Annuity or Lump Sum - still confused

[Ken11]

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.

 

[brewer12345]

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.

 

[MooreBonds]

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.

 

[audreyh1]

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.

 

[Midpack]

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...

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.

 

[rescueme]

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 -

 

[audreyh1]

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.

 

[prototype]

......................... 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).