whirlwind three week process, but I'm retired now

[Midpack]

^^^^ This makes alot of sense except for one point I will play the devil's advocate on .... "You can buy an annuity with your lump sum tomorrow, wait until you're 75" The reverse of that statement is what the basis of an annuity is predicated on -- Depending on what you screwup or the market does to you between now and "75" determines whether you will or will not have that $$ to get an annuity later --- Buying the annuity locks the $$ in a certain value versus an unknown value.

"Buying the annuity locks the $$ in a certain value versus an unknown value" is true. But buying now provides the lowest possible income per year vs upfront annuity cost and forgoes the real returns from that sum forever. Lump sums are larger than normal today for the same reason. Real returns could be average or even above in the long run, I'm nt ready to just give that return away just yet.

We've debated this several times.

First, as I mentioned in #21 above, the upfront cost of annuities are at or near all time highs. IOW they've (almost) never been more expensive for a given annual income. If you can wait (and I realize not everyone can for a variety of reasons), you could buy the same income for less when interest rates rise (and they will but who knows when). If we were in an average interest rate environment, the cost of an annuity could go up or down and the benefit to waiting would be uncertain. That's just not the case at present.

If your portfolio is at a surplus vs the cost of annuity, and real returns are average or better, if you buy an annuity now you forever forego those returns on that money. That could literally be $ millions. I am not suggesting anyone arbitrarily wait until 75 to buy an annuity. I advocate constantly comparing your portfolio to the cost of an annuity that provides the income needed to cover base expenses (at a minimum), I get an annuity quote quarterly. If I get close to my "annuitization hurdle", I will annuitize at least some of my portfolio then, whether I am 60, 80 or anywhere in between. As long as I don't wait too long there isn't much downside that I see. I've posted articles explaining the approach so many times I'm afraid to link to it again, but you can search.

I realize some people just prefer to buy an annuity to avoid the uncertainty in waiting - there's nothing wrong with that. As long as buyers understand what they may be giving up, it could be $ millions for many here, I don't care what anyone else does. It seems worthwhile to me to explain the options, especially in this interest rate environment. Anyone who says there's one right answer, doesn't know what they're talking about...

 

[militaryman]

Gotcha Midpack, Again, this makes alot of sense ^^^^^^^

I would just insert one caveat

"As long as buyers understand what they may be giving up, it could be millions for many here, or depending on how their investment turned out it could be zero gain and in fact a huge loss of principle"

The annuity locks in the assurance that neither will come true and thus its attraction for some folks, in some instances.

 

[Midpack]

Gotcha Midpack, Again, this makes alot of sense ^^^^^^^

I would just insert one caveat

"As long as buyers understand what they may be giving up, it could be millions for many here, or depending on how their investment turned out it could be zero gain and in fact a huge loss of principle"

The annuity locks in the assurance that neither will come true and thus its attraction for some folks, in some instances.

Once you understand what an "annuitization hurdle" is, the caveat isn't necessary...http://www.schulmerichandassoc.com/Modern_Portfolio_Decumulation.pdf.

If you're near the hurdle at whatever age you are, then you should probably annuitize. If your at the hurdle when you retire, you don't have much of a choice, and you might have considered working longer if at all possible.

 

[militaryman]

haha ok.....

 

[rescueme]

• The lump sum is most likely the amount it would cost to buy the annuity the company is offering, in which case they are of equal value (lump sum vs annuity income). It's easy enough to get quotes to verify. Just assuming it is "undervalued" is incorrect.
  [*]It's unlikely the company is providing the annuity, they are probably buying an annuity on behalf of the retiring employee. Odds are the company is not 'pricing the lump sum.' Also as easy as asking the company.
  [*]With interest rates at historic lows, the cost of an annuity for a given income/year is at or near all time highs. There has never been a better time to take a lump sum than now. I took a lump sum last Jun, and the amount was 1.7X what it would have been if interest rates were at 6%. This has been discussed factually here and elsewhere. I have seen dissenting views, but none with factual support.
  [*]And finally, the OP can buy an annuity for himself at any time. He has definitely not missed his chance to "offload longevity risk." Odds are considerable that he can do so more cost effectively later..

  I completely agree (saved me a lot of typing )!!!

 

[phoneguy55]

OK.....( whew ) .....I just read through that article on "The Annuitization Hurdle". In fact I read through it a few times, since it was much like a cross between Latin and a physics theorem ( to me ). But actually, I did garner the gist of what he was saying. I think...
If one were to always keep his eye on the minimum amount needed to sustain a given lifestyle later in life, then not locking into a formal annuity during the early years of retirement would allow the advantage of higher (possible ) yields. But once the portfolio is decreased either through disbursements over time, or even poor yields, then a formal annuity might be the stop-gap measure to ride out your remaining years. The cost of an annuity will be less as the expected "drop dead" age is approached, so waiting is definitely a viable tact.
I am not sure that is exactly what that whole article meant to convey, but that's what I took away from it, and I will have to keep that in mind as I set up a plan. I saved the article to reread a few more times, since if nothing else it shows that there are alternatives to the conventional plans.

 

[Midpack]

OK.....( whew ) .....I just read through that article on "The Annuitization Hurdle". In fact I read through it a few times, since it was much like a cross between Latin and a physics theorem ( to me ). But actually, I did garner the gist of what he was saying. I think...
If one were to always keep his eye on the minimum amount needed to sustain a given lifestyle later in life, then not locking into a formal annuity during the early years of retirement would allow the advantage of higher (possible ) yields. But once the portfolio is decreased either through disbursements over time, or even poor yields, then a formal annuity might be the stop-gap measure to ride out your remaining years. The cost of an annuity will be less as the expected "drop dead" age is approached, so waiting is definitely a viable tact.
I am not sure that is exactly what that whole article meant to convey, but that's what I took away from it, and I will have to keep that in mind as I set up a plan. I saved the article to reread a few more times, since if nothing else it shows that there are alternatives to the conventional plans.

Guess what, that's exactly what the article is saying. Unless you're already at or near the annuitization hurdle, you can wait and maybe come out ahead. You can hit the crossover at any age from, even as you retire, or if all goes well - never, and you'll be $ ahead. It's just something to be aware of...

 

[Khufu]

I respectfully but strongly disagree with this advice.

• The lump sum is most likely the amount it would cost to buy the annuity the company is offering, in which case they are of equal value (lump sum vs annuity income). It's easy enough to get quotes to verify. Just assuming it is "undervalued" is incorrect.
  • It's unlikely the company is providing the annuity, they are probably buying an annuity on behalf of the retiring employee. Odds are the company is not 'pricing the lump sum.' Also as easy as asking the company.
• With interest rates at historic lows, the cost of an annuity for a given income/year is at or near all time highs. There has never been a better time to take a lump sum than now. I took a lump sum last Jun, and the amount was 1.7X what it would have been if interest rates were at 6%. This has been discussed factually here and elsewhere. I have seen dissenting views, but none with factual support.
• And finally, the OP can buy an annuity for himself at any time. He has definitely not missed his chance to "offload longevity risk." Odds are considerable that he can do so more cost effectively later.
• I can give other reasons if necessary...

I am sure you post with good intention but IMHO, I don't think you've begun to provide a basis to draw this conclusion.

We can't analyze the OP's annuity decision because he did not provide the detail to do a present value analysis. However, when companies make an offer like this one it is usually not actuarially fair, unlike the SSA, for example. That means that the lump sum is usually not going to be enough to buy the same annuity. Companies know that people have an irrational preference for cash and that the average person cannot do a financial analysis, indeed probably does not know that an analysis is necessary, just like the OP. Here's one writer's explanation on why lump sum payouts are a bad deal:

Why lump sum pension payouts are a bad deal for most retirees | RetirementRevised

For one thing, plan sponsors now typically use a corporate bond rate, instead of the risk-free Treasury rate, to discount lump sum payments resulting in a lower lump sum amount. For another reason, a company provided pension is guaranteed by the PBGC while a private annuity is probably only protected by the state guarantee association and probably only for $100k. Also, when offering early retirement terms companies sometimes sweeten the monthly annuity payout. The OP does not discuss this.

As for interest rates, the general belief of posters here is that they must go up because they were higher in the past. The market disagrees. Interest rates, other than short-term Treasuries, are set by the market. If the market were indeed convinced that they will go back up to 6% soon, then it would raise them now. My own view is that rates and growth can remain low for an extended period following the financial crisis, perhaps for a very long time.

Probably the main reason for the OP to take the annuity is that he knows nothing about investing and is unlikely to do better on his own.

The OP has in any case made a poor decision because he based it on his gut feelings which have zero value in such decision-making. The main element of such a decision is to have a plan in place to fund his retirement, which he does not have. If he cannot afford to pay for a lifetime that lasts into his 90's then he cannot afford to accept the longevity risk and should offload it to an insurance company. At this point he should consider using the lump sum to delay receiving SS, which is buying more annuity from the lowest cost provider.

 

[Gumby]

. . . Read, read, and read some more. . .

And here is a good list of what to read:

http://www.early-retirement.org/for...reading-list-with-a-military-twist-46732.html

 

[Running_Man]

I respectfully but strongly disagree with this advice.

• The lump sum is most likely the amount it would cost to buy the annuity the company is offering, in which case they are of equal value (lump sum vs annuity income). It's easy enough to get quotes to verify. Just assuming it is "undervalued" is incorrect.
  • It's unlikely the company is providing the annuity, they are probably buying an annuity on behalf of the retiring employee. Odds are the company is not 'pricing the lump sum.' Also as easy as asking the company.
• With interest rates at historic lows, the cost of an annuity for a given income/year is at or near all time highs. There has never been a better time to take a lump sum than now. I took a lump sum last Jun, and the amount was 1.7X what it would have been if interest rates were at 6%. This has been discussed factually here and elsewhere. I have seen dissenting views, but none with factual support.
• And finally, the OP can buy an annuity for himself at any time. He has definitely not missed his chance to "offload longevity risk." Odds are considerable that he can do so more cost effectively later.
• I can give other reasons if necessary...

.

https://institutional.vanguard.com/iam/pdf/DB2012PT.pdf

So in 2012 there is a reduction in the use of 30 year US treasury with it's 3.3% yield being thrown out and a 5.3% corporate bond yield replacing. So for lump sums over the past few years the lump sum resulting payout calculation is declining even as interest rates fell. Last year the calculation was based on 80% corporate bonds and 20% 30 year treasuries and this year is 100% corporate bonds. Resulting in an increase of the interest rate used of about .25% over 2011 despite the 1% reduction in 30 year treasures year over year. I would estimate that his pension were to have paid him in the area of 36K per year,(phoneguy 55 could best answer this) if there was no inflation calculation involved. Currently the quotes I see on annuity with no inflation are only paying 27K per year for the sum he received.

I see he is planning on a 30K per year withdrawl which is about 4% of his starting point, and while this is quite possible to work in the long run, once the 12K per year runs out the math gets progressively cloudier on this implementation process. I assume SS @ 62 for about 15-18K is in the back of the envelope retirement plans.

The issue becomes how to make the money last a lifetime and the plan around this is difficult at 45K a year in expenses and 750K in assets, I would require over a million dollars in a 30 year retirement and his likely needs to plan for 40 and I'd want to have 1.3MM +. So I think cost reduction of 25% to me is imperative in the coming years or watch carefully for the next couple of years and hope for a very favorable investment climate. The retiree health care plan of course can be pulled at any time by Verizon and is also something to watch as a potential budget buster.

 

[phoneguy55]

Running man...
Excellent pragmatic breakdown of the situation given the variables I shared. I just looked over the retirement papers and see that if I had chosen the annuity pension the amount would have been $26.5K / yr. The lump sum pension was $478.5K which I opted for.( separate 401K at $235K now) I am by no means thinking I will have a shortened life span, but I do feel that the next 6 to 10 years would be when I would want to live as close to my recent lifestyle as possible. To live "way" below my means now and plan on having the same amount each year for 30 years seems backwards to me ( somewhat). I could do without a hefty mortgage and a big car payment and a few other expenditures in my mid 60's, much better than I can imagine doing without them now. I guess with inflation requiring more per year, and my willingness to lower my needs in 8 to 10 years, it may be a wash, but in my naive view of the future, I am thinking Soc.Sec. plus whatever that lump sum amount in an IRA will give me by 62, should allow for a lower, but comfortable income as I wind down. If that untouched lump sum is only at $500K by 62, a 4% yield would get me $20K a year plus Soc.Sec. of about $16K ...so almost $40K when i would be willing to slash my expenses more than I would now. Is this too shortsighted? I appreciate your input, and your points DO make me ponder, and recalculate a few different approaches. Obviously , continuing to work for a few more years being the most sensible. (aarrgg).

 

[Running_Man]

Was there an inflation provision in your pension? Most practically I would think you need to guard yourself from spending too much too soon and too quickly drawing down your portfolio. So 2 ways to do that is have very good investment returns - which is outside your immediate control or to reduce your expense or else work. Perhaps a part time job you would enjoy could be a source of income if the potential for expense reduction seems unlikely today.

Use the firecalc model to try and get a good idea before you talk to your advisor so you have an idea of what is possible. Certainly you have time to sit back and reflect on your course of action - I wish you the best of good fortune going forward.

 

[Midpack]

We disagree, that's allowed...

We can't analyze the OP's annuity decision because he did not provide the detail to do a present value analysis. However, when companies make an offer like this one it is usually not actuarially fair, unlike the SSA, for example. What does SSA have to do with a lump sum? Fair? That means that the lump sum is usually not going to be enough to buy the same annuity. I took a lump sum last Jun. The lump sum I got was within $2K of the quotes I got. The MegaCorp was just going to buy an annuity on my behalf in the open market so it made no difference to them. From what I read, that pretty common, employers don't typically hold on to the liability themselves when you retire. And you might want to stipulate that "companies" refers to annuity providers, not employers. Companies know that people have an irrational preference for cash and that the average person cannot do a financial analysis, indeed probably does not know that an analysis is necessary, just like the OP. No, but they can easily compare vs annuity quotes.

As for interest rates, the general belief of posters here is that they must go up because they were higher in the past. The market disagrees. Interest rates, other than short-term Treasuries, are set by the market. If the market were indeed convinced that they will go back up to 6% soon, then it would raise them now. My own view is that rates and growth can remain low for an extended period following the financial crisis, perhaps for a very long time. Extended time yes into 2014 at least, but not forever IMO.

Probably the main reason for the OP to take the annuity is that he knows nothing about investing and is unlikely to do better on his own. That seems a little condescending...as does the next remark, you don't enough to make that statement.

The OP has in any case made a poor decision because he based it on his gut feelings which have zero value in such decision-making. The main element of such a decision is to have a plan in place to fund his retirement, which he does not have. He can buy an annuity tomorrow or any time thereafter, he has kept his options open for now, vs having locked in an annuity at high cost. If he cannot afford to pay for a lifetime that lasts into his 90's then he cannot afford to accept the longevity risk and should offload it to an insurance company. At this point he should consider using the lump sum to delay receiving SS, which is buying more annuity from the lowest cost provider. Not necessarily for reasons stated above, but still an option. I take it you don't expect interest rates to stay low indefinitely, and you have little hope of real returns in the foreseeable future.

 

[mh]

I think the only thing you really need to do NOW is associated with the IRA which I think you were correct on. You have PLENTY of time to become conversant enough in investing to pretty much do it yourself. Do NOT let anyone steer you into loaded funds. Read some books, read here, ask questions. There's no reason you can't develop the confidence to do it and do it well. After all, you have the time now to get up to speed on a very important topic...it's sort of your "job" now! Good luck and congratulations on the opportunity.

+1 spend at least a month reading through some investment related threads and go over to the bogle heads site as well before doing anything with the rolled over IRA.

You can post at both sites on your advisor's suggestions ( if you still decide to use one ) and you'll probably get get some valuable commentary

 

[harley]

Probably the main reason for the OP to take the annuity is that he knows nothing about investing and is unlikely to do better on his own.

The OP has in any case made a poor decision because he based it on his gut feelings which have zero value in such decision-making. The main element of such a decision is to have a plan in place to fund his retirement, which he does not have. If he cannot afford to pay for a lifetime that lasts into his 90's then he cannot afford to accept the longevity risk and should offload it to an insurance company. At this point he should consider using the lump sum to delay receiving SS, which is buying more annuity from the lowest cost provider.

You know, when you have to make a decision like this on short notice without a lot of information (and the OP has admitted he's not as finance-literate as he'd like to be) sometimes you just have to go based on your gut. And in the case of an annuity or a lump sum, if you take the annuity you've made a final decision, no possibility of a do-over. If you take the lump sum, you can change your mind later and buy your own annuity. Even if you end up with a little less than you might have had otherwise, it still gives you time to educate yourself, make choices, and deal with any consequences. I think, given the circumstances, he made a fine decision.

 

[Accidental Retiree]

+1

 

[phoneguy55]

Harley:
...well, I most certainly have not lived my life doing "anything" rashly....but this did all happen within a 3 week timespan. Absolutely no intention of going,...and then gone by the 1st of the month. I did scramble and get 3 different professional "opinions" just on whether I could do this....more than whether I should do it. I did not leave my career of 26 years with the intent of NOT WORKING....but am trying to determine if that is in the realm of possibility or not. Working at something until at least 60, ...in my case...will make the most sense and may be how I handle this sudden life challenge. Thanks for seeing the situation as it was, rather than some short sighted impetuous haphazard lark. I appreciate all the comments and have taken each one to heart....no matter what angle they have been pitched at.

 

[Htown Harry]

I could do without a hefty mortgage and a big car payment and a few other expenditures in my mid 60's, much better than I can imagine doing without them now. I guess with inflation requiring more per year, and my willingness to lower my needs in 8 to 10 years, it may be a wash, but in my naive view of the future, I am thinking Soc.Sec. plus whatever that lump sum amount in an IRA will give me by 62, should allow for a lower, but comfortable income as I wind down.

You can find backup to your intuition on reduced spending needs as you age, but also opinions that say counting on it adds considerable longevity risk to your financial plan.

Finance and retirement author Scott Burns (linked as a "quick link" on the er.org home page) has written about this a number of times. He and collaborator Lawrence Kotlikoff call it "consumption smoothing". Here's one recent example:

Burns: In retirement, should you eat dessert first? - Houston Chronicle

Search the term on er.org and you'll find some additional threads on the subject.

Congrats, phoneguy. You getting valuable advice from all, even when they disagree. Reading, learning, thinking, and asking are all beneficial to you at this time. "Buying" most likely isn't.

 

[phoneguy55]

HTown Harry:....
Thanks for the link and the information about "consumption smoothing" . I read quite a bit about it since I saw your post last night. Since I am not one to be wreckless ( by any means) I will always err on the side of needing more than I can even envision as I get older. But !...with that being said, and staying ever vigilant to not burning any bridges for myself, I still think that ( just for me) hedging a little for NOW against having more when over 70 or so, still seems important. My portfolio is by no means adequate for me to just think I am set til the "end". If I decide to not return to work then my options are to expect an even distribution from now til the end, which will mean a considerable drop in lifestyle, or (sensibly) try to enjoy the next 8 to 10 years (now 56) with as close to my old lifestyle as I can. If I had stayed working at my "well paid" job until 66 or so, I would have had the better lifestyle until then, and would have saved much more to live well from then on. But, here I am....with the cards I was dealt. Every day this site seems to add another variable to the complex formula ( haven't worked with quadratic equations in a while ....whew) that will help me solve for "x". Thanks for the insights, as always.

 

[Khufu]

HTown Harry:....
Thanks for the link and the information about "consumption smoothing" . I read quite a bit about it since I saw your post last night. Since I am not one to be wreckless ( by any means) I will always err on the side of needing more than I can even envision as I get older. But !...with that being said, and staying ever vigilant to not burning any bridges for myself, I still think that ( just for me) hedging a little for NOW against having more when over 70 or so, still seems important. My portfolio is by no means adequate for me to just think I am set til the "end". If I decide to not return to work then my options are to expect an even distribution from now til the end, which will mean a considerable drop in lifestyle, or (sensibly) try to enjoy the next 8 to 10 years (now 56) with as close to my old lifestyle as I can. If I had stayed working at my "well paid" job until 66 or so, I would have had the better lifestyle until then, and would have saved much more to live well from then on. But, here I am....with the cards I was dealt. Every day this site seems to add another variable to the complex formula ( haven't worked with quadratic equations in a while ....whew) that will help me solve for "x". Thanks for the insights, as always.

In my opinion consumption smoothing is the most useful way to plan. I recommend reading Kotlikoff's and Burns's "Spend 'Til the End." I also recommend Kotlikoff's planning software, Esplanner, from esplanner.com. It's not free and it has a significant learning curve. But it handles multiple, non-concurrent streams of income well, knows the SS rules for you and your spouse, knows the Federal tax tables and the tax tables of all the states, handles annuities, upcoming one-time expenditures such as replacing a car, and more. So, for instance, I use Esplanner to answer planning questions for me, such as: if I retired abroad at age 62, delayed taking SS until 70, how much more disposable income would I have under my assumptions for return rates, inflation, etc. (The answer was 25%, a much bigger difference than I could expect from improving portfolio returns by the way.)

In my opinion, you are now in a crisis of survival, because your labor earnings have been cut short in the last years of relatively high earning/saving when you need it most. You can certainly forget about using the rule-of-thumb of the 4% so-called Safe Withdrawal Rate since that was calculated for a thirty year period beginning at 65. By leaving the workforce at 56, you face a much more severe financial problem.

My own priority is to avoid running out of money for myself and my wife. I am quite willing to sacrifice some current consumption to achieve that. I would not expect to be consoled when I am old, sick and broke with memories of wonderful vacations of the past. But your priorities may well be different. If I were in your shoes with my priorities I would try to get another job while I still could since that would make the biggest difference in financing your retirement. The next most effective step would be to reduce your cost of living as much as possible. Savings go right to the bottom line and are tax-free, as you know. As I mentioned in a previous post, you could consider relocating or taking in a roommate or moving into a shared household. Doesn't sound very appealing, does it? And yet, making effective savings moves soon could make a big difference in your chances for survival. (I have one acquaintance who went from being poor in Brooklyn to living well and within his means in Mexico and enjoying life immensely.) Frankly, your interest in enjoying your current lifestyle for the next few years (which means spending more than you can afford) sounds like a prescription for disaster. The question is not about having more when you are 70, but of having enough when you are 70 or 75 or 85.

I do hope things work out for you. You still have plenty of options. I hope you approach them with an open mind to come up with the best solution.

 

[phoneguy55]

Khufu:...
As in your previous comments regarding my situation, I thank you for your attempt to warn me of the pitfalls that many have fallen victim to through lack of planning and possible lack of fiscal discipline. I have always been an organized, regimented, and overly cautious planner who ( mostly) made out well in life because of it. This one took me by surprise. Luckily I only have myself to plan for, which takes some of the stress off of the situation. I will be taking the next few months to get myself as educated as I can regarding the "options", many of which you and a few others on here have suggested. Thank you....