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Author: RoadScholar5 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76421  
Subject: Interesting Pension Twist Date: 1/2/2012 2:45 PM
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I have a call into my prior employer's pension office about the following issue and they indicated someone will return my call sometime later this week.

I requested details regarding my future pension benefits which I will be eligible for in 2026 - the benefit totals nearly $2K/month.

However...the value of the lump sum, defined as "value of your entire or partial benefit"....

is calculated at slightly over $1,000 - for a lump sum?

I don't see a relationship between a future benefit of approx. $24K/year and a current value of $1,000.

As I said, I am seeking a clarification, but if any of you can see what I am missing, would appreciate your input.

Thanks, RS
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69939 of 76421
Subject: Re: Interesting Pension Twist Date: 1/2/2012 6:46 PM
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Think of it kind of like a mortgage. At current interest rates, how much money must be in the account on the day you begin collecting to pay that benefit (mortgage style from interest and principle) for your life expectancy.

And then if the funds were paid in full today, how much would be deposited today to grow to the needed amount (using compound interest) on your first payment date.

It is fairly straight forward to set up a spreadsheet in say Excel to do this calculation using likely interest rates. It's a two stage calculation. An accumulation stage and a payout stage.

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Author: RoadScholar5 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69940 of 76421
Subject: Re: Interesting Pension Twist Date: 1/2/2012 7:33 PM
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I do follow you, just having problem with the idea that $1,000 today will be worth $24K/year over approximately 10 years if we use the assumption of average age of 75, when that first day is only 16 years away.


RS

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69941 of 76421
Subject: Re: Interesting Pension Twist Date: 1/2/2012 8:19 PM
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RoadScholar5 writes,

I do follow you, just having problem with the idea that $1,000 today will be worth $24K/year over approximately 10 years if we use the assumption of average age of 75, when that first day is only 16 years away.


What you're looking for is the "Present Value of a Future Life Annuity". That's a two-step calculation.

First determine the cost of a life annuity paying $24,000/year (I'll assume you're 65-years-old when you start drawing the annuity benefit.

Here's a link to some quotes on life annuities.

http://www.principal.com/retirement/incomeannuity/elm/income...

A $24,000/year benefit for a 65-year-old male would cost $370,000.

Now you need to calculate how much money you need today at say 4% interest to have $370,000 in 16 years. That works out to about $198,000.

I don't know where your former employer came up with a cash value of $1,000, but if that's in fact the case, obviously you're much better off waiting to take the monthly benefit at age 65.

intercst

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69942 of 76421
Subject: Re: Interesting Pension Twist Date: 1/3/2012 9:29 AM
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Perhaps your information does not include annual additions to the account?

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Author: RoadScholar5 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69944 of 76421
Subject: Re: Interesting Pension Twist Date: 1/3/2012 10:51 AM
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Thank you. I am working to get to the bottom of this.

The plan was frozen in 2005. I left the company in 2009...

There have been no additions.

RS

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Author: RoadScholar5 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69945 of 76421
Subject: Re: Interesting Pension Twist Date: 1/3/2012 10:54 AM
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Thank you for the link.

I notice the pay out rates for females are lower than the rates for males.

I assume this may be related to the issue that the average life span for a woman is longer than a man, but we are penalized for that? (actuarily?) is that a word? LOL

Thanks again, RS

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69946 of 76421
Subject: Re: Interesting Pension Twist Date: 1/3/2012 11:08 AM
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Yes, a company can decide to pay you less if they anticipate you will live longer. I believe the average life expectancy for women currently stands at 3 yrs longer than men.

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Author: Incomeonly Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69949 of 76421
Subject: Re: Interesting Pension Twist Date: 1/6/2012 3:01 PM
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Intercst said it right. Determining the present value (today's cash value) of your future lifetime annuity is a two step process.

You don't give all the needed information, so I'll make some assumptions to see if I can come up with an approximate present value.

Current age: 51
Pension full-benefit age: 65 (in 2026)
Life expectancy: 87
Current accrued benefit: $24,000/yr
Inlation adjuster for benefit: No
Expected annual average rate of return during retirement years: 5.2%
Expected annual average rate of return, pre-retirement: 7.4%

Calculations:

Value of lump sum required at first year of retirement: $326,363
Present (today's cash) value: $120,127

Clearly, there is some form of miscommunication

Reasons the employer's estimate on present value could come in lower than this is if they assumed a joint survivor benefit or if you are not fully vested in the accrued benefit.

One other possiblility is that the HR person gave you the annual funding requirement rather than the present value...although even the AFR should be higher than $1,000.

Post back with what you find out.

BruceM

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