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Old 04-26-2011, 02:43 PM   #21
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For the most part, pensions are guaranteed for the INSURER to make money, not the annuitant. So, while things look good, unless your pension has a guaranteed COLA, you can't beat inflation in a pension.........
Did you mean "annuities" instead of the first "pensions"? And maybe something similar in the second sentence?
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Old 04-27-2011, 03:41 PM   #22
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My DW has the choice at age 55 between taking a lump sum of about $400,000 (from the International Financial Institution she used to work ofr) or a cola'd annuity of about $30,000/year. Seems like a no-brainer in favor of the annuity, but perhaps I'm missing something?
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Old 04-27-2011, 03:52 PM   #23
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Seems like a no-brainer in favor of the annuity, but perhaps I'm missing something?
The devil's in the details, as they say:

- COLA adjusted?
- Survivor benefit; e.g. joint policy?
- Guaranteed term (e.g. - die tomorrow, where does the rest of the money go; back to the issuing company or to a survivor, and if so what are the options - lump sum or period certain payments?)

These are just a few things to consider.

While my former company offered the same thing, these types of considerations pushed (us) into taking the lump sum and purchasing our own SPIA - along with only converting only what we needed. By taking the company’s terms, we were locked into an “all or nothing” decision and only wanted the SPIA to be a certain % of our retirement investment assets.

It’s not an automatic decision. You have to match “their offering” to “your requirements”.
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Old 04-27-2011, 09:38 PM   #24
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Originally Posted by FinanceDude View Post
For the most part, pensions are guaranteed for the INSURER to make money, not the annuitant. So, while things look good, unless your pension has a guaranteed COLA, you can't beat inflation in a pension.........
This is my viewpoint also. We are living in a very challenging time when what we have seen over the past 30 years may not be at all like what we will see over the next 30.

I personally would not want any non cola pension, unless it were so huge that I could save and reinvest much of it.

High or even moderate inflation combined with the progressive income tax grind non cola pensions into dust.

Ha
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Old 04-27-2011, 10:45 PM   #25
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Did you mean "annuities" instead of the first "pensions"? And maybe something similar in the second sentence?
Most pensions are a form of annuity........
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Old 04-29-2011, 03:54 PM   #26
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When I FIREd, I had the same type of decision. I could take all as an annuity or 1/2 as lump sum and 1/2 as an annuity. The annuity default was 50% survivors benefit for DW. We chose 100% annuity with 100% survivors benefit for DW.

In the 1/2 lump sum option, I would have had to make an 8-9% return to equal the annuity amount. So my decision was easy, as I am not smart enough to guarantee a return that big. It turned out to be an excellent decision as I left in July of 2007 right before the market starting to tank.

IMO, it's a math problem with your personal health issues factored in.
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Old 04-29-2011, 06:08 PM   #27
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I personally would not want any non cola pension, unless it were so huge that I could save and reinvest much of it.

High or even moderate inflation combined with the progressive income tax grind non cola pensions into dust.
I would like the first $30/year of my income to be COLA, but after that I'm willing to be more flexible. I'm much more interested in having extra money earlier in ER (disclaimer: I will have European-style health coverage with my pension.) The drop in real spending as retirement progresses shown by Bernicke et al is not far off the devaluation of a constant sum due to moderate inflation. I'd keep a proportion of my portfolio in stocks and adjust that upwards if inflation started to take hold.
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Old 04-29-2011, 08:31 PM   #28
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This is my viewpoint also. We are living in a very challenging time when what we have seen over the past 30 years may not be at all like what we will see over the next 30.

I personally would not want any non cola pension, unless it were so huge that I could save and reinvest much of it.

High or even moderate inflation combined with the progressive income tax grind non cola pensions into dust.

Ha
IMO the cola vs non cola pension is a moot point if the return vs the lump sum is high enough and you have other assets to carry you from early retirement to the age you can access your IRA, 401K, SS, or whatever. I look at mine as invested money making much more than I could safely earn in the market. For me it's a stepping stone to carry me to the next plateau.
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Old 04-30-2011, 09:01 AM   #29
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Nominal Pensions are what they are... a guaranteed income stream. There is some inflation risk. But there is inflation risk with nominal bonds too. One will be exposed to inflation risk if one intends to use a long-term strategic allocation strategy that includes bonds (i.e., no timing).

The decision is not as simple as: inflation risk... don't do it!

There are other reasons/risks that make an annuity an attractive option.

The lump or annuity decision needs to be carefully considered in the context of one's overall situation and the pension's viability and its features.

A blended solution of annuities (i.e., pension, SS, or SPIA) can be used to reduce risk when combined with a portfolio of stocks and bonds....

I believe people are often conflicted because they hope to maximize their income... but they also need to balance that with all of their risks (which is not all financial market or economics oriented). People often get caught up in a confusing web of interlinked risks and risks that are not linked. Then need to understand that those illustrations they read in the studies about portfolios does not mean their personal situation will turn out that way! Many things can go wrong... some initiated by their own hand (mistakes) or unexpected life events!

I intend to augment our guaranteed income streams (Pension and SS 62/70) with a small nominal SPIA ladder purchased over the next few years. Why nominal... I want a larger income from it in the early years of ER. Our portfolio can deal with the inflation risk. These income streams reduce the WR%. It enables us to weather an extreme prolonged market downturn (which I hope does not occur).
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Old 04-30-2011, 09:34 AM   #30
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Not too concerned with gov cola inflation %.
(How's that been working out for you?)
They are so far from reality when it comes to actual inflation
numbers to me its almost useless. (sorry)
Just like un-employment numbers, Not even close.........

Using the pension/annuity option can be used as a bridge from 55 to 59 1/2 when a Roth IRA is accessible and 62 for SS.

Lots of options out there.......
Lots of great advice...

more of an Un-Cola
http://www.fedsmith.com/article/2563...get-about.html
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Old 04-30-2011, 10:17 AM   #31
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I intend to augment our guaranteed income streams (Pension and SS 62/70) with a small nominal SPIA ladder purchased over the next few years. Why nominal... I want a larger income from it in the early years of ER. Our portfolio can deal with the inflation risk. These income streams reduce the WR%. It enables us to weather an extreme prolonged market downturn (which I hope does not occur).
Rather than talk about what we may do, just to point out that this is what we actually did ...

We purchased an SPIA with 10% of our joint portfolio, at the time of my retirement at age 59. I'll be retired four years (tomorrow! ) and at age 63, can tell you that it worked out as planned, enabling DW to delay her SS till FRA age of 66 (she turns 63 next month) and delaying my SS till age 70 (primarly for my DW's benefit).

I'm not looking to have income "forever" (even the SPIA is just that). However, I/we are looking to have some sort of base income to act as "gap insurance", without managing investments or worrying about inflation over a relatively short time - that's why we have the remaining 90% of our joint portfolio.

In our case, it fit our desires/need.

BTW, if one looks at an SPIA as a normal non-government pension (e.g. without COLA, as my former company had at one time), this is no different. However by doing what we did, it is allowing both of us to delay our respective SS incomes, and "trading up" to a superior inflation adjusted income product in the future.
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Old 05-01-2011, 06:37 AM   #32
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My DW has the choice at age 55 between taking a lump sum of about $400,000 (from the International Financial Institution she used to work ofr) or a cola'd annuity of about $30,000/year. Seems like a no-brainer in favor of the annuity, but perhaps I'm missing something?

One way to get a feel for the value of a $30k/yr payout with a COLA is to get a quote from a top rated insurance company for the same (or equivalent SPIA).

Be sure to use the same payout option (e.g. Joint Survivor life 100%).

You can get a nominal (no cola) annuity illustration for a quote here:

Immediate Annuities - Instant Annuity Quote Calculator.

400k would not buy a 30k/yr nominal annuity for a 55 year old female... based on the quote I did. A female 55 SL nominal annuity quote was a just over 500k. The Cola would just increase the cost.

What would the payout be if she deferred taking it till 60?
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