The company is not offering this for his benefit. They are trying to reduce their pension responsibility as cheaply as they can. You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive. How much he would receive, at what age, and whether the pension is COLA'd are all important considerations. The health of the company is also an issue.
Should he just go to Vanguard.com and open an account?Yes, that would be a good start. Opening two accounts would be even better. One would be "his" IRA - the "I" does stand for Individual so that has to be in one person's name. The other would be a joint brokerage account the two of you can use for any taxable investing.
Any advise is greatly appreciated! Thank you. :)Previous suggestions to look before you leap at the lump sum are good. See the 'Misc. calcs' tab on the case study spreadsheet (http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228) for some help doing the math.
The company is not offering this for his benefit. They are trying to reduce their pension responsibility as cheaply as they can. You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive. How much he would receive, at what age, and whether the pension is COLA'd are all important considerations. The health of the company is also an issue.
Agreed. Often, pensions that pay out year-after-year will pay more out than the employee put in. Find out what the estimated benefit per year is going to be and calculate that out till age 90 or so and see if it's more than rolling the money over would make.
The company is not offering this for his benefit. They are trying to reduce their pension responsibility as cheaply as they can. You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive. How much he would receive, at what age, and whether the pension is COLA'd are all important considerations. The health of the company is also an issue.
The company is not offering this for his benefit. They are trying to reduce their pension responsibility as cheaply as they can. You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive. How much he would receive, at what age, and whether the pension is COLA'd are all important considerations. The health of the company is also an issue.
The way that they are calculating the lump sum payout is:
$708.60 Age 65 Single Life Annuity
X87.8747 Present Value Factor-what is this?
$62,268.01 Lump Sum payable 12-1-15
If he doesn't take the lump sum, and at age 65 started receiving $708.60 per month for, say, 25 years until he dies at age 90, then that equals 708.60 X 25 X 12 = $212,580.
My husband has read through the whole packet, and there is no mention of cost of living adjustments.
He did, however, find this little nugget buried in the pages: "Please note that the IRS is expected to publish a new mortality table for calculating lump sum payments. It is anticipated that this table will generally reflect longer expected lifetimes and possibly result in larger lump sum payments. This table is expected to be effective for lump sums paid in 2017. As a result, it will not apply to the lump sum currently available as part of this offer."
We have received these "one-time" offers from them for the last few years. However, this is the first year that they have actually sent a packet of information also.
So, my husband is leaning toward NOT taking the lump sum payment. I was thinking of this money as just sitting there being lazy and not earning any interest. I thought we should take the money and make it start working for us.
The company is not offering this for his benefit. They are trying to reduce their pension responsibility as cheaply as they can. You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive. How much he would receive, at what age, and whether the pension is COLA'd are all important considerations. The health of the company is also an issue.
Agreed. Often, pensions that pay out year-after-year will pay more out than the employee put in. Find out what the estimated benefit per year is going to be and calculate that out till age 90 or so and see if it's more than rolling the money over would make.
It is way naive, I think, to just assume that the pension will still be there when the OP's husband is ready and eligible to start collecting on it, 10 years or more from now. The OP's original post starts from the assumption that the single lump-sum payout will be taken. In her shoes, I would most definitely stick with that!
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I think my husband is still on the fence about whether or not to take the lump sum. Sorry I was unclear! He and I are just feeling our way along on this. I think the more we are learning, the more he wants to leave it where it is. He wants to know how much this $62,000 will grow. Would it grow to $212,000 in 25 years? Is that even the right way to look at it?
Anyway, the information packet that he received said that "The Pension Benefit Guaranty Corporation (PBGC) is a federal agency which guarantees benefits under the plan up to certain maximum limits in the event the pension plan terminates without sufficient assets and the employer is in financial distress. This maximum limit is set by law and changes each year. Your benefit payable under the plan is covered by the PBGC. However, if you receive your benefit in a lump-sum payment, the PBGC no longer guarantees your benefit after your payment date. For more information....go to www.pbgc.gov."
The company is not offering this for his benefit. They are trying to reduce their pension responsibility as cheaply as they can. You need to figure out how they are calculating the lump sum amount, and how that discounted value compares to the pension he would receive. How much he would receive, at what age, and whether the pension is COLA'd are all important considerations. The health of the company is also an issue.
The way that they are calculating the lump sum payout is:
$708.60 Age 65 Single Life Annuity
X87.8747 Present Value Factor-what is this?
$62,268.01 Lump Sum payable 12-1-15
If he doesn't take the lump sum, and at age 65 started receiving $708.60 per month for, say, 25 years until he dies at age 90, then that equals 708.60 X 25 X 12 = $212,580.
My husband has read through the whole packet, and there is no mention of cost of living adjustments.
He did, however, find this little nugget buried in the pages: "Please note that the IRS is expected to publish a new mortality table for calculating lump sum payments. It is anticipated that this table will generally reflect longer expected lifetimes and possibly result in larger lump sum payments. This table is expected to be effective for lump sums paid in 2017. As a result, it will not apply to the lump sum currently available as part of this offer."
We have received these "one-time" offers from them for the last few years. However, this is the first year that they have actually sent a packet of information also.
So, my husband is leaning toward NOT taking the lump sum payment. I was thinking of this money as just sitting there being lazy and not earning any interest. I thought we should take the money and make it start working for us.
The present value factor is likely the sum of:
(1+i)^(-t) * tPa
Where:
t=time from now (in years/months)
i=assumed interest rate(annual/monthly basis)
tPa = probability of him making it until t years/months from now
Summed over next month until the end of their mortality table .
Without knowing the mortality assumptions or even if the pension is payable to a surviving partner (the formula above would be tweaked), it's hard to guess their i.
I think my husband is still on the fence about whether or not to take the lump sum. Sorry I was unclear! He and I are just feeling our way along on this. I think the more we are learning, the more he wants to leave it where it is. He wants to know how much this $62,000 will grow. Would it grow to $212,000 in 25 years? Is that even the right way to look at it?The table below is from the spreadsheet mentioned above - you can download your own copy and adjust the assumptions as desired.
One way to evaluate "pension now" vs. "pension later" |
Compare pension payment promised at the later time to either |
- the "Interest generated by Future Value" (Future Value principal is not touched) |
- the "Constant withdrawal of FV over time L" (principal goes to zero) |
- "Trinity-style withdrawal of FV over time L" (inflation-adjusted spending and principal goes to zero) |
Lump sum now | PV | $62268 | |
Payment starting now | Pmt_now | 0 | $/payment |
Interest rate | i | 6.0% | /yr |
number of years | n | 11 | yr |
number of payments/year | freq | 12 | /yr |
When payments are made for each n | type | 0 | 0 = at end, 1 = at start |
Future Value | FV | $120278 | |
Interest generated by Future Value | FV(i,n,P) * i | 601 | $/payment |
Longevity of future pension | L | 20 | yr |
Constant withdrawal of FV over time L | Pmt_future | 857 | $/payment |
Spending growth rate (e.g., CPI) | g | 2.0% | /yr |
First year Trinity-style withdrawal | W(FV,L,i,g) | 8457 | $/yr |
705 | $/mo |