<p>It’s a rough(the emphasis on rough) estimate without taking into account of inflation, lifetime span, cola or not, residual value of the investment, etc… It gives you a quick idea what’s the worth.</p>
<p>Busdriver11, are you going to have a choice to take a lump sum payment instead of future cash flows? </p>
<p>The lump sum is the bonds in my example. </p>
<p>I dont believe this myself, but if you and your husband really have short life spans, a lump sum is something to look at. For many people, I would say forget the lump sum, but you may be an exception.</p>
<p>It is extremely unlikely you are going to receive an offer of a lump sum of $3.3 million instead of steady payments of $130,000 a year. If you are offered 3.3, you should probably take the lump sum. There will be some tax implications that complicate this. </p>
<p>My guess is you will be offered less than $2 million in a lump sum. Still…you arent poor. I know you worked hard, but I cant feel sorry for you. :)</p>
<p>You have a three legged stool. Most people dont whether they worked hard or not.</p>
<p>No, there is no lump sum, and I doubt the company would ever offer that. Why would they, when they only have to make two years of pension payments (unless you choose a lower rate for your survivor spouse). I would take a lot less for a lump sum, just to know for sure it’s there and that I can leave it to my kids, but I really doubt it would ever come. Theoretically based upon family history, we should live into our nineties, so who knows.</p>
<p>Many companies offer a lump sum. Nobody is going to offer $3.3 million instead of a $130,000 pension. </p>
<p>But a company may offer $1.5 to &1.9 million. Actuaries will crunch rhe numbers and come up with a value.</p>
<p>If you take the lump sum, you are betting on higher rates of returns or your death.</p>
<p>If life expectancy of employees is in the early 60’s, there is no reason for a company to offer a lump sum.</p>
<p>I am an investment advisor and I always put a value on pensions based on current treasury rates and what they would yield. For instance, if client was getting $100K per year from a pension, I would need $4 million in 10 year treasuries at their current ~2.5% yield to generate the same yearly income. That exercise is done simply to give people an idea of just how valuable these retirement payouts are. A teacher may tell me that they ONLY get $35,000/year, but that would take way over a million in treasuries to duplicate. Pensions are a gift, unless, of course, you worked for United!</p>
<p>deleted</p>
<p>I can go on-line and see what the lump sum would be for my pension from a previous employer.</p>
<p>The figure is much lower than I would think (in other words, my rate of return would have to be higher than I think is reasonable to make it worth it to take the lump sum). I don’t remember what the implied rate of return was,but anytime I have checked, I didn’t like it.</p>
<p>So, I 'm still getting the pension at 65.</p>
<p>Pensions are fantastic. </p>
<p>“What happened with United?”</p>
<p>They, along with the majority of other major carriers, when they went bankrupt, ditched their pension plans. So people who had been planning on a good pension ended up with what little they could get from the PBGC.</p>
<p>Busdriver11, if you are really concerned your company will go bankrupt and the company is publicly traded,
you can buy out of the money long term puts (leaps) for insurance. Like all insurance we want the puts to expire worthless. This would be insurance. Maybe, you would buy $10,000 of insurance each year. Something like that with the idea of making hundreds of thousands or more in a bankruptcy. </p>
<p>It is a bad bet, but sometimes we make bad bets because the consequences of the bad bets occuring are too devastating. Sometimes we make bad bets for peace of mind. Peace of mind is very important.</p>
<p>You can follow the company and the economy. If the company is making money, if the company has positive cash flow, you wouldnt buy the puts. </p>
<p>You can come up with scenarios where you might want the puts. </p>
<p>Just something to think about if the company falters.</p>
<p>That’s an interesting strategy. Right now it would be a terrible bet, but if the company started doing poorly, I agree that a bad bet for peace of mind might be worth it. I don’t really think we will lose our pension, it’s more likely we will not collect on it for very long. I just think about all those people who were absolutely convinced that their pensions would be there for them, and they weren’t. It is such a thing of the past. A significant amount of money in leaps sounds like a rational bet as insurance. I’ll bet very few people have gone that route to cover their pensions, but wished they had.</p>
<p>parent I have a question about your post 1744 since a pension ends when you die or when your spouse dies with nothing left to anyone else I always calculate the value using current interest rates less return of principal over the average actuarial lifespan for my age. What the pension does is protect you if you outlive the average but it takes away if you die early.</p>
<p>Sorry if this is OT, but for those of you who plan to downsize how do you intend to invest the proceeds from the sale of your current residence? For instance, some folks have mentioned renting, either permanently or temporarily, and some folks have mentioned doing some traveling such as living in an RV for a while or doing monthly rentals of vacation homes. If the idea is to live in some sort of temporary housing for a year or two or three after retirement and then buy/build your next house then where will you park the money from the sale of your house? Would you put the portion needed for the next house into CDs or a MMA and then invest the balance elsewhere? Or are you comfortable taking a bit more risk for presumably greater returns?</p>
<p>I won’t be taking any risk with the money I intend to buy my next house with.</p>
<p>And got a call from D1 last night that I think everyone out here will appreciate, “Mom, I am trying to figure out what to do with my bonus I just got at work. Should I increase my 401K contribution – I am already contriburing the full 4% match amount – or should I max out my Roth with it?” :D</p>
<p>Nice, intparent! We got a call after DS’s employer was bought out by a bigger company. He said" I think I need an accountant".</p>
<p>intparent: Job well done :)</p>
<p>Tom1944, </p>
<p>Are you going to be offered a lump sum payment?</p>
<p>dstark,
One of these days we have to get in contact with DH’s old employer about his pension (as measly as it is). Are you saying the lump sum is the way to go? And what happens if, g-d forbid, something happens to him before he elects what to do with his pension?</p>
<p>intparent - that’s great. Isn’t it nice to realize that our kids really did pay attention when we tried to give them advice? And even better, that they feel comfortable asking us such questions now? </p>
<p>I appreciate your comment about not taking any risk with the house funds. That’s my inclination, too. Dh only wants to set aside the portion we’ll need initially (earnest money) and not worry about the rest since he anticipates some significant deferred compensation payouts before we’d close on that house. I don’t like to count on that income. I didn’t think it would be a concern this soon, but there’s a chance we may sell our house later this year if everything falls into place. I’m keeping my fingers crossed because if the house sells then dh may consider retiring a bit sooner, too.</p>
<p>I am absolutely not saying the lump sum is the way to go. </p>
<p>It depends… On many factors…
Your age, life expectancy (your health), interest rates, inflation, does the pension have an inflation kicker, are you worried about outliving your money, how secure the pension is etc. </p>
<p>One friend recently took monthly payments…she managed $5 billion. One friend may take a lump sum. He is older and had cancer.</p>
<p>I guess I will ask a follow up question to tom1944. What percentage is the lump sum compared to 25 years of payments?</p>
<p>For some people the answer to how a pension should be handled is obvious…
For others… It will be a guess.</p>