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Should I take the lump sum or annuity?
Old 01-29-2015, 01:39 PM   #1
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Should I take the lump sum or annuity?

Lump Sum = $1.44MM
50% Survivor Annuity = $6,187/month
100% Survivor Annuity = $5,866/month
I am 53, my wife is 48, have 2 kids entering college in the fall
Have about $1.4MM in other investments, owe $80k on mortgage

Should I take the lump sum or one of the annuities?
Which annuity? The company says most people take the 50% one

Thanks
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Old 01-29-2015, 02:09 PM   #2
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Quote:
Originally Posted by bulbar View Post
Lump Sum = $1.44MM
50% Survivor Annuity = $6,187/month
100% Survivor Annuity = $5,866/month
I am 53, my wife is 48, have 2 kids entering college in the fall
Have about $1.4MM in other investments, owe $80k on mortgage

Should I take the lump sum or one of the annuities?
Which annuity? The company says most people take the 50% one

Thanks
How secure is the pension? Current funding levels? Is it private or a public pension?

Also, are your numbers correct on 50%/100%? Statistically, your wife will live to be about 4 years older than you. She is currently 5 years younger, so she'll be a widow for (statistically) about 8-9 years after your passing. Taking the 100% survivor's option will 'cost' you about $300/mo while you are alive. If both of you live to average age (say, 78 for you and 82 for her), you'll lose out on $300/mo for about 25 years. But when she's a widow, she'll gain about $2,772/mo with 100% survivor's vs 50% survivor's option, for about 8 years.

Total "cost" while you're both alive is $90,000 (over 25 years), while the "gain" if she's a widow is $266,000 (over 8 years). Problem is that those 8 years she's a widow is 25 years hence, and has a greater discount factor, while the $300/mo cost is from now until 25 years, so not discounted as much. But still looks like your smart choice would be if you took 100% survivor's option instead of the 50% survivor's.

But that assumes both of you are in good health and have decent family genetic health histories.

As far as what "other people do", it completely depends on their particular situation, and what their ages are and projected health outlooks are. Wouldn't make as much sense if your wife were 10 years older for you to take 100% survivors option unless you are in frail health and she's the definition of healthy living.

Bigger question is the stability of your pension. Good news is that your pension is roughly half of your income. Do you quality for SS? What is your projected SS benefit? What is your projected monthly spending with taxes? If your pension is very secure, I'd probably opt for the 100% survivor's option.

Some other things that might tip the scales in favor of the pension:
-State taxes: does your state tax pensions more favorably than capital gains/dividend income? Same question for IRAs.
-Investment portfolio: how is your $1.4M in other investments split up in taxable/ROTH/Traditional accounts?

Is it possible to take part of your pension in a roll-over (if it's maybe not as secure), and take a majority in a 100% survivor's?
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Old 01-29-2015, 06:57 PM   #3
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COLA or not?
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Old 01-29-2015, 07:17 PM   #4
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One simple rule: It is almost never a good idea to take the annuity. The exception to that rule would be if you don't trust yourself with the money. If you think having access to it will make you blow it, take the annuity. Otherwise get yourself a good advisor, invest it, and take a systematic withdrawal from it with a 3% cost of living increase and you'll get far more out of it, plus you'll have something to leave your kids someday
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Old 01-29-2015, 08:28 PM   #5
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Thanks for the responses. It's not COLA. It's probably very secure. I live in Texas so no state income tax.

I heard the biggest drawback to taking the monthly pension is that it is of course taxable right away. I can defer taking withdraws from the lump sum so taxes would I think be less.
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Old 01-29-2015, 09:36 PM   #6
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One simple rule: It is almost never a good idea to take the annuity. The exception to that rule would be if you don't trust yourself with the money. If you think having access to it will make you blow it, take the annuity. Otherwise get yourself a good advisor, invest it, and take a systematic withdrawal from it with a 3% cost of living increase and you'll get far more out of it, plus you'll have something to leave your kids someday
So what you're saying is that an annuity is almost never a good idea. Yet you then suggest they get a "good advisor"?

And what, pray tell, should they be investing in? Is a 50% stocks/50% bonds portfolio "acceptable"? If so, the OP states that their net worth is nearly evenly split between current investments and the annuity cash option. So you're telling the OP that it's a no-brainer to take the cash roll-over....and then proceed to invest it in bonds in a 50/50 allocation? Earning what, 1%?

The annuity of the OP is 'yielding' over 5%. Yes, I know, it's not a true yield, since you will never get the bond principal back...but sure beats the pants off of anything out there for the foreseeable future, assuming it's a solid pension.

I would suggest the OP consider the 100% survivor's annuity as their bond allocation of investments, and then invest their other $1.4M in all equities. True, you are able to time your withdrawals better if it were all in cash....but surely you would buy some bonds with that $2.84M portfolio, would you not? And would you rather have a bond paying 1.5%-3%, or a set pension yielding a tad more that you know will be there regardless of what the market does or what inflation/deflation does.

Also you never posted what your expected budget is. If you only want a budget of $70k/year including taxes, then yes you could roll it over and invest all $2.84M in well diversified equities yielding 2.5% and have it all under your control. But taking 50% of your portfolio and putting it in bonds isn't a bad idea. And then you can delay SS until age 70 to maximize your benefit and let that be a bit of a longevity safeguard.

Also, are you able to roll over say 33% of your pension to take in cash, and let 67% go into 100% survivor's option? That would probably be a pretty decent compromise, where you have a solid annual cash flow you don't ever have to worry about, and still give you a big investment portfolio that will hopefully grow over time.
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Old 01-29-2015, 10:35 PM   #7
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Whether or not an annuity is good or not depends on a lot of factors. I don't think anyone can make a blanket statement on it.
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Old 01-30-2015, 09:53 PM   #8
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So what you're saying is that an annuity is almost never a good idea. Yet you then suggest they get a "good advisor"?

And what, pray tell, should they be investing in? Is a 50% stocks/50% bonds portfolio "acceptable"? If so, the OP states that their net worth is nearly evenly split between current investments and the annuity cash option. So you're telling the OP that it's a no-brainer to take the cash roll-over....and then proceed to invest it in bonds in a 50/50 allocation? Earning what, 1%?

The annuity of the OP is 'yielding' over 5%. Yes, I know, it's not a true yield, since you will never get the bond principal back...but sure beats the pants off of anything out there for the foreseeable future, assuming it's a solid pension.

I would suggest the OP consider the 100% survivor's annuity as their bond allocation of investments, and then invest their other $1.4M in all equities. True, you are able to time your withdrawals better if it were all in cash....but surely you would buy some bonds with that $2.84M portfolio, would you not? And would you rather have a bond paying 1.5%-3%, or a set pension yielding a tad more that you know will be there regardless of what the market does or what inflation/deflation does.

Also you never posted what your expected budget is. If you only want a budget of $70k/year including taxes, then yes you could roll it over and invest all $2.84M in well diversified equities yielding 2.5% and have it all under your control. But taking 50% of your portfolio and putting it in bonds isn't a bad idea. And then you can delay SS until age 70 to maximize your benefit and let that be a bit of a longevity safeguard.

Also, are you able to roll over say 33% of your pension to take in cash, and let 67% go into 100% survivor's option? That would probably be a pretty decent compromise, where you have a solid annual cash flow you don't ever have to worry about, and still give you a big investment portfolio that will hopefully grow over time.

If you ever would even consider annuitizing, the worst time to do that would be when interest rates are at an all time low.......like right now. Insurers base these payments partially on current interest rates. If annuitizing were a serious consideration, one would surely wait until rates were higher.
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Old 01-30-2015, 11:05 PM   #9
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To clarify, I said never a good idea to take the annuity (aka annuitize) Although I'm not a big fan of annuities, they do make sense in certain circumstances, but annuitizing is almost never a good idea.
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Old 01-31-2015, 09:34 AM   #10
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If you ever would even consider annuitizing, the worst time to do that would be when interest rates are at an all time low.......like right now. Insurers base these payments partially on current interest rates. If annuitizing were a serious consideration, one would surely wait until rates were higher.
My pension monthly payout is not changed by interest rates. Only the lump sum payout changes due to interest rates.
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Should I take the lump sum or annuity?
Old 01-31-2015, 10:25 AM   #11
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Should I take the lump sum or annuity?

Jim - we have insufficient information to accurately advise you. Each person has their own views and goals. It also depends on your planned expenses post-retirement, especially if you have planned college expenses. If you can live off the annuity payments, handle college expenses without dipping into other investments - letting those portfolios accrue further wealth - that may be one way to go. With an annuity, you're buying relative safety (less risk) in exchange for better wealth accumulation potential. There may be fewer assets to leave your kids. If you and your spouse die early in a car accident, that could cause a major decline in their inheritance. It's rather like life insurance in reverse lol. How long do you think you and your wife will live, based on family health data? But the annuity will also offer protection from an extremely bad recession - permitting you to sit through without selling diminished assets.


There's no right or wrong answer, only what you are comfortable with. For the record, DW and I have pensions off which we can survive and we chose 100% survivorship. We take a minor draw from a seven digit portfolio - allowing it to continue accumulating - to pay for traveling. When we tire of the RV life, our withdrawal rate will probably diminish as we will no longer be spending $20k a year traveling. Or, when RMDs kick in, we'll merely reinvest a large portion back into taxable accounts. We have one son, to whom we intend to leave a significant inheritance. Hence, our decision. When the topic of pensions comes up here, I hear a lot of "I wish I had one". Not everyone, of course.

Make your plans for retirement, construct a realistic budget, imagine the possible ways that budget could go awry, choose your planned lifestyle, then make your decision.


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Old 01-31-2015, 11:06 AM   #12
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Here is another angle for consideration: If the pension is payable starting before 59.5 there could be benefit in taking the pension over a lump sum in that one could begin to draw off of the pension in ER. In rolling over a lump sum to an IRA I believe that you would the have to wait until 59.5 to access it without penalty.
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Old 01-31-2015, 11:12 AM   #13
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If you ever would even consider annuitizing, the worst time to do that would be when interest rates are at an all time low.......like right now. Insurers base these payments partially on current interest rates. If annuitizing were a serious consideration, one would surely wait until rates were higher.
There have been posts in the past that have examined this very real concern and astute observation. However, at the same time, if you wait 5-10 years before buying that annuity, you are then taking on risk with your portfolio that it will continue to grow higher than inflation in the meantime - in addition to having to live off of your portfolio in the meantime. Also, being 5-10 years older will increase your annuity payout just from being older - but also reduces your total "gain" from the annuity by reducing your total cash flow from the annuity by 5-10 years.

True, if you had a choice of buying an annuity when nominal rates are miniscule and real rates are negative vs when real rates are positive, ALL OTHER THINGS EQUAL, then you will have a higher annuity payout when rates are higher. However, you have to factor in the fact that you are older if you delay buying it, and your total accumulated cash flow up until death from the annuity could be less. Also, while I and others have been so sure of rates going nowhere but up from here for the past 5 years, they have in fact, gone DOWN, and there is no guarantee that we won't have nastiness with the stock market and interest rates for the next 10+ years as the world slowly pulls itself out from this current malaise. And if you wait 5-10 years to buy an annuity, rates may not be that much different from where they are now. There is a good chance they will be higher - but that's why I would strongly suggest the OP taking part of their pension in a cash rollover, and annuitizing perhaps 2/3 of it, if it's possible, to diversify.

I do admit that I was once in your camp of "an annuity is almost never a good idea"....but the more I think about things, securing PART of your cash flow can be a very good thing, and something I will strongly consider doing, along with delaying SS until age 70.
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Old 01-31-2015, 02:27 PM   #14
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Wanted to back up MooreBonds comments. The old metaphor of the 3 legged stool still holds true, when possible: SS, fixed pension and personal investments


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Old 01-31-2015, 04:04 PM   #15
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My starting point for these threads is to see how much of annuity would buy on the private marketplace, on a place like immediateannuities.com. Plugging in your numbers I get $5,414/month for a joint life policy.

So the $5,866 is better which is pretty much always the case since the financial crisis. That said it is only 8% better than what you could get in the outside and their is no guarantee that the website has the highest quotes. You probably could do better Vanguard and/or BerkshireHathaway and I'd highly recommend spending some time shopping around getting quotes before making a decision..

I have been making these pension vs lump sum checks about once a month since I joined the site, and pretty much in every case the company offers at least 10% better deal on the annuity than an outside insurance company and I believe 15% is more typical.

At 15% premium for folks in their late 50s I think it is pretty much in a no brainer to take the pension as long as you have other saving which you do. At 8% premium it is tougher call.

In your case. You and your wife are young and you face a long retirement, inflation is more of risk than if you were both 10 years older. You have two kids so leaving them an inheritance is more of a factor. In addition, my understanding is for financial aid purposes income is a lot more important than assets (especially retirement assets). Although I'm not really knowledgeable about the subject.

Assuming you have sufficient assets to make it to 59.5, without tapping into your retirement. I'd be inclined to annuitized no more than 1/2 the 1.44 million if that is an option and if it is all or nothing. I'd go with the lump sum.
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Old 01-31-2015, 07:36 PM   #16
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I decided to take my monthly instead of lump (in the future). For me it was increasing income streams and my pension has a generous survivor benefit (big part of decision). I worked for a mega mega pharma co. so stability is not a problem. Good luck with your decision!


Ps I wish I had your numbers concerning $!
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Old 02-01-2015, 08:02 AM   #17
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As it's already been mentioned, this question has come up many times on this forum, just in the past year. You can simply do a search of this forum and read a lot of good info to help you make your decision.

Lot's of factor to consider and I'm not sure there is always a really strong right or wrong answer, "most" of the time. For me, I had to make this decision twice in my life, and both times I took the lump sum. I have never regretted it.
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Old 02-04-2015, 08:48 PM   #18
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In 2013 we bought a small rental for $77,500, which is bringing in $805/month. After expenses it is putting in our pocket (ignoring tax write off's) a consistent $583/month. ($6996 per year)
$1,440,000.00 divided by $77,500 equals 18 such units.

If all such units are occupied, the monthly net rent is around $10,000.
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Old 02-05-2015, 07:20 AM   #19
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Assuming that you are both healthy, given that you are so young and interest rates are so low, I think I would lean towards the lump sum, especially since the annuity is not COLAed and you are so young.

Will having the annuity or not affect financial aid for your kid's college costs? Assuming that you plan to ER I would assume that the lower income associated with not having the annuity would be better.

Plus, you have lots of year to do low cost Roth conversions to reduce your RMDs later in life.
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Old 02-05-2015, 07:42 AM   #20
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Lump Sum = $1.44MM
50% Survivor Annuity = $6,187/month
100% Survivor Annuity = $5,866/month
I am 53, my wife is 48, have 2 kids entering college in the fall
Have about $1.4MM in other investments, owe $80k on mortgage

Should I take the lump sum or one of the annuities?
Which annuity? The company says most people take the 50% one

Thanks
I went to ImmediateAnnuity.com and got a 100% survivor payout for $1.44MM of $5,414/month. I am assuming that you would start the annuity immediately. If not, it would definitely increase the payout.

It's pretty typical for lump sum offers not being able to buy an equivalent annuity. Your offer is closer than most I've seen.

From a cash flow standpoint you are about $5k beeter off per year with the annuity rather than buying one on the open market. I'm certainly not suggesting that you do that.

Will this pension be "guaranteed" by the Federal program? If it is, I'm not sure what the maximum pension guarantee is. If it's with an insurance company, you would be way above any guarantee with the state programs.

How comfortable are you handling your entire budget depending on your $2.8 MM portfolio? There have been several threads where people ask if $3 MM is enough to retire on. They generally get slightly bashed by us old timers. You should be able to take $112k/yr out of the $2.8 MM but that is inflation adjusted where your pension will decline as inflation cuts into its worth.

I would lean towards taking the money not that my opinion has any special value. I just would hate to have that much of my personal finances depending on the annuity payout.

If you take the annuity I can't see any reason to not take the 100% benefit for your wife. If something happened near term, your family would be in a difficult situation with the drop in income. Statistically, your wife should outlive you. If that happens when you are 92, it probably isn't a big deal. If it happens when you are 62, she's hurting.
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