My two cents...My companies Cash Balance pension plan is offering me either a 380,000 lump sum or an annuity of 2200 per month which is a 100% joint survivor annuity which I think if I die before my wife she will continue to have it. I had been fairly convinced that I would take the lump sum and put in into my rollover IRA but my financial advisor says that in the long run living till I am 90 I would come out about 360,000 better off.
You may want to compare this non-COLA annuity to an very stable, predictable, inflation-protected income that could be generated from the 380,000.
There are significant assumptions that go into the calculation including how long you and your spouse will live and what inflation will be during that time.
Let's assume you and/or your spouse lives for another 25 years and inflation averages 3% during that time. (Since 1929, US inflation has averaged about 3.1%/year)
- Your non-COLA pension of 26,400/year will have the purchasing power of 12,600 after 25 years (in today's dollars). This is an average of 19,500/year (in today's dollars) over those 25 years.
- To generate a ladder of TIPS paying out the equivalent amount of money over 25 years, would cost you about 360,000 right now. That's just a bit less money than you would receive as a lump sum.
- You don't give up the entire lump sum; should you and your spouse die before the ladder ends, your beneficiaries would still have access to the remaining money.
- Your payout is protected against high inflation with a TIPS ladder, whereas the spending power of your non-COLA annuity would be severely reduced over time.
Here's a tool to identify the TIPS in building any ladder. https://www.tipsladder.com/generate
I've made this lump sum vs non-COLA pension decision twice. In both instances, I took the lump sum and invested it according to my stock/fixed income asset allocation for my retirement portfolio. Good decision both times.
Statistics: Posted by dogagility — Tue Jan 14, 2025 4:23 pm