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Author: BuildMWell 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: of 75683  
Subject: Re: Cashing out Pension to IRA? Date: 12/30/2003 4:37 PM
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"I'm unsure of how to measure the performance of the pension.
All I know is that by age so-and-so, I'll receive X dollars per month and that I can cash out now (approx $30,000)." - lyates1

To me, that is the key here. If you know the monthly payout at age 65, you can pretty well figure out the yield on the account. If that yield is satisfactory, stick with the pension...if not, roll it over and start self-directing the funds.

Let's say the payout is $500/month at age 65. That is $6000/year 13 years from now. The series present value factor at 6% for 20 years (age 85) is 11.470...so your $6000/year is worth about $68,820 at age 65.

Now, we can work that number backwards to the present day. $68,820 in 13 years versus $30,000 today is a present value of 2.294. This equates to a compound yield of 6.59%. Thus, it seems to me that your pension would yield slightly better than 6% if you left it alone AND if it promised to pay you $500/month.

Based on all this, look at the monthly payout. If it is under $500/month, get it into your own IRA fast! If it is over $500/month, ask yourself what yield would satisfy you...I bet the answer is that you can do far better on your own if you try.

Let's do this thing the other way. Let's assume you can make 10% on your personal investments. $30,000 today at 10% will net 3.452 times your money in 13 years...or $103,560 at age 65. Then, at 10%, you can take out $12,164/year for 20 years or better than twice the pension plan amount. Or, at a SWR of 4%, you can take out $635/month and never touch your $103,560 of capital! You can leave over $200K behind for your heirs.

Such is the beauty of compound interest and having control over your own money.
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