Why isnt the annuity being affected the same as if you take a lump sum? Will the segment rates affect the annuity at some point also? I understand their are different plans. Has the annuity rate ever gone down?
5 replies (most recent on top)
Again, you need to make sure you understand what specific pension SPD you're under.
It's always spoken about here as if everyone is under the same plan. Everyone is not under the same plan. Not all plans have lump sums that are adversely impacted due to rising interest rates (for instance mine).
I need my popcorn for this conversstion
Good stuff. I need both the lump and the annuity
The first reply to this post provides a pretty good basic explanation of the difference between the lump sum vs annuity option. Nicely done, but with a caveat.
The reason that grabbing the lump sum is often more attractive is this. Numbers are just for example purposes.
Let's say I'm older in my sixties.
Let's assume my lump sum total is $400k (Option 1)
Let's also assume my monthly annuity is $2k (Option 2) and I have a spouse who receives my check if I die until they die.
Option 1 I take my lump sum of $400k and "invest it" so it makes some money for me. Even better, let's just spend it without investing it at all. If I spend $50k per year, I can live like that for 8 years before I'm broke.
With Option 2, I need to stay alive for 16.6 years before I get that $400k. That's if I'm single. If I'm married (partner etc) and want them to have my check when I die, my original payment amount is reduced to "fund" those checks. Because I want to care for my spouse, I now only get $1k per month so when I die they can enjoy the same until they die. Now it's 33 years getting my $400k
Let's say I retire, get sick in a year, and die. My annuity payment was low because I wanted to carry my spouse. Sure, my spouse gets that annuity $1k, but again will need to wait 30+ years for that $400k total.
Tragedy strikes and my spouse dies two years later. That's three-years total of $1k per month. Everybody dead? So now is the annuity. Thanks for the $36k...
If I had taken Option 1, My heirs get the balance of the $400k. An annuity just stops.
Wow thanks
The monthly pension payment is a bargained for benefit and is actually what we are all working toward.
In your contract book, look up your job title (in the appropriate appendix) and below the wage scale it will tell you the pension band for your job title. Then go to the monthly benefit table for the appropriate year, look up your pension band and it will give you a dollar amount for that pension band and it also may have some age qualifications unless you have 30+ years of service. Multiply the dollar amount by your years of service and that is roughly the monthly pension amount you will receive. The fidelity website can give you the exact amount because it is calculated down to the day, not just the years.
That is your actual monthly pension amount, no matter what the economy is doing this is the bargained for monthly pension amount.
The lump sum option was added recently (recently in the overall comparison of many companies that are over a century old).
The lump-sum option amount is calculated to be the amount it would cost for the retiree to purchase a private annuity from an insurance company that would pay that same monthly payment as the monthly pension benefit at the interest rate that was determined the previous year.
If the interest rate goes up, then the investment required to purchase an annuity is less because you are making a larger interest rate on the investment. If the interest rate goes down then the interest paid on the investment in the annuity is less, so the lump sum must be more to provide that same monthly benefit in lower interest yielding annuity.
The retirement benefit is actually a certain monthly payment, that amount does not change with the interest rate. The lump sum fluctuates due to the amount required to purchase an annuity contract in a fluctuating economy.