Which of these pension choices are better?

Question

I have to decide on a pension payment plan from a former employer to begin this year. I am 55. The choices are as follows.

1. $727 per month for life.
OR
2. $1287 per month for the first seven years, then $358 per month for life.

I know inflation rate and life expectancy (both unknown) are the factors deciding this. Does anyone know of any web sites dealing with making these kinds of decisions?

Answer 1

This is essentially a future value calculation.

If you assume a 5% rate; option #2 will pay out $727/month from age 55 until 72; then $358 the rest of the way. You save the difference of (1287-727) and then start removing money once your 7 years are up to keep up the $727 income stream.

If you make a higher rate of return (which most funds do) then it will obviously last you a longer amount of time.

The benefit to this is that if you happen to pass away beforehand, you have accumulated savings you can pass along.

The downside, obviously, is that if you live for a very long time, is that you'll be down to the $358/month stream.


Edit: Another option is to use the ~$50k accumulated savings after 7 years to purchase another annuity.

Answer 2

I don't know of any websites, but there are certain obvious questions:

1. How is your health? (If it is good, you may live a long life. If it is not good, take that into account.)

2. At what age did your parents die? (If they were long lived you will probably live long too.)

3. Would your pension continue to your estate if you die? and if so, for how long?

4. Would you be able to manage financially if the pension was only $358?

-----------
Your scenario 1 would total $305,340. if you lived to age 90.

Your scenario 2 would total only $228,396. if you lived to age 90.

That is a HUGE difference. Plus I believe it would be difficult to get used to the larger income and then adjust to it being cut in half after seven years.

Once you have factored all the above you may have a better understanding and be able to make the best choice.

Good luck.

Answer 3

It depends. If you are a good saver and won't spend your whole check regardless, then choice 2 is probably best, you'll be able to get ahead of the game. But if you have no other resources and you're going to spend it all each month, then the 65 year old version of you would prefer getting $727 per month to $358.

Of course assuming you'll separately get social security starting in your 60s, that's a factor to be considered also.

Seriously -- don't leave these choices to strangers on Yahoo. Go see a financial adviser (look up Ameriprise).

Answer 4

CHoice 1 works, becuase it does not tempot you to spend all the extra money. After age 62, sometimes, social security kicks in. However, having close to an extra 100 dollars a week from the pernsion at that age for the rest of your life makes a lot of sense. If your family life lines go into their 80s, that's a lot of years. Take choice 1 unless everyone dies in your family by age 62-68.

Answer 5

You need to calculate the Present Value of each revenue stream. The higher the Present Value, the better the option. Try a calculation, the website gives a good explanation. I'll use a 5% yearly interest rate.
http://www.investopedia.com/calculator/AnnuityPV.aspx

OPTION 1 - easy

Interest rate per time period = .4 (5% / 12 months)
Number of time periods = 300 (if you live to 80 = 25 year x 12 months)
Payment Amount = $727

>>> $126,876.76 <<<
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OPTION 2 - (3 steps) can't find a easy calculator for this

1
Interest rate per time period = .4
Number of time periods = 84
Payment Amount = $1287

>>> $91,665.86 <<<

THEN

2
Interest rate per time period = .4
Number of time period = 216
Payment Amount = $358

>>> $51,713.12 <<<

Note, technically you should find the present value of the $51,713 because it is seven years down the road. But it is only a few $1,000 less, so to simplify things, I'll ignore it.

3
Now add $91,665.86 + $51,713.12 = $143,378

Present Value Result (if you live to age 80)
OPTION 1 = $126,876
OPTION 2 = $143,378

OPTION 2 is better.
Adjust the number of time periods (months) to see differences at different life spans.
.

Answer 6

The company has calculated PV (present value to them) of the 2 offers for expected interest rates and average life expectancy (which is longer at 55 than at birth) so they are almost certainly the same in pure money terms. To make your decision you need to consider personal factors. Don't forget the effect of income taxes.
Are you going to have another source of income before you qualify for social security?
Do you have other savings?
Are you healthy?
I would be tempted to take 2 because it provides more flexibility.
There are links for retirement planning calculators that might help at http://retireplan.about.com/cs/calculators/a/calculators.htm