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Old 02-05-2012, 06:30 AM   #21
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It's not a very good time to buy an annuity. Check out the annuity trends charts at immediateannuities.com:
Annuity Trends - Interest Rate Trends

I'm planning to take the lump. I'll put a chunk of it away in CDs or a Short Term bond fund to use later IF I see the need (at which time I hope interest rates have reverted to the mean). I'll invest the rest is a 50/50 stock/bond portfolio.
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Old 02-05-2012, 08:03 AM   #22
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Annuities never compare well to current interest rates, so waiting may not lead to a positive outcome or make a future choice any easier. The annuity option isn't bad, and if the administration is reliable and financially secure it should be considered.
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Old 02-05-2012, 09:02 AM   #23
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Annuities never compare well to current interest rates, so waiting may not lead to a positive outcome or make a future choice any easier.
How true, how true ...

Just a couple of other reasons why we purchased our first SPIA, rather than waiting on better rates:

- It acted as a defined benefit (e.g. pension), and like most pensions of the past, was for life and non-COLA'ed. For me, it gave a "base" to build upon.

- The preimum paid removed that portion of possible future excess RMD's (excess being withdrawls required by law, rather than required by current living expenses). Taxed deferred funds used for purchase of an SPIA are not subject to RMD's, since the life policy assumes those funds to be paid out over your lifetime.

- That preimum removed a portion of funds from my portfolio from investment risk (even though subject to interest rate risk). Of course, since we funded it with less than 10% of our then joint portfolio value, we have the remaining 90% subject to those investment/market risks. Oh, BTW it turns out (dumb luck) that the first five years of income will be at a time when interest rates are lower than at the time of purchase (like I said, dumb luck) and it looks like that "policy" will continue.

- Lastly, it met our desire to be able to have a stable source of base income that will allow us to extend claiming SS till FRA (for DW) and age 70, for me. That will allow us to use the options available to a married couple that will give me 50% of DW's FRA SS (were the same age) for four years, while my SS increases by 8% (plus any COLA) from age 66-69.

More importantly, it will allow me to max out my SS at age 70, assuming that DW will get the benefit after I'm gone. There's no accounting for when one's life ends, but at least you can plan for if you're still around. Like I've always said - money is for the living, not the dead. BTW, at that time (in just over five years), the SPIA payment will be just "icing on the cake", not really retired for any current income needs (DW's two small pensions, along with our respective SS income will be "on-line" at that time). That also means that any current interest rate will not impact us, regardless of what the SPIA is paying. Basically, we're "trading up" from the SPIA to a superior retirement income product, which is COLA adjusted - AKA SS...

BTW, what are you going to use as income while you're waiting for interest rates to meet your criteria? Sure, you can use the lump sum (or any vehicle you invested in short-term), but that just reduces the amount you can put into a future SPIA - while you are sitting on your low interest CD's. Just an additional thought to consider (without argument if an SPIA should be even considered, regardless of current interest rates).

BTW, these are not "you should" comments. Rather than they are considerations based upon our own experience. If you agree/disagree? Fine. I'm just offering them up from somebody who has actually "been there, done that" and may find some value while doing their own research ...
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Old 02-05-2012, 09:18 AM   #24
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I am new to this forum, been reading a lot and still have questions about whether take a lump sum or annuity from my company.

The numbers. I am 56, wife 56 and I am about to retire. The company I work for (Megacorp) offers a “cash balance pension plan”. The cash balance is $676,111 which I can roll into an IRA. If I take an annuity starting April 2012, the single life annuity would be 3,684/month and 100% Joint and Survivor would be 3,380/month. No COLA. This seems like a decent payout, with single life annual payout at 6.54% of lump sum value.

What I’m confused about is how to weigh all the other factors. Here are some factors I can think of, but I am probably missing others.

Longevity. We are in good health and longevity runs in my family and in my wife’s family. This would favor annuity.

Annuity risk. Megacorp is in an industry rife with mergers and acquisitions. Megacorp may proper and acquire other companies, but an equally possible scenario is that things will go poorly and Megacorp and will have to merge or be acquired. What happens to the annuity if the company gets acquired? How do I determine the funding level and risk of losing all or part of the annuity?

Portfolio size. I have a decent portfolio including 401k, deferred comp and a taxable account. Adding the lump sum would create a portfolio large enough to retire on using a 3.5% SWR to meet required expenses. Does this scenario favor lump sum or annuity?

Taxes. If I start taking the annuity now then I have to pay taxes on that money now. I don’t need a pension now as I have other assets to live on. So that would seem to point to rolling over lump sum into IRA, correct?

Any advice or other factors I should consider?
$676,182.31, earning 6.248%, will provide 600 monthly payments of $3,684
$676,142.55, earning 5.92%, provides 480 monthly payments of $3,684
$676,141.70, earning 5.131%, provides 360 monthly payments of $3,684
$676,183.67 buys 300 months of $3,684 payments at 4.305%
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Old 02-05-2012, 09:34 AM   #25
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$676,182.31, earning 6.248%, will provide 600 monthly payments of $3,684
$676,142.55, earning 5.92%, provides 480 monthly payments of $3,684
Just a note. If you're not aware, be careful of state guarantee's on your policy.

Some states have a $100k max - some up to $300k.

Just an FYI for anybody starting their research...
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Old 02-05-2012, 03:45 PM   #26
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I will be making this decision later this year.
I'm leaning heavily towards the lump sum.
The considerations midpack mentioned drive me to this.
ALso- my pension annuity has no cola.
Inflation is a very big concern over the next 30 years.
So, I dont see the annuity as all that safe.
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Old 02-05-2012, 03:59 PM   #27
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Originally Posted by rescueme View Post
Just a note. If you're not aware, be careful of state guarantee's on your policy.

Some states have a $100k max - some up to $300k.

Just an FYI for anybody starting their research...
I would use nolhga.com :: welcome as a starting point in understanding and researching state guaranty fund coverage.
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Old 07-01-2012, 11:14 AM   #28
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Don't forget that you are getting funded by the return of your own money, not necessarily due to any interest rate.

Many folks say/think that they will wait until they are older to purchase a vehicle such as an SPIA since they believe they get a higher interest rate. The rate has nothing to do with it since the bulk of the payments will be the return of your own money (preimum paid) over a shorter remaining lifespan.
I had never really looked at SPIA that closely before (am only 35), and had always had it in the back of my mind as a possible idea to kick around when I'm in my 60s.

However, at the Berkshire Hathaway annuity quote site, something really opened my eyes, which could be quite a bombshell for older SPIA recipients:
(quoted from the BRK website)
"Under current IRS rules, if your annuity is purchased with non-qualified after-tax dollars, your annual after-tax cash payment, assuming a marginal tax rate of 40.0%, will be $___ every year for the first ___ years because the IRS will consider ___% of each payment to you a return of your principal. Any payments you may receive after ___ years will be fully taxable, reducing your annual after-tax cash return to $___ thereafter.
"

So if you live past your statistical life expectancy, your SPIA will suddenly be distributing 100% income, and your net taxable income (and taxes) will increase, even though your annual distributions from the SPIA will remain the same.

Hopefully those with a SPIA were aware of this....I always knew that part of your SPIA was considered a 'return of capital', but didn't realize it becomes 100% taxable after your life expectancy - and hadn't really seen this fact mentioned by SPIA proponents in some forum discussions.

Of course, your life expectancy would put you in your early 80s, and many people are expecting annual expenses to drop as they become less mobile...but it would still be a nasty shock to your budget if your taxes increased by quite a bit from one year to the next just as you might have to start considering LTC expenses.
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Old 07-01-2012, 03:49 PM   #29
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In that scenario, your increase in taxes due to 100% taxable income could be offset by the tax deductibility of your higher LTC/medical expenses, so it may well be a wash.
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Old 07-01-2012, 07:15 PM   #30
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Originally Posted by MooreBonds View Post
However, at the Berkshire Hathaway annuity quote site, something really opened my eyes, which could be quite a bombshell for older SPIA recipients:
(quoted from the BRK website)
"Under current IRS rules, if your annuity is purchased with non-qualified after-tax dollars, your annual after-tax cash payment, assuming a marginal tax rate of 40.0%, will be $___ every year for the first ___ years because the IRS will consider ___% of each payment to you a return of your principal. Any payments you may receive after ___ years will be fully taxable, reducing your annual after-tax cash return to $___ thereafter. "

So if you live past your statistical life expectancy, your SPIA will suddenly be distributing 100% income, and your net taxable income (and taxes) will increase, even though your annual distributions from the SPIA will remain the same.
Haven't bought a SPIA so I hadn't thought about it, but it stands to reason since the IRS can't anticipate how long an individual will live in the interim before they actually go poof. Here's a fictitious example based on $1,000/mo without the blanks so a reader can see an example of the impact...
Quote:
Your investment of $274,966 will yield 2.54% based upon our mortality assumptions and the U.S. Treasury yield curve as of June 29, 2012. This investment will provide you with $1,000 every month for as long as you or the joint annuitant are alive, beginning on August 1, 2012.

Under current IRS rules, if your annuity is purchased with non-qualified after-tax dollars, your annual after-tax cash payment, assuming a marginal tax rate of 40.0%, will be $10,584 every year for the first 32.5 years because the IRS will consider 70.5% of each payment to you a return of your principal. Any payments you may receive after 32.5 years will be fully taxable, reducing your annual after-tax cash return to $7,200 thereafter.
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Old 07-01-2012, 07:42 PM   #31
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Hopefully those with a SPIA were aware of this....I always knew that part of your SPIA was considered a 'return of capital', but didn't realize it becomes 100% taxable after your life expectancy - and hadn't really seen this fact mentioned by SPIA proponents in some forum discussions.
I could be wrong (I often am), but I think a lot of folks that get an SPIA would do so with pre-tax dollars (as I did, at age 59, funded partly by my retirement lump sum) and all income is taxable as received as monthly income.

BTW, the BRK site does not accept pre-tax funds. You can go to a site such as Immediate Annuities - Instant Annuity Quote Calculator. or

Fidelity Investments: Guaranteed Income Estimator for a Fidelity quote, under different scenerio's -
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Old 07-01-2012, 08:25 PM   #32
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I think it's just as likely someone buy an SPIA with after-tax dollars - if they want guaranteed income but are afraid to handle the investing themselves.
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Old 07-01-2012, 08:40 PM   #33
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......................... The cash balance is $676,111 which I can roll into an IRA. If I take an annuity starting April 2012, the single life annuity would be 3,684/month and 100% Joint and Survivor would be 3,380/month. No COLA...............

I retired almost 18 months ago (megacorp - solid pesion plan since they locked closed it dow in 2004 ro new emplyees and those with less than 10 years I think), I was granfathered in). My lump was only about 480K and my monthly anninty was a little over $4K/mo (I'm not married, and there is no COLA). If my lump sum was $675K I would have taken that, but I went with annity, plus I already a latge amount of money in my 401K and iRA. When the Dept. of Labor (or whatever agency) that regulated pension pkans allowed companies to change from federal rates to corporate bond rates it gave everybody a 10-20 percent hit on lump sums...alot of people retire before that went into effect.

Anyway JMHO in your case a bird in the hand (especially a big one of 675K is a lot better than the annuity they are offering you).
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