Calculator for determining Lump-Sum vs. Annuity

L1: Calculator for determining Lump-Sum vs. AnnuityGood morning,
This is probably not the right forum, but I wanted to know if any of the calculators on this site could be used to determine increase in a lump-sum payment that is based on the GATT rate which is lower for AUGUST (this is the month 4Q payments are based). 3Q payments were based on GATT Rate in May (5.2%).
If none of these calculators help with determining the new amt. maybe someone can direct me to a site with this type of financial calculator. Did call the HR dept. but they said they don”t publish the new rate until after 17th of the month and could”t give me next quarters payout, but I am retiring on 9-16 & need to determine payout figure if changed start of pension from 9-17 to 10-1. I assume since the rate went down, the cash payout will increase, but really wanted to figure out for sure before I change to the October date. I check the 30-yr. treasury rate for August & avg. was 5.0%. I know the cashout is based on other variables (***afterall I will be 14 days older***), but can”t see anyway that it wouldbe less. It may not be a large increase, but any increase would be money in my pocket (“account”).
MUST leave company on 9-16-06 (Special Offer), but Ican pick a future date to start receiving Pension which is going to be a lump sum (cashout) Rolled over to an IRA where at some point Imay set up 72T, but hoping to hold off on withdrawals until after 59.5.
Details: Age 56 – Turn 57 in DEC. Lump-sum at 5.2% is 366,000 –
Question: What wouldlump sum be at 5.0%???- Any guidance would be appreciated.
meb242006-09-09 10:00, By: meb24, IP: [71.230.92.4]

L2: Calculator for determining Lump-Sum vs. AnnuityI doubt if this calculator would be an exact match, as I suspect the mortality tables are different. You also have to know what joint and several benefit would exist to your surviving spouse, if any. The lump sum must contemplate that added value.
Nonetheless, trying to plug in some #s in the reverse calculator yields an indication of about 2.5% more or around 375,000 using the 5.0% rate published by the Fed Reserve. That seems a little less than I would expect. You don”t happen to have two prior quotes do you? If you did, you could project what the reduced 20 basis points would do based on the difference from the prior quotes.
If your plan uses the particular monthly rate for the month prior to quarter”s end instead of averaging 3 monthly rates, you would have to wait until December to get the next rate. You also have to figure when you need the funds and probably also have to worry about when the plan can change to the new methods per the PPA. Those would raise interest rates by using corporates and lower lump sums, so you can figure that the plan will probably adopt the change as soon as they can under the PPA.
Once you decide on pulling the trigger for the lump sum, you might want to check to see if the plan will offer any partial distributions. If so, you would avoid the penalty under the age 55 separation from service exception, and could also avoid the 5 year SEPP requirement which always carry some risks since a SEPP limits your discretion as to distribution amounts. As for the life annuity you can probably take, this is probably not the best time for that as long term interest rates are still relatively low, and that favors the lump sum.2006-09-10 00:00, By: Alan S., IP: [24.116.68.91]

L2: Calculator for determining Lump-Sum vs. AnnuityLooks like the PPA does not present an immediate concern. The new corporate bond rates do not begin to phase in until 2008 and then @20% per year. But once that starts, the trend is definitely higher and that means lower lump sums.2006-09-10 00:08, By: Alan S., IP: [24.116.68.91]

L2: Calculator for determining Lump-Sum vs. AnnuityAlan S:

Thanks for your response. You are always so helpful. I read most of your posts and have learned a great deal on this forum.

I too came up with a similar amount about $8K. I tried using the reverse calculator but could not get the numbers to match the annuity amount. What I did was use the percentage difference between .62 & .20 (4.58%-5.20% & 5.20%-5.0%) & multiplied it by the 23K difference ($388,900-$366,000) coming up with $7K-8K. Not scientific but seemed to be a logical starting point.

Your quote: You don’t happen to have two prior quotes do you?۝
In fact, I have one prior quote 2nd Q GATT rate 4.58% had a payout of $388,900 with annual annuity of $26,296. I neglected in my first post to give an annual annuity for the $366,000, which is $26,430. (Not sure if that detail MUDDIES the water anymore or not)

I called the HR Dept. to get the formula they use, but was told it is a very complicated because it is figured in at least three different ways, and I will receive the formula that gives the highest payout. I”m sure they use some financial calculator to figure it out — I don”t think its Rocket Science, but nontheless seems to be a secret. Beside the GATT rate with two different mortality tables (GAM 83 or UP84 (? not sure about that one), they also use the PBGC rate, which I think presently is 3.9% but w/a different mortality table than what is used with the GATT rate formulas. Way too confusing for the lay person, but I do think the HR Rep. should be able to plug in the known AUGUST 5.0% GATT rate for the next quarter (even though not officially published by the HR Dept until the 9/17, which is too late for me to make a decisionMust know before 9/16). Also, FYI another retiree in my group (younger & less yrs. of service) had a better payout figure using the PBGC. I think the PBGC works out better for the younger worker. I seem to recall previous estimates in the last year or so, in my case always produced better payouts w/the GATT rate (but not sure about this because I don’t have copies). Seems after age 55 or 56 the GATT rate produces the higher payout, but I don’t know if that is correct for the next quarter.

In order for me to make an informed decision that could amount to an $8-$10K difference, HR should be able to work these figures out & I should not have to wrack my brain trying to make a guess what is the best deal. I will have to be more assertive with them since I must make a decision before 9/16 my last day on the payroll.

As far as making withdrawals I do not plan to use this money once it is rolled over into the IRA for about 8-10 years. I will be using my 401K (over 55 exception no 10% penalty) for living expenses. The Plan allows partial systematic withdrawals, plus one extra lump sum withdrawal annually. Therefore, I will not have to set up the 72T since the 401K will allow the partial withdrawals & I will not necessarily be locked into the 5 year 72T scenario, plus I will still have the option of the once per year withdrawal if I need more for an emergency.

I was planning to retire in about 2 years or so, but the company is DOWNSIZING and made an incentive offer to leave early. (Given 30 days to make a decision, which I made last Thursday 9/7 it happened so quickly). The incentive amounts to about 1 year’s salary, but payable over next 4 years. Therefore, I will need to replace about _ of my salary for the next 3 years in order to payoff major expenses (Mortgage, Car Loans, & daughter’s tuition all interest rates under 4.5%). At that point, I’ll be over 59.5, and I can reevaluate my situation.

Bottom Line: I will try to get definite answers from HR in next day or two.

Thanks for taking the time to try and figure it out & thanks for your helpful advice.

meb242006-09-11 15:35, By: meb24, IP: [71.230.92.4]

L2: Calculator for determining Lump-Sum vs. AnnuityThanks for the detail – I have not been involved in this issue since going through it myself in 1997, and at that time the GAM 83 was the only mortality table used by my employer. Basically, they would need a spreadsheet for each mortality table and then plug in the interest rate. Am somewhat surprised by the 3 pronged calculation you are dealing with. There were several suits in the late 90s regarding abuse of lump sum calculations, typically not including the value of spousal survivor benefits and not using the correct interest rate.
With the potential for error increased by the complexityof your calculation, I would press for copies of the calculations using all three methods. It”s the combination of longer mortality and lower interest rates that work to your benefit. Of course, you have already made the big decision, and is it virtually impossible to determine which way the 30 year rate will go between August and November. Good luck with whatever you decide.
2006-09-11 23:57, By: Alan S., IP: [24.116.68.91]

L2: Calculator for determining Lump-Sum vs. Annuitymeb,I”m in a very similar position with the option to trigger a lump 10/1 with an interest rate basis of 5.16%. With rates declining, I”m keen to slip a couple months and hope for some 5.0% or so as the basis and benefit from a bit lower discount for early distribution. I estimate a 1% decline in the 30 year rate yields a 12% higher lump amount. My primary concern with “slipping” a few months is the PPA. Alan correctly advised that the rate basis shift to corporates only begins to feather in beginning in 2008 but a floor rate of 5.50% is mandated to begin 1/1/2006. Clearly a problem for plans as distributions have been made this year at lower rates and I remain unable to get a clear answer as to when my plan will impose the “floor”. With the rate decline and my expectation that my plan will impose the PPA requirements 1/1/2007, I look to trigger for a 12/1/2006 lump. If I get surprised with an earlier floor imposition, I”ll likely defer the lump until late 2007. Any folks who see my read on the PPA floor as incorrect, appreciate advice as, if it is not an issue, I”ll defer a bit as long as 30 yr. rates are trending down.Sorry if this re is redundant as I attempted to post previously, not sure where it went 2006-09-12 13:42, By: Cisco, IP: [24.233.49.214]

L2: Calculator for determining Lump-Sum vs. Annuitymeb,An re to your last post. I”d thought the PBGC rate basis expired several years ago and the GATT basis is the current rule. Similarly, mortailty tables also defined. How this all ended up in the General Agreement on Tariffs and Trade act is a mystery to me. In any event, it appears your plan allows you to define a later date for trigger, no exposure to the “floor” and, with the GATT rate decline (30 yr treasury), your better off with a later date. 30 yr is at 4.91% currently. I may be viewing slippage on a different basis from you as my plan works on a three month average (Jul-Sep rates set the 12/1 lump basis). Official IRS rates at http://www.irs.gov/retirement/article/0,,id=96450,00.html.Best of luck (and all disclaimers apply!) – Cisco2006-09-12 14:11, By: Cisco, IP: [24.233.49.214]

L2: Calculator for determining Lump-Sum vs. AnnuityCisco,
The 5.5% rate (if the other two options are not even higher) are indeed effective this year. Some commentary even suggests the plan can recover excess payments, so rushing the calculation may not even do any good. How do you navigate this mine field when it is already extremely difficult to get specific answers from plan administrators relative to providing the employee needed info to take advantage of ideal dates to make the election?2006-09-14 20:37, By: Alan S., IP: [24.116.68.91]

L2: Calculator for determining Lump-Sum vs. Annuity
Yes, a mine field! I have had one of the HR folk tell me (with no
authority) that the plan will provide some advance notice for the 5.50%
floor implementation. At least they don”t appear to be contemplating
recovery of excess payments from those that have already received lump
distributions at lower rates…that will surely prove to be a quagmire
for any plans attempting to go that route.

As to navigating the mine field, I intend to watch the 30 yr rate
closely to capture the lowest possible 3 month average, watch for the
“advance” notice of the 5.5% floor implementation, trigger when that is
provided or the 3 month average ticks upward. Likely a bit of
over-optimization on my part, potential for a mis-step and kaboom.
I”ve some rules of thumb to keep my sanity through this, delaying one
year yields a net 3% (8% outright less 5% foregone return on a safe
investment), a one percent increase in the 3 month average 30 year rate
costs 12%. Assuming a $500k lump at the 5.16 average 30 yr rate
(worth $525k in one year, slipping two months to get 5.0% (worth $531k
10 months later), get a “kaboom” with sudden 5.5% (immediate lump worth
$480k and in one year $503k) or, kaboom and assuming 30 year basis does
not go above 5.5% in the next 9 months or so as the rule is the higher
of the two, trigger in one year for $518k. Looking out one year,
downside is $7k, upside is $6k. In the big scheme, not really material
but we all want as much mullah as possible. As a footnote, deferring a
lump trigger for a full ten years yields about 5% annualized at a
constant rate basis. With the 5.5% floor, the upcoming corporate
basket and all the complexity otherwise, I”ll be happy to take the
cash sooner vs later.

All somewhat off topic. Appreciate the posts here as I will be looking
at implementing a 72t program (tax savings) as well as Roth conversion
(tax savings speculation) in the next couple years, likely a
combination of the two.. No need for the cash as I”m fortunate enough
to have saved excessively (if that is possible) and am covered for ten
years or so with AT investments. Roth convert eats into that and makes
a 72t a nice complement. I”m bearish on tax rates but also a bit
concerned with our Washington friends constantly changing the rules of
the game. Another far more significant mine field! Much spreadsheet
work to do.

btw – I”m confounded with the congressional sponsor of the lump rate
basis change in the PPA suggesting the 30 yr rate basis was arbitrary
as the reason to shift to the as yet defined corporate basket…and
then implementing an arbitrary 5.50% floor. 2006-09-16 13:11, By: Cisco, IP: [24.233.49.214]

L2: Calculator for determining Lump-Sum vs. AnnuityAre you going to be able to partition your IRAs to produce a TIRA outside the SEPP universe from which to do the Roth conversions? You can actuallycomplete conversions totally within your SEPP universe without busting the SEPP, but that presents challenges with IRA custodians failing to understand what is going on, and increases the chances of an inadvertant bust. Most custodians have probably never handled that particular combination before, but it appears to be a way of managing your taxable income while maintaining the SEPP.
For example, you could convert a portion of your TIRA SEPP balance, and the conversion account would become part of the SEPP universe from which you can choose whether to satisfy your annual distribution from the TIRA or the Roth. If you create the Roth and decide to take a portion from it and it includes conversions within 5 years, there is no 10% on the conversion because it is part of the SEPP. So, it can be done, but could produce some challenges. Probably better to keep the TIRA converted to Roth totally outside the SEPP from day one.
2006-09-16 21:14, By: Alan S., IP: [24.116.68.91]

L2: Calculator for determining Lump-Sum vs. Annuity
Alan,
Geez, fortunately I”ve a couple years
to get educated and ruminate, as well as continuing to be an avid reader of
the posts on this board. Many thanks to folks like you that are
reqular posters!
Regards – Cisco
2006-09-18 14:16, By: Cisco, IP: [24.233.49.214]

L2: Calculator for determining Lump-Sum vs. AnnuityYou did not mention if your retirement plan includes investments in your employer”s stock, often contributed by them for their “matching”. If so, you should seriously consider NOT rolling your company retirement plan into an IRA. In that case you would normally benefit significantly by utilizing the tax provisions related to NUA (NET UNREALIZED APPRECIATION) which taxes you at regular tax rates only on the EMPLOYER”S COST initially, and then CAPITAL GAINS ON ALL APPRECIATION IN EXCESS OF THEIR COST.
This techniquehas beendiscussed elsewhere on this forum several times.2006-09-18 14:53, By: dlztaxes, IP: [4.175.9.79]

L2: Calculator for determining Lump-Sum vs. AnnuityHello diz,For the 401k, I”ve no company stock that was
contributed. Matching was in cash and invested in mutual funds. I do
hold a very small (2%) piece of the company stock fund rather than
discrete shares but don”t believe that would qualify for NUA
treatment. The source of that 2% was from a prior employer (acquired)
where I used some of my contributions and company matching monies to
buy the prior company stock fund. Converted to my current employer on
acquisition. Sadly, not sure there is much in the way of gains or if I
could trace back to cost given convoluted history. Perhaps a great
example of why it”s not often advisable to have your all your eggs in
the company basket. That said, many colleagues have done well working
the stock volatility. In any event, if this type of stock
fund does qualify for NUA, perhaps I”ll look into developing the
original cost basis. If discrete shares are required for NUA, let me
know and I”ll be saved another major learning exercise!Thanks for the re – Cisco2006-09-19 12:48, By: Cisco, IP: [24.233.49.214]

L2: Calculator for determining Lump-Sum vs. AnnuityActually, unitized company stock funds do qualify for NUA treatment. I assume you worked for this company when the shares were acquired and this company was subsequently acquired. You could ask the plan administrator for a cost basis quote for the shares for NUA purposes and see what they say. Usually, NUA does not become really compelling until that cost basis breaks below perhaps 40% of current FMV. Above that you have the large up front tax bill on the 40% plus, loss of tax deferral on future dividends, the risk of not doing the lump sum distribution properly, and no step up in basis if you pass because the NUA is considered IRD.2006-09-19 23:34, By: Alan S., IP: [24.116.68.91]

L2: Calculator for determining Lump-Sum vs. AnnuityAlan,
The cost basis was available online and
amounts to about 58% of the current value. Some details to put this
in perspective: This is a discrete 401k, all pre-tax and not the
401k that I am looking to rollover for the purpose of Roth/72t
activity. $340K total current value for the 401k with about $20k in
company stock fund (roughly $12k cost basis). Little incentive to do
much rollover-wise with this account except to eliminate some
financial complexity. Investment options are quite extensive. And I
don”t need to tap for 10 years or so and hopefully all will at least
double in value. If I understand correctly, when I take
distributions from this account post 59.5 yrs in age, I can realize a
cap gains tax rate on the stock fund gain rather than regular income
tax rates with the NUA treatment. For simplicity and using current
value, assume I take all out in one year, 35% marginal tax (at
current rate, likely higher!) versus 15% cap gains (likely higher as
well!), worth some $1.6k in tax savings. Gains should
increase before I need funds from this account and actual
distributions would likely be spread over 10 years, though I could
perhaps accelerate distributions specifically from this account
versus others to no detriment. If the filing paperwork isn”t too
much of a burden, perhaps a worthwhile exercise. If I were to clear
this account over 3-4 years and assuming the gain were to increase to
say $30k (with potential tax savings of $6k total), would it be worth
the filing exercise…an extra hour or so on tax forms per year?
Once again, thanks
for the re.

Regards – Cisco
2006-09-20 13:11, By: Cisco, IP: [24.233.49.214]