Expert: Allen - 2/5/2008

Question
QUESTION: I will turn 55 in 3 months.  I have an early retirement option.  Cash balance is $49,272.  Single life is $492.72 monthly.  Indexed annuity is $227.23. Cash Refund annuity is $265.62  Single. No children. No need for cash now.
At 65 the numbers are $66,217. SL is $662.18. IA is $343.31
CF is $422.68. Any calculators you can recommend for figuring early vs. late or which payment option to choose?  Or do you have any recommendations?

ANSWER: The numbers don't make sense to me. Normally the lump sum will be more than 100 times the single life annuity amount; the cash refund and indexed annuities will be a larger percentage of the single life annuity; the annuities will not be the same percentage of the lump sum at age 55 and age 65; the lump sum will grow by more than 2.9% compounded from age 55 to age 65.

If in fact these are the correct numbers, the most valuable option, from an actuarial standpoint, by a wide margin is the single life annuity beginning at age 55. (As far as the answer for one individual, it depends on how long he or she lives and how well he or she can invest the money. These are questions which can't be answered with certainty.)

As far as calculators, I don't know of any.

---------- FOLLOW-UP ----------

QUESTION: I found these curious as well. I will get an updated statement from my pension manager.  I don't know if this helps.  I stopped working for this company in 1993.  They converted to a cash balance plan in 1989.  I believe I have the right to a guaranteed benefits provision to choose the previous plan formula. Maybe this results in the single life number?   As an ex-employee my cash balance is fixed at a interest rate of 3% per year. Does this explain the lump sum figure to you?  I instinctively felt the single annuity was the better deal.  Can you give me somewhat of an explanation as to why you feel this to be the case by a wide margin from an actuarial standpoint?  I am about to send a detailed letter to the manager with questions?  Is there anything you think I should be asking??

Answer
If the numbers turn out to be correct, I see no reason not to take distribution at age 55. If you elect the lump sum and roll to an IRA, you should be able to do a lot better than 3%.

The reason I stated that the single life annuity was the best option is that if you went to an insurance company with $49,000, you'd be lucky to find one that would give you much more than $300 per month in a life annuity. The $492 monthly payment assumes an internal rate of return of over 15%.