Message Font: Serif | Sans-Serif

No. of Recommendations: 0
Which way to go?

Mom's retiring. Age 61 married spouse 65. Both excellent health. Spouse has small pension plus social security

There is 13,187. credited to the plan which she can take (rollover) or leave on the table.

If she leaves it on the table:

657.00 monthly (guaranteed 3 years to spouse if she dies)
645.00 monthly (10 years guaranteed)
631.00 monthly (15 years guaranteed)

If she takes the 13,187:

542.00 monthly (3 yr guarantee)
532.00 monthly (10 yr guarantee)
521.00 monthly (15 yr. guarantee)

Wanted to see if anyone sees a clear choice.
No. of Recommendations: 0
The choice is not clear to me, but think of it this way. With the 10 year option, the difference of \$113 a month represents a 10.3% return on that \$13,187.

Now, I don't know whether the lump sum can come out in cash money. Assuming it does, then the questions are 1) can she do that well on her own; 2) how long is she going to live.

The answer to 1) seems to be Probably, but it is by no means guaranteed. The answer to 2) is that according to statistics, she will live to 82 with 50% probability.

I'll also assume that what you mean by guarantee period is that the payouts stop after 10 years from the beginning of payouts if Mom dies (say after 2 years), not 10 years after her death. So if Mom dies after 11 years of payouts, they stop.

So the decision is whether to take a guaranteed return that is pretty decent, but which will certainly stop after an unfortunate event, or to take a non-guaranteed return that will never stop if you are a good enough investor.

It is not clear, and depends on the circumstances and risk tolerance that an individual has. As I started writing this paragraph, I was thinking I'd take the cash. But I am single, so I don't care about returns in perpetuity. So I don't know as regards myself if I had the option.
No. of Recommendations: 0
DLHKL posted;
"There is 13,187. credited to the plan which she can take (rollover) or leave on the table.

If she leaves it on the table:

657.00 monthly (guaranteed 3 years to spouse if she dies)
645.00 monthly (10 years guaranteed)
631.00 monthly (15 years guaranteed)

If she takes the 13,187:

542.00 monthly (3 yr guarantee)
532.00 monthly (10 yr guarantee)
521.00 monthly (15 yr. guarantee)

Wanted to see if anyone sees a clear choice."

It all depends on how long she will live and he will live. Taking mortality rates, it's unlikely that he will live longer than her. Irrespective of that
let's use 83 as an assumed age of death for your mother, here are the calculations...

I have assumed that this pension amount will continue for as long as she lives. My sassumption is that the guarantee period is a payout to the spouse if she dies before the guarantee period is up. If the guarantee period means that there is no guarantee of any payment past that period, the worst case would be death at the end of the guarantee period.

Here are my calculations.

1> \$657 vs \$542...

Additional cash flow of \$135/mo (\$657-542) for 25 years (83-61+3) that equals \$13,187 present value investment would need a return rate of 11.6%. If the cash flow is for only 20 years, the rate of return needed 10.8%. For 10 years, 4.23%.

2> \$645 vs \$532..

Add'l cash flow of \$113/mo. Return needed for 22 years, 8.8%. For 15 years, 6.2%. and for 10 years, 4.6%.

3> \$631 vs 521...

Add'l cashflow of \$110/mo. Return needed on \$13,187 for 22 years would be 8.4% Return needed for 15 years, would be 5.8%.

Summary:

There are other methods of trying to evaluate the worth of the additional cash flow but they will also hinge on an estimation of longevity.

If you take the \$13,187 and invest without concern to taxes, you would need to find an investment that would be a guaranteed 11.6% to produce the additional \$135/mo difference in scenario #1 for 25 year.

If the payments continue until your mother dies and if she is in good health, I think it would be better to leave the money in the pension. If your mom is unlikely to life at least 10 years then it may be better to takes the money.

I did not take taxes into consideration and if taxes must be paid on this distribution then your mother's income now versus the future income could be more of a determining factor.

Hope this helped. If you are more confused than before, email me and I will try to clarify the issue.

BGP
No. of Recommendations: 0
JABoa posted;

"The choice is not clear to me, but think of it this way. With the 10 year option, the difference of \$113 a month represents a 10.3% return on that \$13,187."

Your return assumption is \$113 x 12 = \$1,356/year
with an investment of \$13,187. This would be correct if at the end of 10 years, his mother could cash out the \$13,187. I don't believe this is the case.

The rate is much lower because the additional \$113 per month is being paid partially through return and partially with principle so that there would be no principle at the end of 10 years and this would calcualte out to be a return of 4.6% per year.

BGP

No. of Recommendations: 0
My 2 cents

Remember life expectancies are averages. Your parents might die tomorrow or might live to be 100. Use life expectancies with caution.

It's obviously not an easy decision. I'm confused if you aren't.

Chuck