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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75830  
Subject: Pension info to consider Date: 10/4/2012 8:30 PM
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We finally (a week late) got the specifics on my husband's pension. He is being offered the opportunity to choose: 1. take lump sum now, 2. take monthly payments now, or 3. do nothing and receive pension benefits at age 65 (he's 47 now).

Here's their offer:

1. lump sum: 35,000
2. monthly payments now: 170
3. pension benefits at 65: 670

Choices #2 and 3 are based on a single life annuity. We don't see the upside of choosing single life, since I am dependent on his income/savings. So those numbers would be lower with a 50, 75, or 100% joint and survivor annuity. On their web site, the calculator says a 100% j/s annuity payment at age 65 would be $500 a month.

The PPA interest rates they used are -1.2, -3.6, and -4.5% on the 5 years, 6-20 years, and the 21+ years respectively. (Not sure what this means, but I have a general idea.)

Soooo...I am surprised at the lump sum amount. It seems maybe they are expecting someone to only live about 5 years after age 65. (I know the math isn't straight-forward when they figure these things.)

I am assuming our retirement living expenses will be similar to our current expenses, about $3000 a month. Our retirement savings right now is $180k.

Any opinions on what the best choice would be, given these specifics?

(Thanks again for all the input on the previous thread! I will be noodling all of this in the days/weeks ahead.)
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71001 of 75830
Subject: Re: Pension info to consider Date: 10/4/2012 8:48 PM
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Choices #2 and 3 are based on a single life annuity. We don't see the upside of choosing single life, since I am dependent on his income/savings. So those numbers would be lower with a 50, 75, or 100% joint and survivor annuity. On their web site, the calculator says a 100% j/s annuity payment at age 65 would be $500 a month.

I think you've got a typo here - either in the first or second sentence. One of those "single life" should be a "joint life" for this to make sense.

You might want to mention your age as well, since that can be a big factor in choosing a joint life payout vs. a single life payout.

The benefit for the joint annuity is all for you. If he were to choose a single life annuity, when he dies the annuity ends. So if he dies before you do, that income stream would stop. If the loss of that income would severely affect you in retirement, you would typically want to consider a joint annuity rather than a single. Rarely is the decision clear cut. When it is clear, it usually means one spouse is currently facing a life-threatening illness. And I don't think that is your situation.

--Peter

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71002 of 75830
Subject: Re: Pension info to consider Date: 10/4/2012 10:07 PM
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I think you've got a typo here - either in the first or second sentence. One of those "single life" should be a "joint life" for this to make sense.

?

You might want to mention your age as well, since that can be a big factor in choosing a joint life payout vs. a single life payout.

47

Thanks!

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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: 71004 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 9:07 AM
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gogreengo,

As someone who has been investing for 40-some years, I would be all over the lump sum payout.

Starting at 47 and using 65 for an end point:

At 6% annual return, the $35K would be $254,430. Using a 4% withdrawal rate would give you $915 per month. Payments could slightly increase each year to $1,085 at 70.

At 4% annual return, the $35K would be $199,131. Using a 4% withdrawal rate would give you $707 per month.


Your math is terribly incorrect.

6% compound on $35k for 18 years (65-47) is $99,901 (compounded annually). I have no idea how you got to $254,000 but that would be a rate of nearly 12% a year. Take 4% of that a year and you are looking at $333 a month, half of what they would get in their pension.

4% compound would only be $71,000.

I'll run a more detailed analysis of the options presented later (unless someone else beats me to it) but I had to respond to this gross over estimate before I started my day.

As someone who has been investing for 40-some years,

I mean no disrespect but when you use your previous experience to add weight to your opinion, you should really do a better job in the results. A simple eyeballing of the numbers and using the Rule of 72 and I immediately knew something was wrong with your math.

Compound interest calc:
http://www.moneychimp.com/calculator/compound_interest_calcu...

Measure twice, cut once:
http://www.bankrate.com/calculators/savings/compound-interes...

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71005 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 9:55 AM
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I agree with another post, I'd take the lump sum. I'm all about having my money in my greedy little hands instead of depending on someone else's greedy little hands.

Much can change in twenty years too. Company goes bankrupt, bought out, poorly handles the pension fund (California or Chicago anyone?), etc. I'd rather be in control of my money and take the risk and responsibility.

Also keep in mind inflation. Even at historical norms, your buying power is halved every 20 years (more or less). So that current annuity would only give you $85 in buying power. The pension $335. And I personally think that inflation has a good chance of repeating the 70s. So your annuity options would really suck if that occurs.

JLC

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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: 71006 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 10:41 AM
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My recommendation*:

Take the pension at 65, single life.

The $35,000 is unlikely to grow enough to provide you the same guaranteed income amount at 65 that would last you the rest of your life.

Taking the income early is significantly penalized. *Assuming no Cost of Living Adjustments (COLA), that $170 a month would pay you $36,720 between now and 65. You would breakeven on those payments around the age of 72. Every year after that, you will have made more income if you waited until 72.

Take single life and use the difference between the single and the joint and have your husband buy 20-30 year term life policy on himself for $100k to $200k in death benefit.

This option would likely cost less that the $150 monthly difference. By using this method, you would get a death benefit if he dies early over that 20-30 yr period that you could then use to replace the $670 (or $500 joint life alternative). If you die first during that period, he simply cancels the insurance policy and his net income goes back up to the full $670. *This option does require that your husband be in good enough health that he would qualify for term life coverage at age 65. You could consider buying it prior to age 65 just in case.

For example, a 64 yr old male in good health can get $100k of coverage for about $94 a month for 20 yrs. They can get $200k of coverage for for 20 years at about $165, still cheaper than the difference between single and joint life.

You can take $670 a month from $100k for over 10 years and $500 a month would last you over 16 years, not accounting for any interest earned on the balance.

www.reliaquote.com and www.accuquote.com

When I ran the numbers for someone 65, it required that I call them for a quote so I had to bump the age down a bit.

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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: 71007 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 10:57 AM
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To expand on a point JLC made, can you let us know if you are provided any COLA adjustments on the pension income?

I assumed you had some COLA so I did not add inflation to my calcs but if not, you have to discount the current and future income for potential inflation. I would use 3-4%. That would make them significantly less attractive. $670 adjusted for 3% inflation over 18 years would reduce the purchasing power down to $394. 4% would take it down to $330.

Note, even at 4% inflation, I still might take the the pension at $330 a month inflation adjusted dollars versus the $35,000, invested at 6% for 18 years, and then take 4% of that, for $333 a month. That is a lot of risk over 18 years to get an extra $3 a month. There were a lot of people in 2007 five yrs from retirement that had to change their plans based on faulty assumed rates of return.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71008 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 11:00 AM
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Hawkwin,

Thanks for catching that!

I still had a $5,000 annual contribution plugged into the sheet from a previous question.

The numbers you stated here are very close.

Thanks again.

Gene

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Author: PSUEngineer 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: 71009 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 11:18 AM
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Much can change in twenty years too. Company goes bankrupt, bought out, poorly handles the pension fund (California or Chicago anyone?), etc. I'd rather be in control of my money and take the risk and responsibility.

I guess it really depends on what you think is the chances that the company will survive and the pension fund remains viable. Hawkin has done a good analysis of the options. The OP has not mentioned the company's name. We're in the same position as the OP. We're looking at the options right now. For us, I feel a bit comfortable that the company will be around in 19 years. It's a 100 plus year old German pharmaceutical company that will remain nameless. I think it will survive but things can happen.

PSU

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71010 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 11:30 AM
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Soapbox first : We don't see the upside of choosing single life, since I am dependent on his income/savings.

Unless you are disabled, you need to consider changing this. There are a couple of women who have posted during/after husband illness and death about having nothing and being eligible for nothing until early & reduced SS at 60(for widows). Look at what happens financially if your husband dies tomorrow. The SS death benefit is $255.

I am assuming our retirement living expenses will be similar to our current expenses, about $3000 a month. Our retirement savings right now is $180k.

One other thing to look at is if you choose a pension payment, what happens if he dies before he begins taking a benefit(it could be more than you think with either single or survivor choices) ?

You need to look at SS possibilities at retirement both as a couple and if one of you is alone. Then look at your retirement savings and expected income needs. I use the 4% safe withdrawal rate in my calculations. It does seem like you need to work on the retirement savings.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71011 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 11:50 AM
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I have sent a request to TMF to have my post removed.

I do not want to have it on the board with the erroneous data in it.

Gene

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Author: PSUEngineer 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: 71012 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 11:54 AM
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I have sent a request to TMF to have my post removed.

I do not want to have it on the board with the erroneous data in it.


I would have preferred that you didn't. It was corrected so others can see the correction. It is a good illustration to show that you need to check the calculations to be sure that they are right.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71013 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 12:56 PM
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PSUEngineer,

I would have preferred that you didn't. It was corrected so others can see the correction. It is a good illustration to show that you need to check the calculations to be sure that they are right.

While I agree with you on this, it was racking up recs which told me a lot of people were reading it and thinking it was great.

I can only hope that those folks also read Hawkwin's catch of the problem. Unfortunately, some people only look at highly rec'd posts and if just one of those people did that with the data in the post, I would not be happy about it.

Gene

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71014 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 2:46 PM
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Thanks everyone! You guys are great! We're going to call them and ask a few questions, especially: What happens if he chooses to wait and take pension benefits at 65, but passes away before then? And, is there a cost of living allowance?

Other facts to mention:

My husband is in generally okay health. But, he is overweight and doesn't exercise. His triglycerides are high, and glucose should be a bit lower. And there is heart disease in his family.

We have 20-year term life on him for $750k (will bring us to age 62, costs $54 a month, can be renewed when the term is over), plus there's another 100k through his work, for a total of 850k. That helps me sleep better at night!

I am not legally disabled, but I am "dis-abled" in that I would find it hard to work right now due to some health stuff. I do have marketable skills, but if/when I do work again it will be as a self-employed person.

I'll get back with additional info soon.

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71015 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 3:39 PM
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Okay, here's what happens if he passes away before retirement age of 65. I would get half of a 50% j/s monthly payment at the date he would have reached "early" retirement at age 60. So it would be a little less than half of $305 per month (152). (That is what the benefit would be at his age of 65). Am I understanding that correctly, or do they mean half of what his benefit would be, so I would get 305? I'll ask them.

I found no cost of living info in their plan materials.

After looking at the plan materials, my eyes are glazed over. It seems it would be easier to take the money and run. BUT there are some good ideas here to consider.

Oh, and their Net Assets for the plan are 1.3 billion, and their liabilities are 1.5 billion. Their funding target attainment is 87%. Does that tell us something? Looks like they are underfunded? (The pension is insured.)

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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: 71016 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 3:41 PM
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We have 20-year term life on him for $750k (will bring us to age 62, costs $54 a month, can be renewed when the term is over), plus there's another 100k through his work, for a total of 850k. That helps me sleep better at night!

Good deal!! Often such policies give you the ability to renew without the need to re-verify insurability. If his policy allows for such, the cost will certainly go up at 62 but that would make insurability at 62/65 a non-issue. You probably don't need as much at 62 either, but such a decision would take more in-depth analysis.

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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: 71017 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 4:42 PM
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Their funding target attainment is 87%

That is actually not bad. Many plans have dropped below the 80% or 60% threshold. Any plan above 80% is generally considered well funded. 95% would be better (which is another threshold that requires disclosure).

http://hr.cch.com/news/pension/102209a.asp

Significantly underfunded plans, referred to as "at-risk," have special rules for determining funding targets. In general, the regulations provide that a plan is in at-risk status for a plan year if the funding target attainment percentage (FTAP) for the preceding plan year is less than 80% (65%, 70%, and 75%, respectively, for plan years beginning in 2008, 2009, and 2010), and the at-risk FTAP for the preceding plan year is less than 70%.

----------

I found no cost of living info in their plan materials.

Not good; and that is something you should clarify. Does the $670 a month ever have a chance of increasing and is that $670 in today's dollars or future dollars (e.g. next year, will that number be $684, for example, and so on).

With no COLA, the cost of the insurance at 62 might actually be more than the difference between the single and the joint life - but since you already pay for that, it should be less of an issue.

Tougher choice, but still clear for me with the pension. The lump sum does not get a COLA adjustment either so at 65 you could get $670 from the pension or take a lump sum and if you earn 6%, take the SWR (Safe Withdrawal Rate*) of 4% and get $333 a month. Your $35,000 would need to grow to $201,000 to use the SWR to replicate the $670 a month in income.

*Many people, including myself, no longer believe the SWR is 4%. Something closer to 3% is likely more accurate with the low interest rates, volatility, and longer life expectancy. Some think the rate is as low as 2%. Google such and you will find many different opinions.

http://www.cbsnews.com/8301-505146_162-39945237/four-percent...

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71018 of 75830
Subject: Re: Pension info to consider Date: 10/5/2012 6:17 PM
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Okay, I have clarification from the not-so-helpful phone people. If he passed away before age 65, I would get half of his benefit amount under a 50% j/s monthly benefit. So I would get $305 a month beginning at what would have been his 60th birthday. I think this is an important consideration in deciding what to do.

No cost of living increases.

That's an interesting question about whether it's today's dollars or tomorrow's dollars. I am under the impression it is tomorrow's dollars, and the monthly payment number is the number it will be at age 65.

Noodling...back later.

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71021 of 75830
Subject: Re: Pension info to consider Date: 10/6/2012 2:54 PM
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I found this article that likely explains why the former employer is offering the lump sum/payments now options:

http://kiplinger.com/magazine/archives/pensions-take-a-lump-...

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71024 of 75830
Subject: Re: Pension info to consider Date: 10/7/2012 11:54 AM
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If there is high inflation, the stock market would go up, right? Would that make investing the lump sum a more attractive alternative (given QE to infinity)?

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71025 of 75830
Subject: Re: Pension info to consider Date: 10/7/2012 11:58 AM
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Another thought: What if interest rates go up in the future, and we have chosen to take the pension at 65, and sometime before then the company decides to freeze its pension--that would likely mean a lower lump sum offer in the future than what they're offering now.

Thoughts?

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71028 of 75830
Subject: Re: Pension info to consider Date: 10/7/2012 3:17 PM
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I found a good article here about companies offering lump sums or regular pension benefits:

http://www.reuters.com/article/2012/07/30/idUS16106135572012...

In the article they have a link where you can get quotes on annuities:

http://www.immediateannuities.com/

I ran a few numbers in their calculator:

A Single Life annuity at age 65 with a $670 a month benefit (like pension SL) would cost 120,800 (SL) to 137,667 (SL w/ 20 years survivor benefit).

A Joint Life annuity at age 65, with $670 a month benefit and 100% to survivor would cost 142,400.

A Joint Life annuity at age 65, with $500 a month benefit (like the pension 100% j/s) and 100% to survivor would cost 106,200.

A Joint Life annuity at age 47, with a cost of $35,000 and 100% to survivor would provide 125 a month.

Who knows what annuities will cost 18 years from now when we are actually 65 years old.

Also, some simple math calculations on potential earnings if choosing the pension benefits at age 65:

671 (SL) x 12 mo = 8052 per year
10 years = 80,520
20 years = 161,040
30 years = 241,560


505 (100% j/s) x 12 = 6060
10 yrs = 60,600
20 yrs = 121,200
30 yrs = 181,800

For me, if he passes away before early retirement age of 60:
305 (50% j/s @ 60 years old) x 12 = 3660
10 yrs = 36,600
20 yrs = 73,200
30 yrs = 109,800


So if we choose the normal route of taking the pension benefits at age 65, the various scenarios could pay out anywhere from 36,600 to 241,560 total.

Any comments on these numbers? Thanks!

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71030 of 75830
Subject: Re: Pension info to consider Date: 10/7/2012 6:47 PM
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gogreengo,

First, sorry for the mis-info in the previous post.

On the stock market vs inflation/deflation vs elections vs on and on, there is nobody that can tell you with any certainty what will happen, when or in what combination. It is the future.

I would suggest at this point, you just step back and try to get all your factors together in one pile.

At 47 you are probably not getting the SSA info sheets on projected benefits. I believe these start at 50 1/2. You can go to the SSA website and use their PIA calculator to get a "guesstimate" on your SSA benefits.

Also will any of your current employment lead to any sort of a pension? If so, try to get some sort of an estimate on that.

Get your current account balances for your entire savings: IRAs, 401K, etc.

Last, look at what you are currently saving and contributing to your IRAs/401Ks.

With that info, you will have most of the info needed to see what your retirement income might be. There are a number of sites that have calculators that can crunch these numbers for you. It won't be exact but it will give you a ballpark number. Don't rely on just one site, try others.

When you are doing this, plug-in the numbers from your research above. Do it again with the next set of numbers. Write the results of each run and what you changed for each. Only change one thing when you make your test runs so you can see what effect it makes.

I believe this will give you the best idea of how the different pension options will work for you and give you a better idea of which option to choose.

Taking the lump sum and buying an annuity is probably the highest cost/lowest return option. Your company is paying a discounted lump sum and the annuity company is taking a pretty good slice off the top paying you another discounted amount.

Depending on how long you have to make this decision, it may end up that making your best guess is your best option. Lots of things can change in an 18 year period.

Gene

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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71036 of 75830
Subject: Re: Pension info to consider Date: 10/8/2012 12:58 PM
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Thanks! Will do. (We do get the SS benefits summaries.)

I wanted to share another article that is helpful for anyone facing a decision on lump sum vs. monthly benefits:

http://www.newretirement.com/Answers/Bud-Hebeler/Lump-Sum-vs...

There is a calculation in about the middle of the article that is helpful.

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