Another Pension Lump Sum Help Needed

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Falco
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Another Pension Lump Sum Help Needed

Post by Falco » Mon Oct 16, 2017 8:29 pm

Hopefully #Cruncher or some other excel wiz can run what return i would need to get for the different ending ages of 82, 90, 100.

Age 45
Pension Lump Sum $138,400
Single Life Annuity at 65: $2161/m no COLA

So assuming i live to 82(expectancy), 90 and 100 what is the return i need to get to self fund equal to the annuity? I came up with rates +/- 5% but dont trust my calculations! :oops:

Thank you in advance! :sharebeer

123
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Re: Another Pension Lump Sum Help Needed

Post by 123 » Mon Oct 16, 2017 8:47 pm

Is the buyout $ 138,400 the buyout amount available now at your age age 45 or the anticipated buyout at age 65 (based on current rates)?
The closest helping hand is at the end of your own arm.

Falco
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Re: Another Pension Lump Sum Help Needed

Post by Falco » Mon Oct 16, 2017 9:04 pm

123 wrote:
Mon Oct 16, 2017 8:47 pm
Is the buyout $ 138,400 the buyout amount available now at your age age 45 or the anticipated buyout at age 65 (based on current rates)?
Correct. If I choose I will get this lump sum this December. Otherwise wait until I'm 65 and get the 2161.

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#Cruncher
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Re: Another Pension Lump Sum Help Needed

Post by #Cruncher » Tue Oct 17, 2017 12:01 am

Falco wrote:
Mon Oct 16, 2017 8:29 pm
Age 45
Pension Lump Sum $138,400
Single Life Annuity at 65: $2161/m no COLA
So assuming i live to 82 (expectancy), 90 and 100 what is the return i need to get to self fund equal to the annuity? I came up with rates [~] 5%
5% is pretty close, Falco. An easy way to calculate it is with the Excel IRR function as shown in the following table that computes the return for living to every age from 68 to 100.

Code: Select all

   Col A     Col B  Col C
Row  Age    Amount    IRR

Code: Select all

  2   45  (138,400)
  3   46         0
  4   47         0
  5   48         0
  6   49         0
  7   50         0
  8   51         0
  9   52         0
 10   53         0
 11   54         0
 12   55         0
 13   56         0
 14   57         0
 15   58         0
 16   59         0
 17   60         0
 18   61         0
 19   62         0
 20   63         0
 21   64         0
 22   65    25,932
 23   66    25,932
 24   67    25,932
 25   68    25,932   (1.3%) [*]
 26   69    25,932   (0.3%)
 27   70    25,932    0.5% 
 28   71    25,932    1.2% 
 29   72    25,932    1.7% 
 30   73    25,932    2.2% 
 31   74    25,932    2.6% 
 32   75    25,932    3.0% 
 33   76    25,932    3.3% 
 34   77    25,932    3.5% 
 35   78    25,932    3.7% 
 36   79    25,932    4.0% 
 37   80    25,932    4.1% 
 38   81    25,932    4.3% 
 39   82    25,932    4.5% <--
 40   83    25,932    4.6% 
 41   84    25,932    4.7% 
 42   85    25,932    4.8% 
 43   86    25,932    4.9% 
 44   87    25,932    5.0% 
 45   88    25,932    5.1% 
 46   89    25,932    5.2% 
 47   90    25,932    5.2% <--
 48   91    25,932    5.3% 
 49   92    25,932    5.3% 
 50   93    25,932    5.4% 
 51   94    25,932    5.4% 
 52   95    25,932    5.5% 
 53   96    25,932    5.5% 
 54   97    25,932    5.6% 
 55   98    25,932    5.6% 
 56   99    25,932    5.6% 
 57  100    25,932    5.7% <--
* Here's the formula I entered in cell C25 and copied down to row 57
C25: -1.3% = IRR(B$2:B25)

Falco
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Re: Another Pension Lump Sum Help Needed

Post by Falco » Tue Oct 17, 2017 9:29 am

Thank you #Cruncher. Do these calculations assume i take the $138,400 now, invest it then beginning when i am 65 in 20y i start taking $2161/m out? And then the interest rate is the annual return i would need to get through the entire horizon from today age 45 until the ages indicated?

If so, then this lump sum option looks much more like one to take over keeping with the pension and annuitizing. Many other threads i read had a 6.5 to almost 8% needed. To need only mid 4% return over a ~40y horizon and mid 5% over a 50y horizon, even in today's lower outlook market, seems fairly feasible.

Of note pension is over 90% funded and with a large multinational bank.

Ami thinking about this the correct way?

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#Cruncher
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Re: Another Pension Lump Sum Help Needed

Post by #Cruncher » Tue Oct 17, 2017 4:09 pm

Falco wrote:
Tue Oct 17, 2017 9:29 am
Do these calculations assume i take the $138,400 now, invest it then beginning when i am 65 in 20y i start taking $2161/m out? And then the interest rate is the annual return i would need to get through the entire horizon from today age 45 until the ages indicated?
Yes. Assume at age 45 you deposit $138,400 into a savings account paying 4.450923% [*] interest at the end of each year. In 19 years this would grow to $316,570. The next year at age 65 you'd begin withdrawing $25,932 (12 X 2161) at the end of each year while still earning the same interest rate. You could do this until age 82 before exhausting the money in the savings account.

Code: Select all

 Age   Interest  Withdrawal     Balance

Code: Select all

  45                            138,400 
  46      6,160           0     144,560 
  47      6,434           0     150,994 
  48      6,721           0     157,715 
  49      7,020           0     164,735 
  50      7,332           0     172,067 
  51      7,659           0     179,726 
  52      7,999           0     187,725 
  53      8,355           0     196,080 
  54      8,727           0     204,808 
  55      9,116           0     213,924 
  56      9,522           0     223,445 
  57      9,945           0     233,391 
  58     10,388           0     243,779 
  59     10,850           0     254,629 
  60     11,333           0     265,962 
  61     11,838           0     277,800 
  62     12,365           0     290,165 
  63     12,915           0     303,080 
  64     13,490           0     316,570 
  65     14,090      25,932     304,728 
  66     13,563      25,932     292,359 
  67     13,013      25,932     279,440 
  68     12,438      25,932     265,946 
  69     11,837      25,932     251,851 
  70     11,210      25,932     237,128 
  71     10,554      25,932     221,751 
  72      9,870      25,932     205,689 
  73      9,155      25,932     188,912 
  74      8,408      25,932     171,388 
  75      7,628      25,932     153,084 
  76      6,814      25,932     133,966 
  77      5,963      25,932     113,997 
  78      5,074      25,932      93,139 
  79      4,146      25,932      71,352 
  80      3,176      25,932      48,596 
  81      2,163      25,932      24,827 
  82      1,105      25,932           0
        -------     -------
Total   328,376     466,776
Falco, continuing in same post," wrote:If so, then this lump sum option looks much more like one to take over keeping with the pension and annuitizing. Many other threads i read had a 6.5 to almost 8% needed. To need only mid 4% return over a ~40y horizon and mid 5% over a 50y horizon, even in today's lower outlook market, seems fairly feasible.
A couple of comments:
  • You've been looking at different pension vs lump sum threads than I have. The ones I've seen typically have the pension returning 4% to 5%, not the 6.5% to 8% you mention.
  • While the pension's return is, indeed, low for one beginning so far in the future, it's still better than what you'd get from a commercial annuity. For example, ImmediateAnnuities shows $138,400 buying a 45 year old male a $1,565 monthly annuity beginning in 20 years. This is $600 less than the $2,161 monthly pension.
* 4.450923% is the IRR result for age 82 in my previous post. (I'm showing it to so many digits to make the balance at age 82 come out to $0.)

Falco
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Re: Another Pension Lump Sum Help Needed

Post by Falco » Tue Oct 17, 2017 9:26 pm

Thank you.

I did check immediate annuities and saw the same thing. Also saw that for a 65yo today you would need just shy of 400k to get 2161...or close to a 5.4% return for the next 20y.

Seems like the annuity is pretty good, but then also I only see 3 rolling 20y periods less than 5% and they were 1927, 28 and 29 if I remember correctly.

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g$$
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Re: Another Pension Lump Sum Help Needed

Post by g$$ » Tue Oct 17, 2017 10:35 pm

Falco wrote:
Tue Oct 17, 2017 9:26 pm
Thank you.

I did check immediate annuities and saw the same thing. Also saw that for a 65yo today you would need just shy of 400k to get 2161...or close to a 5.4% return for the next 20y.

Seems like the annuity is pretty good, but then also I only see 3 rolling 20y periods less than 5% and they were 1927, 28 and 29 if I remember correctly.
Hi. For what it's worth, I think $400k is the amount that an immediate annuity would cost. That is, one that starts paying out $2,161 per month starting at age 45 rather than starting at age 65. The $130k-$150k figure looks more reasonable to me.

Source: Am pension actuary.

-g$$

Beehave
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Re: Another Pension Lump Sum Help Needed

Post by Beehave » Tue Oct 17, 2017 11:06 pm

Crunching the numbers seems to show that the annuity is relatively generous (you would be "buying" it at a very reasonable price). Next issue is the risk-reward comparison, because even if the annuity is nicely priced, that alone is not proof it is the right thing.

Annuity Plusses:
Guaranteed lifetime income. If you live a long time, this is a major plus.
If you take the lump sum and invest it, the investments may lose value in a deflation and you may not recover sufficiently over time, and meanwhile the value of the annuity would have increased.

Annuity Minuses:
The provider may go under and you may not be made whole. This is a twenty year period so the risk is there that one thing or another goes wrong and the annuity won't be collected.
There may be a significant inflation which lowers the value of the annuity payments, whereas your lump sum investment may increase nicely with the inflation.

I'm sure there are other considerations, but seeing as we just can't know, here's my thought.

An annuity or pension is a wonderful thing, especially if you can buy it at a discount. If you are fairly sure of long term employment, then you will be able to accumulate other assets which greatly reduce any of the risks of buyng the annuity/pension and I'd say do not take the lump sum.
However, if you are not sure about your long-term steady employment prospects I'd say avoid the annuity risk and take the lump sum.

Best wishes.

Falco
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Re: Another Pension Lump Sum Help Needed

Post by Falco » Wed Oct 18, 2017 12:56 pm

Thank you all for the responses. Given there isn't a clear advantage either way I will likely take the bird in hand and do the lump sum. I don't have a family history of anyone living past 90 so my goal is to actually retire early.

And Beehives comment about the long time frame rings true...20y is a long time. If I was 5 or 10y away the annuity would be more attractive as it is guaranteeing a 5%+ return over that short time frame


If I get less than 4.5% return I on average lose out doing this.

These are tough but good decisions to have! :)

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