How to value a Pension/ Annuity compared to a lump sum?

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alex123711
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How to value a Pension/ Annuity compared to a lump sum?

Post by alex123711 »

For example the pension pays $8,000 per year (in 30 years) per 100,000 invested. Using this example and taking the average real market return over a 30 year time period of 7% p.a you would end up with $800,000 and using the 4% rule you would have $32,000/year rather than $8,000. Using a more conservative 5% you still end up with $400,000, or $16,000/ year, which is still more than double. Do my calculations make sense or am I missing something?

jacob
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Re: How to value a Pension/ Annuity compared to a lump sum?

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2Birds1Stone
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by 2Birds1Stone »

Here is a good article written by a friend that should answer your question and then some.

https://stopironingshirts.com/how-much- ... ion-worth/

plantingtheseed
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by plantingtheseed »

The point of the pension is to maintain a steady level baseline cash flow (a financial foundation) so that in an event when other income sources no longer generate income, life can continue.

It does what no other investment can do - provide guaranteed income for the rest of your life no matter how long you live.

There is no law or a guarantee that says the stock market has to provide a return. So a pension or an annuity should be part of a good financial planning.


To buy a life time annuity of $8,000 a year ($667/mo.), it would cost anywhere from 200k-250k, depending on age, gender, location, etc. (its life expectancy - i.e. how long they have to pay you). https://www.schwab.com/annuities/fixed- ... calculator


But before looking into purchasing a private annuity, why not maximize the annuity that everyone already has access to (and it's the gold standard of all annuities) - an inflation protected lifetime annuity called social security.

Contrary to all of the misinformation and the brainwashing by those with a political agenda, social security will continue and it is one of the easiest to access and most relied upon of all annuities.

A private annuity with the features of social security will cost quite a bundle and often will not be offered or be as generous.


Another way to get access to lifetime annuity is through employment. This is why a careful screening of a potential employer is very important, when choosing a job.

Making an intelligent decision about one's employment will have a lasting impact when the time comes to cash in.

The best way of getting a lifetime annuity is through employment - because you get two. (pension and social security).

IlliniDave
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by IlliniDave »

I usually just went and got a quote for a deferred annuity that paid the same amount per month as I'd accrued starting at the same time, which gave a market value rather than a DIY estimate. I got the annuity quotes through Vanguard.

When I did that recently I learned that it would take my entire net worth to purchase an equivalent to SS plus my retirement annuity. There's a reason corps are bailing on offering them as a benefit: they are worth (and therefore cost) a lot of money. I never used those valuations in considering my net worth--it just suited my way of assessing things better to just treat them as ongoing income.

The risk pooling aspect of annuities make them tricky to compare to an account of financial assets. If you assume the underwriter is financially sound and stays solvent, there's no worry of inflow halting because of personal asset depletion, which in a sense addresses "longevity risk". Through employment and SS I have an amount of annuitized income I am comfortable with going forward, so I haven't looked into them too much. I can always buy an immediate annuity later. The older one gets, the "cheaper" they are when it's couched as "How much do I have to pay to get $2,000/month?" or whatever. For a lot of boglehead-types that's part of the contingency plan should things go awry with their portfolio or it otherwise appears likely they'll outlive it.

Qazwer
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by Qazwer »

You can get a free - no call quote
https://www.immediateannuities.com/

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GandK
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by GandK »

Why are you asking? It's one thing to (try to) calculate net worth. It's another to try to figure out financially whether to accept one payout type vs another.

I've never found a way to value my pension in a way that made sense to me for a net worth calculation.

plantingtheseed
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by plantingtheseed »

The point is to keep on doing something.

We will all be here for some time, but no one knows for how long.

Knowing the future IS the valuation, which most people aren't very good at.

What will you do with your time here? That will tell you what you MIGHT need, if any. Not the otherway around.

Money is just a tool. It just needs ENOUGH looking after, so that when it's needed, it can serve its purpose. That is all.

It cannot and will not solve everything.

We all live in a yellow submarine, not only bound in space but also in time. What will you do with your time here?

Salathor
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by Salathor »

plantingtheseed wrote:
Thu Oct 14, 2021 2:19 pm
It does what no other investment can do - provide guaranteed income for the rest of your life no matter how long you live.
Just want to point out that a guarantee does not mean something will happen. Insurance providers can go bankrupt. A "guarantee" in the case of an annuity does not mean "something will happen 100%". You're basically hitching your financial wagon to the wellbeing of that insurer.

WFJ
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Re: How to value a Pension/ Annuity compared to a lump sum?

Post by WFJ »

The formula for valuation is Present Value = (Cash Flow/appropriate interest rate). The simple answer is a payment of $8000/year is worth about $500,000. One can use a plethora of calculators to estimate how much money one would need to provide today to have a immediate or deferred annuity that matches when your pension will begin. If one is 45 and pension can start at 55, then this would be the amount need today to fund a 10 yr deferred annuity of $8000. As one looks more into pensions and annuities, the value is highly dependent on rates and time to deferment.

https://www.fidelity.com/annuities/defe ... s/overview

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