As I noted earlier I plan to start receiving a pension from my former employer in November after I turn 55. For obscure reasons I have options to take portions as a lump sum instead of a single life annuity. In one case the lump sum is about 90 times the monthly annuity and in the other case it is about 133. The information packet I received suggested these options are bad deals and that a fair conversion ratio would be about 188.5. This is roughly consistent with annuity quotes I found on the web which had ratios which varied from 164 to 206.
According to the information packet a life expectancy (for males) at 55 of 26 years and a discount rate of 4.3% was used to compare the value of the annuity and lump sum options. And indeed assuming I will live exactly 26 additional years (receiving 312 monthly payments) and applying a discount rate of 4.3% does produce a similar ratio, 189.3. The discount rate needed to produce a ratio of 133 seems to be over 8%. Since I don't think my expected investment returns are over 8% and I don't have any reason to believe my life expectancy is significantly less than average it looks like I will decline the lump sum options.
Friday Cat Blogging – 23 March 2018
3 hours ago