How is a pension annuity calculator
Lump Sum or Monthly Annuity? How to use a Time Value of Money Calculator to help you choose.
hey guys so your company has offered you
a lump sum as an alternative to a
monthly pension what should you do
which option should you take or consider
after considering some things such as is
the pension single life joint life
will there be Cola adjustments do you
have other assets income streams what
are the tax ramifications is the company
financially sound and solvent it really
boils down to a pretty simple question
what is the distribution yield on the
lump sum distribution yield it can be
found by simply dividing the yearly
pension amount by the lump sum for
example if your yearly pension is $6,000
and the lump sum offered is $100,000
then the calculation would be six
thousand divided by 100,000 resulting in
a yield of six percent as a rule of
thumb if the yield is above six percent
take the pension if below six percent
consider the lump sum if taking the lump
sum it's important to figure what the
internal rate of return is needed in
order to match or better yet beat the
distribution yield of the yearly pension
payout let's jump over to the desktop to
analyze this a little further using a
time value of money calculator
okay so we've jumped onto the desktop
and I am currently on a website it's
called FN calculator comm and we will be
using their time value of money
calculator located under the finance and
investment heading so let's go ahead and
click on that brings us to the TVM
calculator page now what we're going to
be doing is we will be using the numbers
from the previous portion of the video
to determine what the internal rate of
return is needed in order to make an
accurate determination of whether or not
to accept the lump sum or to go ahead
and take the lifetime yearly annuity so
as you recall the options that were
given to us was a hundred thousand
dollar lump sum or the $6,000 per year
lifetime annuity so in order to
determine what the internal rate of
return will be to to either match or
better yet beat what the company can do
we need to plug in some numbers so let's
get started
present value in the present value
column we will enter one hundred
thousand dollars that obviously equates
to the lump sum that we would be given
from the company and now we must invest
this on our own and and hopefully get a
return that can sustain us for our
lifetime the payment well if the company
was willing to pay a six hundred oh
excuse me six thousand dollars a year
which is five hundred dollars a month
well then I - and willing to pay myself
five hundred dollars a month six
thousand dollars a year right we want to
keep comparing apples to apples so the
five hundred dollar month payment
equates to six thousand dollars a year
future value future value we put in as
zero why well at the end of our lifetime
ideally we shouldn't have a bunch of
money left over and we shouldn't be a
shortfall either right we we should
be somewhere right next to zero we've
been drawn down on this money for our
entire lives if the math works out
ideally there shouldn't be a whole lot
left so let's just call it zero zero is
the future value the annual percentage
rate we don't know that's what we are
trying to determine and then the period
the period is found by looking at a
lifetime expectancy table now I'm
pulling this one from the Social
Security Administration it's from 2016
but let's hypothetically say that this
lump sum offer has been given to a male
who is 55 years old and according to
Social Security he will live another
twenty five point five two years let's
just call it twenty six okay so Social
Security says you know you're 55 years
old you're healthy you're gonna live
another 26 years great so we come back
to the calculator page we need to enter
that period in a monthly number so let's
jump onto a calculator real quick
twelve months times would we say 26
years equals three hundred and twelve
months so we're gonna go three hundred
and twelve months into the period field
okay so let's recap the present value
that's the hundred thousand dollars that
the company is prepared to hand over to
us if we walk away from the lifetime
annuity the payment that $500 a month
payment we're still gonna pay ourselves
we want that income stream so that five
hundred dollars a month
equates to six thousand dollars a year
future value is zero because ideally we
don't want a bunch of money left over
when we die and then the period is three
hundred and twelve that equates to
twenty six years which is what the life
expectancy is for a male who is
currently aged 55 according to Social
Security and we click on the rate and
look at this according to our time value
of money calculator we need to earn
three point seven one percent
on this money in order to pay ourselves
$500 a month for 26 years that's doable
three point seven one percent that's
that's pretty easy to do even even if
you're a conservative investor that's
pretty easy to do I would be tempted in
this case given these numbers to take
the lump sum and invest that myself now
let's try another example let's let's
say same yearly annuity but in this case
they were only going to offer us say
$60,000 excuse me $60,000 is a lump sum
buyout payment was going to stay the
same the future value would still be 0
our periods would still be the same
which was 312 which is 26 years let's
see what we need to earn now in order to
sustain that uh-huh
look at that nine point four zero four
percent that's a little steep do you
think you could earn nine point zero
four percent for 26 years to sustain
yourself on this offer I would say no
and this is where when you run the
distribution yield off the top of my
head that was 6,000 divided by 60,000
that's what ten percent right am I an
idiot but let's take a look
six divided by sixty equals ten percent
so yeah in that case ten percent that's
a ballpark estimate you'll run the
numbers and it comes out to nine percent
pretty close in this case I would
definitely definitely take the lifetime
annuity I don't want to be trying to
earn nine percent on my money for the
rest of my life to sustain what the
company is going to do risk free now I'm
not a tax attorney I'm not a CPA I'm
a financial advisor although I did stay
at a Holiday Inn Express last night but
know this tool this is an invaluable
tool if you have recently been offered a
buyout how do you know what is a good
offer and what is a bad offer jump on to
a time value of money calculator and
it'll tell you exactly what you need to
know so I hope this video has helped you
out and and cleared some of the fog I
know and when I was presented with an
offer recently I I struggled I I kept
going back and forth you know on one
hand you know that lump sum that's
pretty tempting but you need to look you
need to look at the internal rate of
return what you need to earn for the
rest of your life to match that pension
that the company is willing to give you
virtually risk-free so leave a comment
below let me know what you think was
this helpful and have you been offered a
buyout recently and had no idea how to
evaluate let me know I look forward to
hearing from you
