Lump Sum Calculation

[Guest mnorman]

I hope this is the correct forum to post this question.

I am currently 44 years old and my employer is getting rid of our pension plan. I have been told I can get $1,105.23 at age 65. However, I can elect to receive this as a lump sum of approx. $29,400 now.

My question is, how can I verify the lump sum is correct? I understand that I have to use the plan's interest rate (they tell me it is 8%). Also, that I have to use the mortality factor. I am lost.

I am not completely dumb though. I do understand present values. I assumed that I could calculate the lump sum I was eligible to receive at age 65, and then discount it back to my age now (21 years) using the same 8% rate. Is this correct?

Help.:confused:

[david rigby]

Sort of.

We can help, but a bit more information is needed.

1. Is the plan a governmental one (are you covered by a plan that is sponsored by a county, city, state, or some subdivision thereof)?

If the plan is not governmental, then we (probably) assume it is a "qualified" plan, subject to the rules of federal pension law.

2. What is the plan's fiscal year?

3. Your exact birthdate.

4. Normal form of benefit under the plan (for example, a life annuity with payments for your lifetime only).

5. Proposed date of payment.

6. Normal retirement age under the plan. (This is a defined term so it should be readily available. You stated 65; I'm just clarifying.)

7. Is the benefit amount you quoted (1,105.23) annual? If so, probably one-twelfth payable monthly. Is that correct?

Might be other questions, but this will be a start.

[Guest mnorman]

Ok, took me a bit to get some of the info. But here goes.

1. I work for a private company

2. I think it is jan thru dec

3. birthday = 9/12/57

4. the statement says Life Only Annuity

5. sept 1

6. age 65, I found this one easy enough

7. the $1105.23 is monthly

[Gary]

I specialize in reviewing pension distributions. If you are interested in a thorough review to ensure you receive all you're entitled to, you can contact me at mevoco@mindspring,.com.

My website is pensionright.com.

That site was not operating and may be down for a few days more. If that is the case you can also find out about my services at www.mindspring.com/~mevoco

Gary

[david rigby]

I think this is a problem, or merely a not very accurate estimate.

Federal law established a basis for determining the minimum lump sum. (The plan is free to establish a basis that is more generous than this, as long as it is non-discriminatory and unisex based.) The minimum basis utilizes a particular unisex mortality table (no variation permitted) and an interest rate based on 30-year Treasury securities (a bit of variation permitted). Using your numbers and the required mortality table, working backwards to the derive the interest rate, I calculate an interest rate of about 6.85%.

The reason this could be a problem is that, for a 9/1/2001 payout date, the rate should probably be about 1% lower than my estimate.

Please, someone else check my calculation.

[Guest sdolce]

Pax is on the right track. The average 30-Yr Treasury rate from 10/00 through 7/01 is 5.61% .Using 5.61% as the required rate(the actual rate will be specified in your plan document,along with the variations pax mentions) I get a lump sum of approximately $46,000.

[Guest mnorman]

Thank you pax and sdolce for your help

I fee much better if this is the amount I am due to receive

The HR dept gave us a sheet called "multipliers" for us to use in estimating our payout but the explanations are confusing

I think I am supposed to take my monthly amount at age 65 and multiply it by the number beside my age on the sheet?

Does that sound right? When I do it, I get $204,180 Needless to say I would much rather have this amount But something tells me I goofed

Help? :confused:

[Guest sdolce]

Interesting. If you divide 204180 by 1105.23 you get 184.74,which is an immediate life annuity factor at 5.61% and GATT mortality. Your monthly benefit of 1105.23 is calculated to be payable at 65. If the benefit were to be paid prior to 65 it would have to be reduced actuarially to reflect the earlier payment. Maybe the other multipliers you mentioned are the reduction factors?I'd be happy to take a look at the calc shett for you.

[david rigby]

I agree with sdolce on the last comment. Using 5.61%, I calculate an immediate annuity factor at age 44 of 184.7365.

However, the current factors you have been given may be only for estimate purpose. It is possible that the final amount will have some interpolation. (In our office we usually calculate ages to years and months, and then interpolate the relevant factors.)

It is also possible that the 5.61% is only for illustration purposes. The final payment might use a different rate.

However, I get a different value than sdolce for the estimated lump sum. I think that amount of about $46,000 takes into account the required mortality table and 5.61% after age 65, but then uses only the 5.61% for pre-65 discounting, essentially assuming that pre-65 mortality is irrelevant. The plan can use that definition, but I would find it surprising. If you use the mortality table for all ages and 5.61% for all years, I get a lump sum of about $42,000.

[Guest sdolce]

Pax-You're right, I did discount for interest only.It was quicker than printing tables, and there are already enough variables floating around.Eventually somebody is going to have to get down to reading th plan document an tie up all the loose ends.

[Guest mnorman]

Thanks for the quick reply especially since I got a deadline for making an election

I must admit, I much prefer my calcs to pax and sdolce, but then again your calcs are higher than what I was given to begin with

question though, you said I had to "actuarially adjust" my payment if I take it before 65. Since I am 44 now, how can I calculate that?

I did (finally) read throught the plan summary and it has a table, but the table only goes down to age 55, where it says I get 50%. Is this the table to use?

[Guest sdolce]

It's tough to tell -more variables. A pure actuarial reduction from 65 to 55 would reduce your benefit by 55%-60%, so the 50% reduction is obviously more beneficial,i.e. it's a subsidy. But the subsidy may only apply if you've met certain conditions,like the plan's requirements for early retirement. You may not be able to get the susidized lump sum unless you wait till age 55.Or the subsidy may apply across the board,with an actuarial reduction after 55.Looks like more questions than answers, but at least you have something to go back to your HR department with, so they can get the answers for you.

[david rigby]

We may getting terminology confused here. The lump sum you get will already have all "adjustments" included. If you choose an annuity, it will be provided by the purchase (from a commercial insurance company) of an annuity contract. That contract will provide you $X per month (I think the benefit is the 1105 amount you quoted earlier). If you will become eligible for early retirement, then the contract must include that as well, using the current plan terms in defining early retirement. For example, if the plan permits early retirement as early as age 60 and defines the benefit as:

"age65 benefit, reduced by 5% per year for each year that the commencement date precedes age 65",

then the result, for an early retirement date of exactly age 61, is 1105 x (1-.05x4) = 1105 x .80 = 884 per month.