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Question for the Money Doctors

Question submitted on Sep 13, 2011.

Question

I am conflicted as to whether I should take a $182,000 lump sum from my prior employers DB plan or take the deferred annuity of approx. 1192/month beginnning at age 65. I am 59 that this time.

Answer

The answer is "it depends". Consider the following before moving forward.

* will your pension include an annual cost of living adjustment (COLA)?: most do not and that is my assumption for your pension.

* how long you live?: if you believe you will live a long life, you are better served taking the monthly pension

* what percent of future pension benefits are funded?: a lot of pension funds have had problems post the credit crises. Ask your pension administrator what percent of future benefits are funded

* is your company financially sound now and positioned well for the future?: if the answer to either is no, then your pension may be in jeopardy now or in the future and you may want to consider the lump sum

If you are comfortable with the current funding of your pension fund and your company’s financial position, then a monthly pension is a consideration. If I assume a 3.5% annual inflation rate, your breakeven point is roughly 82 years old. If inflation should increase to 4.5% per year, then your breakeven moves out to age 84. So if you think you’ll live longer than that, take the monthly pension, shorter, then take the lump sum.


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