Annuity or Take My Lumps

[BooBoo]

Pension Questions:
I soon plan to retire from mega corp with a pension. Thankfully, mega corp provides a pension and many payout options:
Lump Sum 390K
Annuity Options:
Highest Payout
Single payout to self: 27272/annually
To
Lowest Payout
Payout to self and DW with 7% inflation protection : 19632 /annually
Many options in between highest and lowest as well.

I priced a 20 year tem life @ 2500 annually for 400K coverage.
The 20 year policy only covers DW until age 78, I do not want to leave her high and dry after 20 years ?
I priced annuities both by paying lump sum and estimating a monthly income stream. The single payout offered by mega corp seems like a good deal. At this point I am leaning toward lump sum and buying 20 year term and some policy to cover later years with less of a payout. I need to do more research on this but I am pretty sure this type of policy is available.
What should I do ? annuity or take my lumps and run ?
FireCalc and others always seem to like annuity income stream over lump sum ?
Your input is greatly appreciated.

 

[Gill]

We need to know your age to properly evaluate the options.
Bruce

 

[DJRR]

How much do you have in other assets and what is your goal for the money? Do you need income, want liquidity, want to leave an inheritance or end of life gift?

I think the answer changes based on your goal. If you need income standard wisdom says you can safely withdraw 4% of your lump sum each year and adjust for inflation. That would be $15,600 per year. Your joint pension with inflation protection is $19,632 which is a better deal and ensures that you and DW will not outlive the money. Plus you save the $2,500 which you can use for some other goal.

The downside is that you will leave no inheritance and if you need a large lump sum for medical expenses or something then you will not have it. If this is half your assets it might not be a big deal, but if it is all your assets then it can be a huge deal.

 

[BooBoo]

I am 54 DW is 57. Goal is income.

 

[frayne]

Take a LS and roll it over into an IRA and set up a portfolio yourself.

 

[Ken11]

Im in a similar situation.
The very low interest rates at this time allow me to take an attractive lump sum. (lump sum is calculated to generate the pension annuity - amount increases as rates decrease)
I'll wait for interest rates to rise then consider buying some annuity income.
Im grateful to be receiving the payout after the recent market crash.
One bullet dodged....

 

[haha]

Pension Questions:
I soon plan to retire from mega corp with a pension. Thankfully, mega corp provides a pension and many payout options:
Lump Sum 390K
Annuity Options:
Highest Payout
Single payout to self: 27272/annually
To
Lowest Payout
Payout to self and DW with 7% inflation protection : 19632 /annually
Many options in between highest and lowest as well.

I priced a 20 year tem life @ 2500 annually for 400K coverage.
The 20 year policy only covers DW until age 78, I do not want to leave her high and dry after 20 years ?
I priced annuities both by paying lump sum and estimating a monthly income stream. The single payout offered by mega corp seems like a good deal. At this point I am leaning toward lump sum and buying 20 year term and some policy to cover later years with less of a payout. I need to do more research on this but I am pretty sure this type of policy is available.
What should I do ? annuity or take my lumps and run ?
FireCalc and others always seem to like annuity income stream over lump sum ?
Your input is greatly appreciated.

I am no expert in this, but it seems that if your employer is very secure, you might definitely look into the private market price for that joint life annuity with 7% inflation protection. This can mean several things, and you need to understand exactly what it means in this case.

But off top of my head, almost $20,000 joint life indexed annuity @ $390,000 for a couple in their 50s sounds pretty good.

You would however want to evaluate it in the context of your entire financial and life picture.

Ha

 

[dgoldenz]

Where did you get $2500/year for the life insurance from? That seems pretty high. At best rates I show $1100/year for a 54 y.o. male, $400k, guaranteed 20 years. Even at standard rates I show $2100/year.

For 30 years I show $1700/year at best rates, $3800/year at standard rates.

For the $8k/year difference between the two, you could guarantee $800k for life at best rates or $600k for life at standard rates. That would give her a lump sum payment upon your death to do whatever she wants with instead of having to continue relying on a smaller income stream. The death benefit is also tax free, while the income stream is taxable.

Even if you died tomorrow, she could take $800k and get a SPIA with an approx. $50k/year payout, which is almost 3x the survivorship option payout (not factoring inflation protection). A $600k death benefit would give her about $40k/year on a SPIA. A SPIA would allow her to minimize taxation if she decides to take the income stream at that point instead of paying taxes on the full value. In all likelihood, interest and SPIA rates will be higher in the future too.

Of course, if she dies first, you then have a life insurance policy that may not be needed, so you have to decide what's most important to you. You could also do a combination of benefits, like a 20-year term policy for $X amount and a permanent policy for $Y amount. That would give you a total of $X + $Y for the first 20 years, then $Y for the rest of your life after the 20-year term drops off.

 

[chinaco]

Take a LS and roll it over into an IRA and set up a portfolio yourself.

Wow! You don't know enough about their situation to just toss that out there. How do you know this is their best course of action?

Heads up folks. This type of off the cuff BS is an example of why you do not just take information off the internet and follow it without doing your own homework.

 

[chinaco]

You need to provide a lot more detail about your life expectancy, total financial situation (debt, assets, income needed), etc.. if you want any decent feedback. Of course, some people do not want to provide that level of detail... and that is understandable.

Are your only sources of income SS and the pension? How does that compare to the level of income you and your DW will need to support yourselves?

You said your goal is income. Do you mean guaranteed income? If so, pensions are annuities are a couple of mainstream options for that situation.

One thing to do is to compare the cost of buying those same income streams (i.e., pension payout options) from highly rated insurance companies (i.e., SPIA). This will give you some sense of the value of the payout per $ (of the lump).

You can get a quote here for non-inflation adjusted annuities. This is not a recommendation to buy from them.... but you can get something to compare.

Immediate Annuities - Instant Annuity Quote Calculator.


You can get a quote for an inflation adjusted joint life annuity from a highly rated insurance company for comparison purposes. What does 7% mean? 7% adjustment up every year or a CPI-U cap?


IMO - More information is needed to make any sort of decision... but unless you have a lot of other resources (i.e., you are very well off), that inflation adjusted joint survivor pension option is probably the more appropriate and low risk route (assuming the pension fund is in good shape). I have not compared the payout... but I suspect you could not buy it with the lump sum. I did a quick SL non-cola annuity quote and it looked like the lump would not buy your SL pension payout. Check for yourself!


Make sure you make the best overall decision for you and your DW. Take your time and do a lot of research. If you do not feel comfortable with it or do not understand it, talk to someone in your benefits department. Consider talking to Fee based financial planner to help you understand it so you can make your decision. Take your time, do your homework!

 

[Aeowyn]

Let me preface this by saying my risk tolerance is pretty high for investing. If you're going to lose sleep over this strategy, then it may not be good for you. But for me, it's a no brainer.

I don't need any particulars to tell you what I would do. I would take the lump sum and roll it into an IRA and buy stock mutual funds. But if you should do this depends on how comfortable you are with having you're money invested in the stock market.

Looking at you're payout options, $27,272 represents 7% of the lump sum and $19,632 represents 5% of the lump sum. Long term, these returns are not unrealistic to get on an annualized basis from a well diversified portfolio. As an example, over the last 10 years, which represent some pretty bad times in the market, my personal annualized return was over 9%. So I think I could pull out an average of $27,272 a year and still be growing the principal for my heirs. I say on average because during bad stock market years, I'm going to be relying on my cash reserves (and lower risk investments). During good stock market years, I'll be taking out more out to keep my reserves full. This of course assumes that I have other assets to turn to in addition to the pension payout.

Even if I had no other retirement funds besides the pension, if I took the lump sum option, I could take out 2 years x $27,272 and put it in cash. I could take out 5 years x $27,272 and put it into some conservative investments (bonds, balanced funds, and large cap growth funds) with an expected annualized return of ~5-6% (with low volatility). The remainder would be put in an aggressive stock portfolio with an anticipated annualized return of over 10% (but with high volatility). With this mix, I think I could maintain a withdrawal of $26,727 annually with a good possibility of not touching the principal. In fact there's a good chance the principal would grow and I could increase the withdrawal rate.

But if you're going to freak out during market down turns and pull money out of the aggressive portfolio - this option is definitely not for you. Or if the idea of seeing the value of you're portfolio go down some years instead of up makes you (or you're wife) nervous, this plan is not for you.

 

[donheff]

I agree that a lot more information is needed to fully analyze the situation but it does sound like both you and your spouse are relying on your choice. Talk of a single life annuity coupled with 20 years of protection for your spouse sounds pretty lousy if your spouse doesn't have other sources of income to cover the gap if you die. I think Ha's answer sounds good, or DGoldenz' if you can cover your bets with a life policy that actually protects your spouse. My question on these "how much protection for the spouse" issues is does your spouse fully understand what you are doing and is she/he knowledgeably on-board?

 

[frayne]

Let me preface this by saying my risk tolerance is pretty high for investing. If you're going to lose sleep over this strategy, then it may not be good for you. But for me, it's a no brainer.

I don't need any particulars to tell you what I would do. I would take the lump sum and roll it into an IRA and buy stock mutual funds. But if you should do this depends on how comfortable you are with having you're money invested in the stock market.

Looking at you're payout options, $27,272 represents 7% of the lump sum and $19,632 represents 5% of the lump sum. Long term, these returns are not unrealistic to get on an annualized basis from a well diversified portfolio. As an example, over the last 10 years, which represent some pretty bad times in the market, my personal annualized return was over 9%. So I think I could pull out an average of $27,272 a year and still be growing the principal for my heirs. I say on average because during bad stock market years, I'm going to be relying on my cash reserves (and lower risk investments). During good stock market years, I'll be taking out more out to keep my reserves full. This of course assumes that I have other assets to turn to in addition to the pension payout.

Even if I had no other retirement funds besides the pension, if I took the lump sum option, I could take out 2 years x $27,272 and put it in cash. I could take out 5 years x $27,272 and put it into some conservative investments (bonds, balanced funds, and large cap growth funds) with an expected annualized return of ~5-6% (with low volatility). The remainder would be put in an aggressive stock portfolio with an anticipated annualized return of over 10% (but with high volatility). With this mix, I think I could maintain a withdrawal of $26,727 annually with a good possibility of not touching the principal. In fact there's a good chance the principal would grow and I could increase the withdrawal rate.

But if you're going to freak out during market down turns and pull money out of the aggressive portfolio - this option is definitely not for you. Or if the idea of seeing the value of you're portfolio go down some years instead of up makes you (or you're wife) nervous, this plan is not for you.

Well said, and exactly my sentiments as opposed to throwing money away into an annuity. I know this will upset some but this is the way I feel. If you are smart enough to work for mega corp. for a long period of time and earn a decent pension, I would think the person would be smart enough and inclined enough to do some serious homework. Investing is not brain surgery but does take some discipline.

 

[dgoldenz]

Well said, and exactly my sentiments as opposed to throwing money away into an annuity. I know this will upset some but this is the way I feel. If you are smart enough to work for mega corp. for a long period of time and earn a decent pension, I would think the person would be smart enough and inclined enough to do some serious homework. Investing is not brain surgery but does take some discipline.

I see this sentiment a lot. Talk to the wife. Do you think they'd prefer a lump sum life insurance payout or prefer to manage a portfolio? I don't get the latter answer too often.

 

[teejayevans]

Pension Questions:
I soon plan to retire from mega corp with a pension. Thankfully, mega corp provides a pension and many payout options:
Lump Sum 390K
Annuity Options:
Highest Payout
Single payout to self: 27272/annually
.

Using 4% rule, you would only be able to pull $15,600 from the 390K lump sum, of course you would have something leftover when you die. Remember that 4% rule allows adjustments for inflation.

I think it depends on you entire financial situation (do you have other investments or is this it, are you a competent investor, do you have children, etc)

 

[youbet]

I see this sentiment a lot. Talk to the wife. Do you think they'd prefer a lump sum life insurance payout or prefer to manage a portfolio? I don't get the latter answer too often.

What's the difference? Just that the lump sum life insurance payout would be in cash and the portfolio would be invested in an array of financial instruments appropriate to the portfolio owner's life situation?

 

[dgoldenz]

What's the difference? Just that the lump sum life insurance payout would be in cash and the portfolio would be invested in an array of financial instruments appropriate to the portfolio owner's life situation?

A lot of widows don't want to deal with the investing because their spouse took care of all of that while they were alive. The spouse left behind might not know a stock from a bond, let alone keeping track of a six-figure portfolio. So they often just take the money and let a financial advisor handle it, buy a SPIA, or let it sit in CD's/MM.

There is also the risk of losing part of the lump sum if that's taken instead of the annuity, which is not a risk most people going into retirement want to take. What happens if you take the lump sum and then lose half of it next year? "Oh that'll never happen..."

Life insurance provides a guaranteed lump-sum tax-free payout in the amount chosen and if it's a permanent policy guaranteed for life, will never change. This seems like a no-brainer situation for pension maximization if the guy is in good health. In some cases the numbers don't work because of age/health/payout rates/etc, but here the numbers add up if he wants to make sure the wife is taken care of in the event of his death.

 

[haha]

Lots of cowboys around here. There will be fewer after the next downdraft in equities.

Ha

 

[Independent]

I priced a 20 year tem life @ 2500 annually for 400K coverage.
The 20 year policy only covers DW until age 78, I do not want to leave her high and dry after 20 years ?

When I looked at a typical life table (http://www.cdc.gov/nchs/data/nvsr/nvsr53/nvsr53_06.pdf) I got a 70% probability that your wife would live more than 20 years.

IMO, the only reason people buy annuities is because they want to deal with the "risk" that they will live to an unusually high age. (I think that's a good reason, and I'm deferring SS for that reason.) If you're pretty sure that living beyond 78 isn't much of a concern, then take the lump sum and spend aggressively.

 

[haha]

I should likely leave this thread before I get into trouble, but there is some very bad advice being given.

OP has given minimal details so I am not about to give any advice myself, other than to proceed cautiously and with reliable information and quality analysis.

Ha

 

[rescueme]

What should I do ? annuity or take my lumps and run ?

You could consider what I did. The company I retired from had the same types of annuity options (e.g. through a third party provider).

What I did was take their "options" and matched it against my/DW's "requirements".

For us, the result is that I took the lump sum and bought a life annuity (SPIA) for DW/me that will pay us as long as one of us are alive, with a minimum guaranteed term. If we both pass before that term is up, the remaining payments go to our estate.

I started my research using http://www.immediateannuities.com/ but also used input from providers such as VG/Fidelity. Not all providers gave us what we wanted so we kept on looking to get the plan that met our requirements.

While the SPIA is not inflation adjusted (we wanted to maximize montly payments in ER), it does provide me with the ability to delay SS till age 70 to maximize my benefit for me while I'm alive, but also for DW assuming I die first. In essence, I'm "trading up" from the SPIA to a superior inflation adjusted product (e.g. SS) with having the SPIA as an addition to income at that point. Also, the delay of SS till age 70 will let me claim 50% of my DW's SS at my FRA so I will be getting SS income, however not my own for a period of four years.

Just what we did, in a similar situation...

 

[rescueme]

Lots of cowboys around here.

He Haw! (or is it "He Ha"? )...

 

[FinanceDude]

Everybody's got an opinion.............

 

[walkinwood]

Re: your question - lump sum or annuity...

There isn't enough information in the OP for a response.

I do know that you can't take 7% a year from your lump sum & be sure it will last your your joint lifetimes.