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Another Lump Sum vs Annuity question with a twist
Old 10-25-2015, 12:59 PM   #1
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Another Lump Sum vs Annuity question with a twist

OK, so not much of a twist, but I really do need some advice for consideration.

My megacorp got gobbled by a bigger megacorp about 10 years ago (I had 10 years at the time)... the original megacorp had a pension plan with lump sum option, but the larger megacorp does not - only the original megacorp time is eligible for lump sum.

During the transition period of five years, there was a "higher of the two" pension plan (the higher is almost always the plan from the original megacorp) component, followed by a "Cash Basis" plan component with the now fully consumed megamegacorp.

Net - I have a Part A (lump sum or annuity), a higher of Part B or C (annuity only), and a Part D (annuity only) as components to my package.

I have read hundreds of the interchanges between e-r.org followers ... all very thoughtful and helpful.

The question is usually - "Is it better to take the pension or buy an annuity with the lump sum?" What I usually hear is something like, "Yes, the pension is better because the employer gets a better rate than an individual buying an annuity."

In my case an annuity that continues to pay my spouse when I auger in, is about $2150/month. The megacorp pension Part A component (either the lump sum or monthly payment) is about $2460/month. Enough of a difference to warrant taking the pension IF i was comparing apples to apples.

I've run FIRECALC and the Fidelity tool several times, playing with numbers ...once I got over the concept of being on the down side of the curve, I will probably have about the same useable income post work as I did when working - factors include not saving via 401K, not saving in addition to 401K, not having house payment (at the same level since we will move to less expensive area), kids gone, etc. (I have a military retirement from 20 years, early IRA before I earned out, real estate, taxable savings, etc)

So, it occurred to me that it might make sense, given our circumstances, to take the lump sum and roll it into a tax deferred construct, manage it more aggressively, etc ...obviously, there is additional risk vs pension or annuity ... but, if I can weather the ups and downs of various components inside the tax advantaged construct (equity and bond markets), wouldn't taking the lump sum and managing it effectively make sense?

Would appreciate comments and criticism :-)

Thanks!!
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Old 10-25-2015, 02:10 PM   #2
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If you have sufficient pension income to cover your basic income needs then I would take the lump sum.

I had a similar choice a while back. I will be getting a state pension and also a couple of SS checks that will more than cover my income needs. I was then offered a pension vs lump sum choice by mega-corp. I didn't need more annuity/pension type income so I took the lump sum and rolled it into Vanguard Balanced Index fund. For interest I will leave it there until I reach mega-corp retirement age and see which is the best. I'll then take income from it and see if it does better than the pension.
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Old 10-25-2015, 02:18 PM   #3
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IMO you are looking at it wrong....

You have no choice in the plan except for A.... you need to decide plan A by itself... IOW, ignore B and C, and also D....


Is the lump sum you get for A large enough that it makes sense to get it or not? If it is not, then take the annuity.... if it is, take the lump sum...


Now, more than likely it is in the middle... then you have to see if cash now is better than an annuity... for both you and your DW..... for me, cash is better.... for my DW an annuity is better.... she is not interested in investing at all....
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Old 10-25-2015, 02:23 PM   #4
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Old 10-25-2015, 04:41 PM   #5
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I assume you are investing, since you mention 401k contributions. It is semi-valid to consider an annuity as part of your bond allocation. As in, if you already have so much pension income that you don't feel the need for bonds in your AA then you probably don't want Part A as an annuity as well.

If you took the Part A pension as an annuity would you increase the equity allocation of your portfolio?

If you took the Part A pension as a lump sum would you increase the bond allocation of your portfolio?

Depending on how you adjust your AA, it may not matter a whole lot which choice you make. If you don't make any portfolio adjustments but change Part A from an annuity to a lump sum invested aggressively in all equities you are effectively changing your AA and taking on more investment risk.
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Old 10-25-2015, 08:15 PM   #6
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Texas - I am ignoring B/C and D (and Animorph, I have three rental properties which I consider as a somewhat substitute for bonds) ...to me the issue is whether or not, understanding the risk and accepting it, to use the lump sum as a broader investment to be balanced like other investments - vice simply as a pension substitute.

Animorph - if I took the lump sum, I would balance it to parallel the remainder of my portfolio ...which, in theory, should provide better overall returns than either the pension or a substitute annuity - I'm probably not being very clear. It just seems short sighted to remain so conservative when I don't need the income related to the conservative position.

nun - when you rolled into VG Balanced Index, did it perform commensurate with what you would have gotten from a pension - i.e. in the 5% range? I know it may not reflect a full business cycle, but must be representative in some manner.
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Old 10-25-2015, 09:19 PM   #7
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If your lump sum can buy an annuity that is within about 10% of the pension payout, I'd say that it's at least worth considering. Many lump sums seem to be coming in much worse than that.

Keeping AA constant, let's say 60/40, if you take the pension you could sell 60% of the lump sum value in bonds and use it to bump up your portfolio equities. If you take the lump sum you could apply 60% to equities and 40% to bonds. Either way, the starting value of your equities is the same. It's just that you are replacing some of your bonds with the annuity. That may be a little better, but probably not a huge difference.

You could do the same thing even if you planned on putting the lump sum all in equities. Take the pension, sell a lump sum worth of bonds in your portfolio and buy equities with it. It changes you AA, but the lump sum is all in equities and you still have the pension.

My AA is all equities, so yeah, I'm tempted by a lump sum that looks almost reasonable instead of a pension I don't really need. There's nothing that stops you from taking the pension and switching your portfolio to all equities if you want to get aggressive. But as long as you have bonds, I think the main comparison is pension versus lump sum in all bonds, leaving your AA constant as above.
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Old 10-25-2015, 09:22 PM   #8
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Originally Posted by stephenson View Post

nun - when you rolled into VG Balanced Index, did it perform commensurate with what you would have gotten from a pension - i.e. in the 5% range? I know it may not reflect a full business cycle, but must be representative in some manner.
Well the interest rate I need to get to equal the pension payments if I live to 83 is 4.4%....I put the lump sum in Vanguard Balance Index in early 2016 and I'm up 2.2%. It's way too early to see if it will beat the pension.
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Old 10-26-2015, 01:55 AM   #9
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Texas - I am ignoring B/C and D (and Animorph, I have three rental properties which I consider as a somewhat substitute for bonds) ...to me the issue is whether or not, understanding the risk and accepting it, to use the lump sum as a broader investment to be balanced like other investments - vice simply as a pension substitute.

Animorph - if I took the lump sum, I would balance it to parallel the remainder of my portfolio ...which, in theory, should provide better overall returns than either the pension or a substitute annuity - I'm probably not being very clear. It just seems short sighted to remain so conservative when I don't need the income related to the conservative position.

nun - when you rolled into VG Balanced Index, did it perform commensurate with what you would have gotten from a pension - i.e. in the 5% range? I know it may not reflect a full business cycle, but must be representative in some manner.

If you look at my post, I gave options for all possibilities.... without numbers we do not know where you fall... however, I doubt that the lump sum will be large enough to justify taking it.... most of the people who do give numbers are clearly in the 'take the annuity' camp....

Also not sure where your DW falls...
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Old 10-26-2015, 06:15 AM   #10
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Texas ...think we're pretty aligned ...the lump is about 450k.

In theory the difference between approaches of low risk/low reward (annuity or pension) vs higher risk/higher reward (some mix of equities and bonds in an allocation using the lump sum) is some percentage per year, changing each year as the components, in whatever allocation chosen, either outperform or under perform the annuity/pension. My thought is, since I don't require the certainty (low risk) of the annuity/pension income, that I should consider the higher value approach (admittedly a longer term concept) of an allocated lump sum.

My spouse is very aware of potential differences and is very competent in differentiating the various concepts, as well as managing the assets ...we've been getting ready for this "event" for a couple of years 😀

I appreciate the discussion ...please continue to provide your thoughts!



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Old 10-26-2015, 09:43 AM   #11
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If you look at my post, I gave options for all possibilities.... without numbers we do not know where you fall... however, I doubt that the lump sum will be large enough to justify taking it.... most of the people who do give numbers are clearly in the 'take the annuity' camp....

Also not sure where your DW falls...
Yes we need numbers....and those would include ages as well as cash amounts. However, the OP seems to have lots of annuity money already and if that is sufficient to cover basic expenses why take the loss of principal and modest interest rates (assuming an average lifespan) of another annuity. Here I'm assuming the OP might get an equivalent interest of 3% or 4% from the annuity if they are lucky. If the annuity has a COLA or is very rich then it might be worth considering, but if its a standard one then the lump sum seems to be a good idea if only to offer some hedge against inflation. The OP seems to be in a great position; a nice floor of annuity income and a lump sum that they can invest aggressively and use for large expenses.

I'd think about the existing annuities as the fixed income part of my portfolio and take the lump sum and invest it so your complete portfolio has the asset allocation you want.......if the annuities are equivalent to 50% of your portfolio you might put everything else into stocks to give you a 50/50 overall asset allocation.
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Old 10-26-2015, 10:15 AM   #12
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Oh well... best laid plans. When I retired 4 years ago, I discovered one of my employer's DC plans had an annuitization option that at the time was quite attractive compared to commercial annuities available at that time... payout rates at age 60 of 7.27% for single life and 6.71% for joint/50% so I decided to leave that money with the employer, let it grow and later use the annuitization.

Fast forward to age 60... they have revised the annuitization factors and they are now 5.85% and 5.36%... not terribly attractive at all so I'm planning to roll the balance into my tIRA. The only saving grace is that the balance has grown to 163% of what it was 4 years ago, so I'm ahead even after the chen in annuitization factors.
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Old 10-26-2015, 10:24 AM   #13
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Hi, again ...and, thanks for the comments.

I left out the age thing ... inferred it by noting I was on the back side of the curve, though :-) 61! Spouse same age.

Wasn't planning on addressing this until next year, but there are rumors of a voluntary RIF at megacorp due to reorgs ...feels like I am behind the power curve in information to make good choices.

Broad picture on numbers:
- Part A 2450/month (or lump sum of about 450K)
- Part B/C 1150/month (annuity only)
- Part D 1175/month (annuity only)
- Supplementary pension 750/month (annuity only)
- retired military income of 3500/month (with spousal protection at 50%)
- rental income of about 3000/month net, from three single family properties now worth about 150K each (the area they are in has pretty good rent to value ratios and I have relatives in the area with their own rentals in the same neighborhoods)
- 900K in 401K (about 90% stocks)
- 650K in supplementary plan (pays out quarterly for 10 years vice monthly)
- 250K in IRAs from another era (mine 175K, wife's 50K)(about 90% stocks)
- about 900K in taxable, joint accounts (90% stocks)
- equity in house and vacation home of about 900K
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Old 10-26-2015, 10:39 AM   #14
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Hi, again ...and, thanks for the comments.

I left out the age thing ... inferred it by noting I was on the back side of the curve, though :-) 61! Spouse same age.

Wasn't planning on addressing this until next year, but there are rumors of a voluntary RIF at megacorp due to reorgs ...feels like I am behind the power curve in information to make good choices.

Broad picture on numbers:
- Part A 2450/month (or lump sum of about 450K)
- Part B/C 1150/month (annuity only)
- Part D 1175/month (annuity only)
- Supplementary pension 750/month (annuity only)
- retired military income of 3500/month (with spousal protection at 50%)
- rental income of about 3000/month net, from three single family properties now worth about 150K each (the area they are in has pretty good rent to value ratios and I have relatives in the area with their own rentals in the same neighborhoods)
- 900K in 401K (about 90% stocks)
- 650K in supplementary plan (pays out quarterly for 10 years vice monthly)
- 250K in IRAs from another era (mine 175K, wife's 50K)(about 90% stocks)
- about 900K in taxable, joint accounts (90% stocks)
- equity in house and vacation home of about 900K
You omit your budget. But even without that I can't really see a reason for you to take the annuity as you have so much "guaranteed" income already. I'm a big fan of annuities/pensions for an income floor, but at a 6.5% payout and a 3.3% IRR assuming single life and you live to 82 I would still probably take the lump sum. You asset mix is such that you don't need another annuity.

Using myself as an example. I'm 54 and I have a rental property and a state pension that provide me with enough income to cover my expenses and when my SS checks begin I will have lots more than I usually spend. So when I was offered the choice of another annuity or a lump sum from mega-corp I took the lump sum. Annuities are good as insurance and they allow you to reinvest dividends and let your other investments grow, but they are usually bad investment sin themselves......so if you don't need one to provide income, then don't buy one.
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Old 10-26-2015, 11:38 AM   #15
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Nun,

That was my thinking, but you expressed it much better ...I think we'll spend more initially with travel, etc, but will stabilize at less than now, especially once we sell the big house ...

I do expect there will be turbulence initially - while we have a house for summertime, we are both interested in another location where we can bail when the weather gets too cold (read: around Thanksgiving in Virginia) ... and, if that is Florida (we're actually both from there) ... I mean south Florida, then we can live there for whatever it takes to reestablish residency and skip the Virginia state income taxes.

I also expect some big purchases (furniture, house remodeling, secondary cars, small boat) initially to establish the second "winter house" with appropriate toys, etc. We are and have been rather frugal over the years - except for the "big house" ...once it is gone ... yay!

Spousal unit and I need to discuss monthly expenses ... sheesh ... lots to consider!
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Old 10-30-2015, 04:05 PM   #16
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I wanted to take the lump sum from my mega-corp, but the offer was way below the annuity cost. I will be starting the pension next year at age 57 when my wife and I will retire (she will be 63.5 at that time). My pension maxes out at age 60, but I am required to take the pension in order to obtain the retiree medical benefit. As it is, the rate of increase to age 60 isn't huge.

I am in line for $2,450/mo (non-COLA) by the middle of next year. According to Fidelity, I would need to spend around $525K on a fixed SPIA to match that payment. The mega-corp offered $243K in a lump sum buyout a year ago. That was an easy "no".

If I had been offered $450K like you were (just noticed you have the same $2,450/mo for Plan A), I very well would have taken it. In your case, you have far beyond what I will be getting because of your two additional annuities. I would take the lump sum, but that's me. Your retirement spending needs and risk tolerance may dictate differently.
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