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Author: willie4317 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: pension plan ? Date: 10/21/2000 8:09 PM
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not sure if is the correct board. please advise if not.
I am currently vested in a former employer's pension plan (annuity) that I could start taking monthly distributions of $430.00. In 10 years (at age 65) that amount would increase to about $950.00.
Here's the question: should i take the 430 now and re-invest that amount in something with a better,but safe, return for 10 more years? I'm not planning on retiring before then.

I guess I'm looking for some numbercrunching guru to evaluate this and see what would be more advantageous.

ps. I PLAN on living well past 65- if this would be any consideration.

Thanks, willie

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25634 of 74759
Subject: Re: pension plan ? Date: 10/21/2000 9:08 PM
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One way, but necessarily the only, to look at this is as a simple present value problem. For starters, lets assume an interest rate of 8% and you will live to age 85.

$430/month @ age 55: @pv(430*12,.08,30) = $58,090

$950/month @ age 65: @pv(950*12,.08,20) / 1.08^10 = $50,752.

Thus, given the assumptions, the better deal is $430/month @ age 55.

However, if you drop the interest rate assumption to 6%; the two alternatives are essentially identical in present value.

TheBadger


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Author: hondaholic Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25635 of 74759
Subject: Re: pension plan ? Date: 10/22/2000 12:20 AM
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One way, but necessarily the only, to look at this is as a simple present value problem. For starters, lets assume an interest rate of 8% and you will live to age 85.

$430/month @ age 55: @pv(430*12,.08,30) = $58,090

$950/month @ age 65: @pv(950*12,.08,20) / 1.08^10 = $50,752.

Thus, given the assumptions, the better deal is $430/month @ age 55.

However, if you drop the interest rate assumption to 6%; the two alternatives are essentially identical in present value.

TheBadger



The next question is what percentage of the population that are living at age 55 will still be living at age 85?

I would take the $430 now as I think I can make more than 6% on my money.

In Canada every resident who is in the work force and contributes to the Canada Pension Plan is entitled to receive benefits based on a retirement age of 65. If you want to you can get the benefits starting at age 60 or postpone it until age 70. If you obtain the pension before age 65 the pension is reduced by 1/2% per month for every month you are under 65. For example at age 60 the benefit is reduced by 60 x .005 = 30%.
If you compare the benefit at age 60 to age 65 it takes until approximately age 78 to receive the same amount. Many people opt to take the pension at age 60 as there is no guarantee that they will reach age 78.


Hondaholic

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25651 of 74759
Subject: Re: pension plan ? Date: 10/22/2000 7:06 PM
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The next question is what percentage of the population that are living at age 55 will still be living at age 85?

I do not know a reference to a table but remember.

The numbers are average, half of us will beat the number.

If you beat the number you do not want to run out of money.

I think the answer maybe 85 to 88 years but I would plan on 90 to 95.

You also have to take into account your health and family health history.

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Author: bhirs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25659 of 74759
Subject: Re: pension plan ? Date: 10/23/2000 11:38 AM
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The Badger wrote:

One way, but necessarily the only, to look at this is as a simple present value problem. For starters, lets assume an interest rate of 8% and you will live to age 85.

$430/month @ age 55: @pv(430*12,.08,30) = $58,090

$950/month @ age 65: @pv(950*12,.08,20) / 1.08^10 = $50,752.

Thus, given the assumptions, the better deal is $430/month @ age 55.

However, if you drop the interest rate assumption to 6%; the two alternatives are essentially identical in present value.


Then, rjm1 wrote:

I think the answer maybe 85 to 88 years but I would plan on 90 to 95.

You also have to take into account your health and family health history.


The monthly amounts are based on a life annuity, so life expectancy is built in. TheBadger pretty much sums it up, that they are assuming roughly a 6% interest rate to make the two equivalent.

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Author: bhirs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25660 of 74759
Subject: Re: pension plan ? Date: 10/23/2000 11:43 AM
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I wrote (before my reply was accidentally submitted):

The monthly amounts are based on a life annuity, so life expectancy is built in. TheBadger pretty much sums it up, that they are assuming roughly a 6% interest rate to make the two equivalent.

That 6% only makes the benefits at 65 equivalent. The point is that there is likely no longevity risk because the payments are until death. Therefore, if you think you can beat the 6% over the next 10 years, you should take the money. If not, let the trustees of the plan hold on to it.

Of course, continuing employment will not only increase your benefit for interest and mortality, you will also enjoy large increases due to service and salary increases. (Assuming that your plans formula is a % of pay times service)



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