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Message
re: Offered lump sum payment for old pension. Should I take it? (Im only 36)
Posted on 4/18/16 at 9:43 am to TigerDeBaiter
Posted on 4/18/16 at 9:43 am to TigerDeBaiter
the risk free rate utilized is likely the one month t bill, and the spread is calculated from there based upon instruments with a similar timeline horizon to when he will retire. Mortality table is a GAM table, use 1987 if you want.
0
Posted on 4/18/16 at 10:09 am to TigerDeBaiter
quote:
What are the rates and life expectancy that are usually used? I tried to back into a scenario and think I got pretty close?
While companies use their own internal data, the SOA does release mortality tables that line up fairly well. The Gam table as mentioned above is likely what is used.
LINK
This post was edited on 4/18/16 at 10:33 am
Posted on 4/18/16 at 11:39 am to GenesChin
Gotcha. Thanks! Don't think I'll ever have a pension but always good to go through some excersizes.
Posted on 4/18/16 at 11:59 am to LSUTigKyl
True. And that's how I would play it as well - in fact, I already did.
One of my former employers canceled our pension plan last year and offered the same options that the OP listed. There was no offer and counter-offer. I mean, you can make a counter-offer if you want to. And then once the cut off date passes, they simply place you in the default option (usually the single life annuity) and you're locked in forever - at least that was the case with my situation.
I took a lump sum rollover into an IRA. I heavily considered rolling it into my Roth and paying the taxes up front. But for simplicity sake (there had been some "accounting issues" with this company and its continued survival was in question), I just rolled it. If the OP's situation is at all similar to what I had, I'd just pick the best option and go with it, depending on what his financial situation is. It's not enough money to stress over, but he has time to make it grow into something more meaningful.
Good luck.
One of my former employers canceled our pension plan last year and offered the same options that the OP listed. There was no offer and counter-offer. I mean, you can make a counter-offer if you want to. And then once the cut off date passes, they simply place you in the default option (usually the single life annuity) and you're locked in forever - at least that was the case with my situation.
I took a lump sum rollover into an IRA. I heavily considered rolling it into my Roth and paying the taxes up front. But for simplicity sake (there had been some "accounting issues" with this company and its continued survival was in question), I just rolled it. If the OP's situation is at all similar to what I had, I'd just pick the best option and go with it, depending on what his financial situation is. It's not enough money to stress over, but he has time to make it grow into something more meaningful.
Good luck.
Posted on 4/19/16 at 6:10 am to Jag_Warrior
Unless the return they are promising you is in the range of 10% or more, I'd definitely take the lump sum.
Investing money in the common 80% stocks 20% bonds ratio roughly doubles your money every 10 years. So at 65, that money would be about $90,000. $355 a month is a 4.7% return on 90k. That's again very rough, but a decent big picture estimate.
Just remember, that once you die the company keeps the money if you keep it with them. You get to pass on the principal of it is yours'.
Investing money in the common 80% stocks 20% bonds ratio roughly doubles your money every 10 years. So at 65, that money would be about $90,000. $355 a month is a 4.7% return on 90k. That's again very rough, but a decent big picture estimate.
Just remember, that once you die the company keeps the money if you keep it with them. You get to pass on the principal of it is yours'.
Posted on 4/19/16 at 8:38 am to baldona
quote:
Unless the return they are promising you is in the range of 10% or more, I'd definitely take the lump sum.
Jesus christ. People need to start giving financial advice on topics they don't understand
Posted on 4/19/16 at 8:45 am to baldona
quote:
Just remember, that once you die the company keeps the money if you keep it with them. You get to pass on the principal of it is yours.
I'm in this camp. Take the lump sum, put it into a retirement account. I'd rather have funds under my control for the next 20-30 years than a minimal annuity at a future age I might not even reach.
Posted on 4/19/16 at 8:58 am to hungryone
quote:
Just remember, that once you die the company keeps the money if you keep it with them.
quote:
than a minimal annuity at a future age I might not even reach.
You both realize the mortality risk associated is included in the lump sum payout right? As in, this payout is reduced by an amount to equal the potential death during deferment
Choosing hte lump sum or the annuity should mathematically be near equal in value. This is a utility argument. Do you value the annuity or lump sum more right now?
This post was edited on 4/19/16 at 9:01 am
Posted on 4/19/16 at 9:05 am to GenesChin
quote:
Jesus christ. People need to start giving financial advice on topics they don't understand
Solid post.
You know exactly what I was trying to say. In other words, never take an annuity at age 36. The returns they are promising ($355/ month) includes the probably that some people will die before they reach 65. Therefore, if you live to 65 or longer it is a horrible return for you and your family. If you and your spouse die before age 65, your family gets nothing. Instead, they could have $80,000+ in a retirement account that will be passed to your heirs.
Roll it into an IRA.
This post was edited on 4/19/16 at 9:07 am
Posted on 4/19/16 at 9:06 am to GenesChin
quote:It pretty much is.
Choosing hte lump sum or the annuity should mathematically be near equal in value.
Basically the only "wrong" decision he can make it here is to cash it out.
Posted on 4/19/16 at 9:40 am to baldona
quote:
You know exactly what I was trying to say.
I know what you are saying, and what you are saying is wrong.
quote:
The returns they are promising ($355/ month) includes the probably that some people will die before they reach 65
What you seem to not realize is that this decreases the value of the lump sum payout. It increases the annuity monthly payout.
quote:
Therefore, if you live to 65 or longer it is a horrible return for you and your family.
You clearly don't realize that there is a tremendous value in eliminating investment+longevity risk for an individual. If you told Warren Buffett he could lock in 6% returns guaranteed for life, he would take it in a heartbeat
quote:
Instead, they could have $80,000+
The stock market historically gives ~7% returns (which isn't even close to guaranteed). On his 62 birthday, he would have roughly $60-65k at that point not 80k.
The value of the annuity i going to be roughly $50k based on the tables. The difference of $10k is the payment to protect against longevity risk which is a huge deal
This post was edited on 4/19/16 at 9:43 am
Posted on 4/19/16 at 9:41 am to baldona
quote:
baldona
Don't argue with the people that work in this field. Reading the Wall Street Journal in the john at work doesn't teach you how pension plans work
More importantly, even if he had $80k at age 62, that likely will be an extremely small % of his retirement portfolio. I'm no financial planner, but I imagine that having a blend of guaranteed payments in a pension annuity certain combined with investment distributions helps protect you from market fluctuations.
There is no company that will ever sell you a life annuity at the rate that a pension plan provides unless rates change significantly.
This post was edited on 4/19/16 at 9:48 am
Posted on 4/19/16 at 1:13 pm to GenesChin
GenesChin your posts are very rational. Thanks for your input
Posted on 4/19/16 at 1:41 pm to GenesChin
Geneschin,
What you are leaving out is what happens if he dies before he hits 65? His family could get nothing depending on the beneficiary agreement. The risk in that is huge.
You are also forgetting that most of the time that people are offered buyouts on pensions is because the Pensions are not doing well. He is also risking the Pension plan/ company go backrupt in the 30 years before he retires. Again, he gets nothing.
The stock market returning 7% is again, as I said 196.7% every 10 years. So like I said they double every 10. If your funds are only returning 7% you need to find new ones. 11,500 doubled 3 times is....$92,000.
So options are:
1.) risk pension goes bankrupt and you don't die before 65 to receive about $65,000 in benefits that you then lose upon death.
2.) take lump sum that could easily turn into $92,000 of your own money at 65 that you choose what to do with and your estate keeps at your death.
Its a rather easy decision to me. There's risk either way.
What you are leaving out is what happens if he dies before he hits 65? His family could get nothing depending on the beneficiary agreement. The risk in that is huge.
You are also forgetting that most of the time that people are offered buyouts on pensions is because the Pensions are not doing well. He is also risking the Pension plan/ company go backrupt in the 30 years before he retires. Again, he gets nothing.
The stock market returning 7% is again, as I said 196.7% every 10 years. So like I said they double every 10. If your funds are only returning 7% you need to find new ones. 11,500 doubled 3 times is....$92,000.
So options are:
1.) risk pension goes bankrupt and you don't die before 65 to receive about $65,000 in benefits that you then lose upon death.
2.) take lump sum that could easily turn into $92,000 of your own money at 65 that you choose what to do with and your estate keeps at your death.
Its a rather easy decision to me. There's risk either way.
Posted on 4/19/16 at 2:10 pm to baldona
quote:
What you are leaving out is what happens if he dies before he hits 65?
I did not leave it out and neither did the people who calculated out the lump sum payout. If you were to remove mortality risk from the deferment, the lump sum payout is roughly $30,000. The reason the lump sum is only $11,000 is because of that mortality risk
quote:
You are also forgetting that most of the time that people are offered buyouts on pensions is because the Pensions are not doing well
Correct.
quote:
He is also risking the Pension plan/ company go backrupt in the 30 years before he retires
Not correct. Most companies that go through this process offer the lump sum to employees and then buy deferred annuities from major life insurance providers to close the portfolio. Unlike company's pension plans that are guaranteed by the employer, these are guaranteed by major life insurers which are regulated to ensure solvency
quote:
If your funds are only returning 7% you need to find new ones.
While this is the historical average, there is still risk that future markets won't get 7%. This 7% time period has experienced the baby boomers, computers, internet and globalization. Can we expect another major event to stimulate growth in such a way?
Additionally, never has the stock market experienced such low inflation/FED interest rates. There is a lot of research on Japan that this will cause growth to stagnate.
Whether you believe it will be bad or not, there is risk and that risk has a cost. The pension transfers that risk to someone else
quote:
Its a rather easy decision to me. There's risk either way.
People have different risk appetite curves. You clearly have a big risk appetite as you are willing to risk money for the potential for relatively small gains while accepting longevity and investment risks
Nothing wrong with that as long as you understand what you are doing. Just know that you are taking on significant risks in doing so
This post was edited on 4/19/16 at 2:27 pm
Posted on 4/19/16 at 2:18 pm to baldona
quote:
baldona
After reading the above, realizee I'm not telling you taking the lump sum is wrong, mathematically they should be relatively equal. All of the risks are calculated to the best actuarial info available and they give you a fair deal either choice.
Additionally, his pension, if they guarantee by purchasing deferred annuities like most closing pension funds, is not at risk (well if it is stocks are going to plummet anyways)
This post was edited on 4/19/16 at 2:20 pm
Posted on 4/19/16 at 2:53 pm to GenesChin
I think that I may have found the reason they are offering a lump sum at this time. The current mortality table that they are using is RP-2000.
The new table set to come out next year will increase their liability in comparison with the existing tables found in RP-2000, the life expectancy for 65-year-old males has risen from 19.6 years to 21.6 years—or 10.4%. For age-65 females, the corresponding increase has been from 21.4 years to 23.8 years—up 11.3%. As life expectancy increases, so does the cost of pension annuity payments. The SOA predicts that retirement liabilities could grow anywhere from 4% to 8%, while some actuarial firms estimate that overall cost increases will be at the high end of this range.
The new table set to come out next year will increase their liability in comparison with the existing tables found in RP-2000, the life expectancy for 65-year-old males has risen from 19.6 years to 21.6 years—or 10.4%. For age-65 females, the corresponding increase has been from 21.4 years to 23.8 years—up 11.3%. As life expectancy increases, so does the cost of pension annuity payments. The SOA predicts that retirement liabilities could grow anywhere from 4% to 8%, while some actuarial firms estimate that overall cost increases will be at the high end of this range.
Posted on 4/19/16 at 3:29 pm to TigerMan79
So I assume the lump sum is based off the 2000 table hoping that they will get takers as a cost cutting move?
Posted on 4/19/16 at 3:30 pm to GenesChin
Why else would they offer it? Certainly not out of the kindness of their heart.
Posted on 4/19/16 at 3:38 pm to iknowmorethanyou
quote:
Why else would they offer it? Certainly not out of the kindness of their heart.
Not all companies that cease to offer pension plans choose to offer lump sums.
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