension. But for delaying until 68 or 70 it is forsaken for each of the three or five preceding years. In these cases, to properly compute the return, it's necessary to show the year-by-year cash flow and use the Excel IRR function.

Code: Select all

         Cash Flow For Delay 65 To       IRR For Delay 65 To
         -------------------------     -----------------------
 Age       66       68        70         66       68       70

Code: Select all

 65.5  (31,536)  (31,536)  (31,536)
 66.5    3,300   (31,536)  (31,536)
 67.5    3,300   (31,536)  (31,536)
 68.5    3,300    11,400   (31,536)
 69.5    3,300    11,400   (31,536)
 70.5    3,300    11,400    22,104 
 71.5    3,300    11,400    22,104 
 72.5    3,300    11,400    22,104 
 73.5    3,300    11,400    22,104 
 74.5    3,300    11,400    22,104 
 75.5    3,300    11,400    22,104 
 76.5    3,300    11,400    22,104 
 77.5    3,300    11,400    22,104     3.69%    2.96%    1.79%
 78.5    3,300    11,400    22,104     4.72%    4.23%    3.41%
 79.5    3,300    11,400    22,104     5.56%    5.25%    4.70%
 80.5    3,300    11,400    22,104     6.25%    6.08%    5.73%
 81.5    3,300    11,400    22,104     6.83%    6.76%    6.56%
 82.5    3,300    11,400    22,104     7.31%    7.33%    7.24%
 83.5    3,300    11,400    22,104     7.72%    7.80%    7.81%
[84.5]   3,300    11,400    22,104   [ 8.07%    8.20%    8.28% ]
 85.5    3,300    11,400    22,104     8.37%    8.54%    8.67%
 86.5    3,300    11,400    22,104     8.62%    8.83%    9.01%
 87.5    3,300    11,400    22,104     8.84%    9.08%    9.29%
 88.5    3,300    11,400    22,104     9.03%    9.30%    9.53%
 89.5    3,300    11,400    22,104     9.20%    9.48%    9.74%
 90.5    3,300    11,400    22,104     9.34%    9.64%    9.92%
 91.5    3,300    11,400    22,104     9.47%    9.78%   10.08%
 92.5    3,300    11,400    22,104     9.58%    9.90%   10.21%
 93.5    3,300    11,400    22,104     9.68%   10.01%   10.33%
 94.5    3,300    11,400    22,104     9.76%   10.10%   10.43%
 95.5    3,300    11,400    22,104     9.84%   10.18%   10.52%
 96.5    3,300    11,400    22,104     9.90%   10.25%   10.60%
 97.5    3,300    11,400    22,104     9.96%   10.32%   10.67%
 98.5    3,300    11,400    22,104    10.02%   10.37%   10.73%
 99.5    3,300    11,400    22,104    10.06%   10.42%   10.78%
Scroll down to the row for age 84.5 and see the same 8.07% return for the one year delay to age 66. But the returns for delaying until age 68 or 70 are much less than you calculated them. Despite this, if you and your wife are in average or better health, delaying until age 70 looks like the best choice to me. If one of you lives until age 92 the return from delaying five years will exceed 10%.
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Re: Delaying pension benefits - what would you do?

Post by Dandy »

I always found the calc of payback period to be misleading. I focused on how many years I would get more monthly income. That assumes I can fund the wait and support a nice lifestyle to collect a higher amount from pensions. The best deferred wait is to collect is Social Security so that should be a higher priority especially if spouse has no pension of her own.

I waited to collect my 2 pensions until they reach maximum value (one at age 60 and the other at 65). Wife (with no pension) took her SS at age 62, I took a spousal on her SS when I was 66. Next year I will collect my SS at age 70. I am fortunate to have been able to fund the wait to collect these higher amounts by using my taxable account. Now I will have the maximum income for the rest of my life and my wife will have my higher SS for the rest of her life. Early death would be unfortunate but I don't feel we have sacrificed any lifestyle wishes -- just taxable money. On the other hand a long life for either of us will be better funded as will unexpected expenses.

Luck plays an major role in any decision. Health, inflation, markets, viability of companies paying my pensions, etc. Luck has been good so far in that despite funding for almost 10 years and having a conservative investment allocation, our financial assets have never been higher. But I also feel if our investments were down a lot I would be glad we had higher income and was less reliant on investment assets.
retired early&luv it
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Re: Delaying pension benefits - what would you do?

Post by retired early&luv it »

But, what do you want to do? Do you want to work? Do you want to travel? I planned to work longer, then I got a new boss that made really bad decisions. I decided that I would rather retire earlier, and I have not regretted a reduced pension to get out faster. But, if I had kept my old boss, I would have stayed longer and I would not have regretted that either. There is more to this decision than $.
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Re: Delaying pension benefits - what would you do?

Post by Grogs »

retired early&luv it wrote:But, what do you want to do? Do you want to work? Do you want to travel? I planned to work longer, then I got a new boss that made really bad decisions. I decided that I would rather retire earlier, and I have not regretted a reduced pension to get out faster. But, if I had kept my old boss, I would have stayed longer and I would not have regretted that either. There is more to this decision than $.
OP didn't specify whether he's still working or not, but I took it to be a pension plan with a penalty (or bonus depending on how one views it) for delaying. Mine works like that, once you've qualified and left the company you can decide when to take it. You can start as early as 12 years before the full retirment age, or any time between that and FRA as you please. For each year before FRA, there's a 5% penalty imposed on the retirement amount. I'm hoping to be FI around 5 years before the FRA, and if that happens I'll have to make the same type of calculations.
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Re: Delaying pension benefits - what would you do?

Post by Valuethinker »

ABS wrote:I will be turning 65 in a few months and will be eligible for a pension, 100% J & S, amount $2640/month. If I wait till 66 it increases to $2903/month. My spouse will not have any pension from her job. I am figuring the break even point to be 11 years, based on the following:

Retiring at 65 cumulative benefits after 11 years: $2640X12X11 = $348,480
Retiring at 66 Cumulative benefits after 10 years: $2903X12X10 = $348, 360

If I do not have an issue with cash flow and assuming life expectancy till 85, would I be better off delaying taking my benefit?

Please critique; your feedback is appreciated.
The most important thing in a pension is longevity insurance. The chance your spouse might live a lot longer t h an that.

Assuming there is no risk of plan sponsor going broke in the next 12 months, by delaying one year you have bought your spouse a higher insurance amount.

Usually that is the best thing to do assuming no other financial needs.
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Re: Delaying pension benefits - what would you do?

Post by Valuethinker »

ThePrune wrote:+1 I agree with #Cruncher's strictly financial analysis.

From a Risk Control perspective:
(1) Do you have any reason to believe that future pension payments would be at risk of severe reduction or termination? (Example: a public pension paid by Illinois). If so, it might be a reason to start the pension sooner and retain you personal investment funds.

(2) If your pension is covered by the Pension Benefit Guaranty Corporation, you appear to be well within the dollar limits for full protection.
Very good point. But if with the pbgc multi employer programme that is in serious financial trouble. One should consider taking the pension immediately or a lump sum transfer out if possible.
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Re: Delaying pension benefits - what would you do?

Post by Flobes »

My calculus is not about break-even points but rather about how all the moving parts synch.

I am 66, delaying both pension and SS 'til 70. Free longevity insurance. Any day that I read that rules/plans are changing for either SS or my state pension, I'll reconsider and promptly file an application for payout benefits.

My 66-69 years will be minimal income years, so low brackets can filled by Roth conversions, reducing taxable RMDs >70.

Additionally, my state exempts up to $24k of "pension/annuities" income from taxation; definition includes Roth conversions. So I have a 4.63% tax incentive to siphon tIRA money pre-70, when that $24k gimme gets filled by SS.
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Re: Delaying pension benefits - what would you do?

Post by itstoomuch »

Valuethinker wrote:
ABS wrote:I will be turning 65 in a few months and will be eligible for a pension, 100% J & S, amount $2640/month. If I wait till 66 it increases to $2903/month. My spouse will not have any pension from her job. I am figuring the break even point to be 11 years, based on the following:

Retiring at 65 cumulative benefits after 11 years: $2640X12X11 = $348,480
Retiring at 66 Cumulative benefits after 10 years: $2903X12X10 = $348, 360

If I do not have an issue with cash flow and assuming life expectancy till 85, would I be better off delaying taking my benefit?

Please critique; your feedback is appreciated.
The most important thing in a pension is longevity insurance. The chance your spouse might live a lot longer t h an that.

Assuming there is no risk of plan sponsor going broke in the next 12 months, by delaying one year you have bought your spouse a higher insurance amount.

Usually that is the best thing to do assuming no other financial needs.
I added the color to "bought" as a highlight.
JMO, Use It or Lose It.
However, by waiting 1 year, You will have gained 10% more immediate benefit. Less taxes, of course
We took SS early. Turning on another couple of GWLB annuities for the 20% increase in benefit, age 70. RMD friendly. Don't need the cashflow either.
Next year, I hope to do more traveling, while I got the chance. Health issues, regardless of what spouse says.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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ABS
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Re: Delaying pension benefits - what would you do?

Post by ABS »

Thank you #cruncher for your analysis and guidance and thanks to everyone for your insights. As long as I am comfortable living off my current assets, I'll delay collecting pension payments until 70. SS strategy is to collect spousal benefits at FRA and full benefits at 70.
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Re: Delaying pension benefits - what would you do?

Post by ubermax »

#Cruncher wrote:Yes. By forsaking $31,680 (12 * 2640) for one year, you'll get $3,156 (12 * 2903 - 31680) more per year for 19 years (85 - 66). This represents a very good return of 7.4%. [1] The likely return is even higher if your wife is no older than you and you're both in average or better health. [2]
I'm puzzled with the above wording ; on a quick read it sounds like "ABS" could anticipate a pretty good investment return by opting to delay a year ; however, to me it says that ABS would have to earn 7.4% on that extra $3,156/year consistently for 19 years to be in the same position in 19 years that he would have been in had he been able to invest that forsaken $31,680 at the same 7.4% for 19 years which is impossible since he gave up the $31,680 ???

Maybe #Cruncher can provide more detail on how ABS would get a 7.4% return ? or maybe someone else understands it and could shed some light ?? II just don't understand who's getting that 7.4% return
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#Cruncher
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Re: Delaying pension benefits - what would you do?

Post by #Cruncher »

ubermax in previous post wrote:Maybe #Cruncher can provide more detail on how ABS would get a 7.4% return?
(I'll use ABS' revised figures from this post that show $2,628 per month if start at age 65 or $2,903 per month if start a year later at age 66.)

If ABS delays his pension from age 65 to 66 he gives up $31,536 (12 X 2628). In exchange beginning one year later he will collect $34,836 (12 X 2903) every year instead of $31,536, an increase of $3,300. If he or his wife live 19 years this is like investing $31,536 and getting $3,300 per year for 19 years in return. This is an 8.07% rate of return as computed with the Excel RATE function:

Code: Select all

8.07% = RATE(19, 3300, -31536, 0, 0)
To illustrate this assume the pensioner does start his pension at age 65. But instead of spending the $31,536 first year's pension, he deposits it into a savings account. Then at the end of each year he withdraws $3,300 from that savings account. For this to continue 19 years, the savings account would have to pay 8.07% interest as shown in the table below:

Code: Select all

       Starting     8.07%
Year    Balance   Interest  Withdrawal

Code: Select all

   1     31,536      2,545     (3,300)
   2     30,781      2,484     (3,300)
   3     29,964      2,418     (3,300)
   4     29,082      2,347     (3,300)
   5     28,128      2,270     (3,300)
   6     27,098      2,186     (3,300)
   7     25,984      2,097     (3,300)
   8     24,781      1,999     (3,300)
   9     23,480      1,895     (3,300)
  10     22,075      1,781     (3,300)
  11     20,556      1,659     (3,300)
  12     18,915      1,526     (3,300)
  13     17,141      1,383     (3,300)
  14     15,224      1,228     (3,300)
  15     13,152      1,061     (3,300)
  16     10,913        881     (3,300)
  17      8,494        685     (3,300)
  18      5,879        474     (3,300)
  19      3,054        246     (3,300)
  20          0
                    ------    --------
 Sum                31,164    (62,700)
And here's the same type of illustration for delaying five years until age 70. In this case the pensioner is assumed to save and deposit the $31,536 age 65 pension into the savings account the first 5 years. Thereafter, instead of adding to the account, he withdraws $22,104 each year. ($22,104 equals the excess of the $4,470 per month age 70 pension over $31,536.) For this to continue until the start of year 20 the savings account's interest rate would need to be 8.28%. (See my previous post for how this rate of return is calculated.)

Code: Select all

       Starting    8.28%     Add or
Year    Balance  Interest  (Withdraw)

Code: Select all

   0                          31,536 
   1     31,536     2,610     31,536 
   2     65,682     5,437     31,536 
   3    102,655     8,497     31,536 
   4    142,688    11,811     31,536 
   5    186,035    15,399    (22,104)
   6    179,330    14,844    (22,104)
   7    172,070    14,243    (22,104)
   8    164,209    13,592    (22,104)
   9    155,698    12,888    (22,104)
  10    146,481    12,125    (22,104)
  11    136,502    11,299    (22,104)
  12    125,697    10,405    (22,104)
  13    113,998     9,436    (22,104)
  14    101,330     8,388    (22,104)
  15     87,613     7,252    (22,104)
  16     72,761     6,023    (22,104)
  17     56,680     4,692    (22,104)
  18     39,268     3,250    (22,104)
  19     20,414     1,690    (22,104)
  20          0 
                  -------   ---------
 Sum              173,880   (173,880)
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Re: Delaying pension benefits - what would you do?

Post by SeeMoe »

Your SS starts at age 66, so wait one year then go for the gold! Meantime payoff any outstanding bills and consider downsizing in general. After a year or so of relaxing and being free, look into part-time jobs if you feel like it, or let the wife continue working maybe.

SeeMoe, retired 21+ years and loving it! :mrgreen:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}
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Re: Delaying pension benefits - what would you do?

Post by ubermax »

#Cruncher wrote:If ABS delays his pension from age 65 to 66 he gives up $31,536 (12 X 2628). In exchange beginning one year later he will collect $34,836 (12 X 2903) every year instead of $31,536, an increase of $3,300. If he or his wife live 19 years this is like investing $31,536 and getting $3,300 per year for 19 years in return. This is an 8.07% rate of return as computed with the Excel RATE function:
Not buying it and it's obvious that OP didn't either , he's passing up both early retirement and your great "return" argument to delay until 70 ; put another way if he was giving up a "guaranteed" 8% return on the annual amount he could have had starting at 65 , then in 19 years he would be in the same financial position if "he" could have earned 8% on that extra 3300 hundred - lot of "what if's" and an 8% return is a pretty high bar .
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Re: Delaying pension benefits - what would you do?

Post by #Cruncher »

ubermax in previous post wrote:Not buying it and it's obvious that OP didn't either , he's passing up both early retirement and your great "return" argument to delay until 70 ...
Delaying pension start from 65 to 66 does provide a very good return. This isn't altered because delaying from 65 to 70 provides an even better one. Both delays return about 8% on the age 65 pension that is not taken. But if one delays until age 70, one gets the 8% return on five years of that pension instead of on just one year. This is like choosing to invest $5 at 8% instead of only $1 at 8%.

Perhaps the options of when to start the pension are better evaluated by calculating the present value (PV) of all four (starting at 65, 66, 68, or 70 presented by ABS in this post) when discounted at the same normal discount rate. The next-to-last row of the following table does this using a discount rate of 4%, which I believe is realistic in today's interest rate environment. The last row shows that the PV increases $12,000 when one delays from age 65 to age 66; but it increases $63,000 when one delays from age 65 to 70. So, delaying to 70 certainly does appear to be the best choice of the four. But if the only options were starting at age 65 or at age 66, then the latter would be the one to choose.

Code: Select all

Row       Col A              Col B       Col C      Col D      Col E      Col F
  1  Assumed years              20
  2  Pension start age                      65         66         68         70
  3  Monthly pension                     2,628      2,903      3,578      4,470
  4  Annual pension                     31,536     34,836     42,936     53,640
                             Rate
  6  66 equals 65           8.0686%   [320,237]  [320,237]   321,114    322,455
  7  68 equals 65           8.2046%   [317,231]   316,938   [317,231]   317,997
  8  70 equals 65           8.2774%   [315,640]   315,192    315,177   [315,640]
  9  Normal discount rate   4.0000%    437,072    448,649    473,559    499,897
 10  Versus 65                                     11,577     36,487     62,825
As an aside, I've also included rows 6, 7, and 8 to show that when discounted at the rates I determined in this post above for the three delay options (65 to 66, 65 to 68, and 65 to 70), the PVs match that for starting the pension at age 65. This is what one would expect.

The main formula in the table above is the one in cell C6 which is copied down and right to fill the range C6:F9. It uses the Excel PV function.

Code: Select all

C6: 320,237 = -PV($B6,     $B$1 - (C$2 - $C$2), C$4,   0, 0) / (1 + $B6) ^ (C$2 - $C$2 - 0.5)
F9: 499,897 = -PV($B9,     $B$1 - (F$2 - $C$2), F$4,   0, 0) / (1 + $B9) ^ (F$2 - $C$2 - 0.5)

C6: 320,237 = -PV(8.0686%, 20   -  0,           31536, 0, 0) /  1.080686 ^ -0.5
F9: 499,897 = -PV(4%,      20   -  5,           53640, 0, 0) /  1.04     ^  4.5
Note: The "- 0.5" at the end of the formula adjusts for the PV function assuming cash flow at the end of each year, while actually the pension payments are spread out over the year.

By the way, ubermax, why do you format all your posts in bold-italic? Reading them gets tiresome after a while -- like reading ones THAT ARE ALL IN CAPITAL LETTERS.
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