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@BCH94

Sorry, but no, I did not find a single universal formula that is used to calculate the value of a lump sum pension distribution.

It has also been a while, so I might err, but I will state what comes to mind.  I suspect no such universal formula is to be found, but it would enable folks make better informed decisions if it did.

If you want a deterministic approach that can be used to enable a better informed decision, good luck. Please share if you do find it. I may very well be wrong, but here is what I think, and insightful correction is certainly welcome. Sharing some of what transpired in my case might help others, and I hope things go well for them.

Based on several online sources, (including Investopedia) it seems that each company has some leeway in creating a formula for determining a lump sum distribution, and whether they might do some annual or monthly or other periodic means of providing ongoing estimates of a lump sum distribution. A company may reserve the right to change some aspects while benefits are still being earned.  Each company’s plan might also mention that if they use something such as the Minimum present value segment rates published by the IRS, which gives some aspect genuinely beyond the employer’s control, and that proves to be a handy way to avoid being forthcoming, or perhaps to avoid revealing the applicable formula.

My Fidelity NetBenefits account allowed for me to model (online) various scenarios while warning that the answers really didn’t count, and the folks at both my company and at Fidelity were not forthcoming about how the calculations were done in the formula they use. I also requested a personalized pre-retirement estimate that took a few weeks and looked rather much like what the online tool generated, including the caveats about not relying on the answer. After the fact, I can say that the answers were reasonable, but there is clearly no intent to provide clarity before deciding. The part about who bears any risk did seem rather clear. The tool (and report provided by Fidelity) was a bit clunky in that the two separate pensions required much of the information to be entered separately, and Fidelity initially told me that I should be able to claim each pension on separate dates, which later proved to have been an error.

If you were able to know that interest rates will be lower next year, waiting may improve the value of your lump sum, but it also likely depends on the formula used by the company and when the company applies the formula and rates to your case. Your company should be able and may be willing to tell you how often the lump sum calculations are estimated for folks that are still with the company, and something of that nature would seem necessary at least annually to determine the liabilities and funded ratio for the plan. I may be off in the specifics, but I think there are ERISA related requirements and IRS Form 5500 that suggest at least an annual calculation is needed, but perhaps there is a way to determine or acceptably estimate the aggregate liabilities without really knowing exactly how much each participant might be owed. After all, the company does not know when each person will retire or whether they might choose a lump sum.

I found that one of my two pensions actually had a set amount that I would be paid, and to my surprise, Fidelity and my company’s benefits representative confirmed that I’d get the same monthly payment regardless of when I started taking payments. The online modeling and snail mail report also showed this unexpected outcome. That led me to want to start those payments immediately and initiate payments from another (newer) plan at a later date (which I would have chosen somewhat based on the way interest rates played out, somewhat like a bondholder might do). Sadly, the company had changed the plan rules after most of the benefits were earned but a year or so before I started payments, and the new rules indicated that the while the two pensions were separately earned under different plans, payments had to commence at the same time. Given that, I went ahead and initiated payments, and now I know what I will receive. I cannot claim that this is the optimal approach, but a fixed monthly payment stream that is not affected by varying interest rates was about the only matter that was genuinely clear.

Good luck, and please do share if you find the magic formula.