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Cash balance or annuity ?
Old 04-23-2011, 02:59 PM   #1
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Cash balance or annuity ?

I always thought I would take the cash balance rather than the annuity option out of my neutered pension.
Back when I started with the Co. 27 yrs ago "Cash Balance" wasn't an option. (Or a real word)
It was 70% of your highest 3 yrs with the co.
with 25 or more years and 55.
I missed the pension grandfather clause (lost $250k in that one) back in 1999.
And now this pension is just a portion of my retirement mix.

So, when 55 I will have option of $335k cash balance or a 100% contingent annuity of $1670 per mo. until were both history.
(or 1840/919, 1718/1289, and 1670/1670 as mentioned above)

With all the hoopla / promotion these days about annuities thought I would throw the question out there. And no, its is not adjusted for inflation. The number will not go up or down.......
I never thought I would ask this question............



But am curious what you wise folks have to say.

added:
(We have no health issues at this time)
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Old 04-23-2011, 04:31 PM   #2
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I had to make this decision earlier this year. After much deliberation, decided to take control of the money and took the lump sum ($135,000) and rolled it into an IRA (Wellesley). The monthly amount (if we took it) would have been $699.

Very difficult decision. Good Luck.
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Old 04-23-2011, 04:45 PM   #3
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When I was deep into trying to figure out how to retire I thought of the yearly annuity amount as return on investment of the lump sum I was offered. I decided the odds were good that I couldn't invest the money and get that return. I also went to the pbgc.gov web site and found mine was not reduced if the plan went belly up. Since I'm 56.5 I have to live on my on dime for the next three years and my pension reduces my personal savings withdrawal rate to a number I can live with. I count on it to give me peace of mind until I need to tap the retirement savings. This is not advise, just my situation. Good luck with whatever you decide.
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Old 04-23-2011, 04:59 PM   #4
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I always think it is worthwhile to see how much of annuity you could purchase with cash balance. So using 335K and assuming you both turn 55 next week. Warren Buffett's company Berkshire would pay you an annuity of $1541. I recommend looking at several online calculators using your actual information.

Recently I have noticed that the annuities provided by pension plans are significantly higher than ones you can purchase directly. This didn't use to be the case, and I believe it is caused by changes in accounting regulations.

$1670/month is equivalent to 6% safe withdrawal with no indexing for inflation. The recent thread on the update to the Trinity study was talking about a 7% withdrawal rate (not inflation adjusted) as being reasonably save for a 30 year retirement so all the numbers are close.

To me a big factor would be if I had kids or heirs that were important to leave money for. $1670 when combined with COLA adjusted SS is probably adequate to fund a modest retirement in many parts of the country.
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Old 04-23-2011, 05:20 PM   #5
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Thanks for the link,
I went to the pbgc.gov web site and found mine was not covered / insured by them.

Thinking lump sum.........again.......

"$1670 when combined with COLA adjusted SS is probably adequate to fund a modest retirement in many parts of the country."

It would be a little over 40k per yr. without touching my main retirement $$$ and guarantee almost no cat food.


I guess either will work......
Tough call.......
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Old 04-23-2011, 05:34 PM   #6
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DW and I also had to decide what to do. Our figures are similar to yours. $348K lump sum or $1948/month annuity with 50% spouse survivor benefits, unCOLA.
Pros:
1. DW wants to leave something to the kids/grandkids if ....
2. DW is concerned about her health. I think she is OK but she is just paranoid after her scary episode right after she retired.
CONS:
1. While I know very little about investing, she absolutely knows 0.

We decided to get the lump sum. We plan to mail in the papers next week.

We are rolling the proceeds over to her 401K stable value fund (earning ~2%) while we decide which investment to put it in. We will not be needing it for a couple of years. Any investment ideas?
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Old 04-23-2011, 06:41 PM   #7
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The $1670/mo vs $335k is equivalent to a yield of 6% for the rest of your life.

If inflation remains low and you live a very long life and the company does not default - you win with the annuity.

When you die there is no value to pass to your spouse (unless the annuity has a survivor benefit clause). High inflation; shorter life expectancy; default by insurer - you lose with an annuity.

Take the lump sum - you assume all risks for how it is invested - win or loose. But in this case you get to drive the train. Are you a good engineer? As Clint Eastwood would say "Well ****, do you feel lucky?"
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Old 04-23-2011, 07:08 PM   #8
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When DH retired he had the choice of a lump sum or pension (his numbers were higher). In his case, the pension would have been guaranteed by pbgc but I found that they would not fully guarantee the entire pension. Also, if I was receiving survivor benefits as the spouse pbgc would only pay 50% instead of the 100% benefits I could get under his pension. So we decided to go for the lump sum.

We also liked the idea of having the lump sum available for unusual expenses, etc. This may depend on how much other sums you have available though outside of the pension.

And, we also felt that you never know what will happen with pbgc in the future.
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Old 04-23-2011, 07:36 PM   #9
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Quote:
Originally Posted by Katsmeow View Post
When DH retired he had the choice of a lump sum or pension (his numbers were higher). In his case, the pension would have been guaranteed by pbgc but I found that they would not fully guarantee the entire pension. Also, if I was receiving survivor benefits as the spouse pbgc would only pay 50% instead of the 100% benefits I could get under his pension. So we decided to go for the lump sum.

We also liked the idea of having the lump sum available for unusual expenses, etc. This may depend on how much other sums you have available though outside of the pension.

And, we also felt that you never know what will happen with pbgc in the future.
Some good points here. I should have stated that I am widowed and only have myself to think about. If my wife was still here it might have made for a totally different decision.
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Old 04-23-2011, 08:51 PM   #10
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I will make this decision later this year.
Im very much leaning towards the lump sum.

Very low interest rates yield a high lump sum amount this year for each dollar of annuity. Perhaps, with higher rates sometime in the future I might consider an indexed annuity.

Also, folks tend to understimate inflation /inflation risk.
I figure my un-COLAed annuity pension will feel pretty anemic after a few years of high inflaiton. IF invested wisely a nest egg should do much better ( in the long term) in an inflationary environment.

I can get pretty cerebral about this.
However, it is a bit spooky
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Old 04-23-2011, 09:09 PM   #11
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Originally Posted by packrat44 View Post
The $1670/mo vs $335k is equivalent to a yield of 6% for the rest of your life.

If inflation remains low and you live a very long life and the company does not default - you win with the annuity.

When you die there is no value to pass to your spouse (unless the annuity has a survivor benefit clause). High inflation; shorter life expectancy; default by insurer - you lose with an annuity.

Take the lump sum - you assume all risks for how it is invested - win or loose. But in this case you get to drive the train. Are you a good engineer? As Clint Eastwood would say "Well ****, do you feel lucky?"
"100% contingent annuity of $1670 per mo. until were both history"

spouse pension=1840/919, 75%=1718/1289, and 100%=1670/1670

Just so you know......

But do agree.......
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Old 04-23-2011, 09:26 PM   #12
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Originally Posted by clifp View Post
Warren Buffett's company Berkshire would pay...
His plan does not currently accept qualified (e.g. pre-tax) rollover funds.

BTW, I took a portion of my cash balance plan and purchased an SPIA (under terms not offered by my former company), with the remaining money invested. I "split the difference" and did not put everything into one "product".
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Old 04-23-2011, 10:41 PM   #13
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I would lean towards the annuity since it seems to be well priced (higher monthly payment than a SPIA from Berkshire - if it were available to you) other than the fact that you indicate that your pension is not guaranteed by the PBGC.

Given that you might want to find out how well funded the pension is and assess your confidence in the pension's sponsor (your employer). If either are of concern then a bird in the hand ($335k cash) is worth two in the bush ($1,670/mo for life).
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Old 04-24-2011, 04:19 AM   #14
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Is the pension fund solid? Well funded?

One way to compare the relative value of the lump to the annuity amount is to take the lump and see what it will buy from an insurance company. Or See what it would cost you to buy the same payout.

Of course, this decision needs to be made in the context of your overall financial health.... amount of nest egg, debt, other annuities (e.g., SS)... as well as your general health and expectations around longevity.

IMO - annuities (income stream) can be used to reduce a number of risks.

You should do some analysis. Compare the two situations.

Jim Otar's book "unveiling the retirement myth" has a framework that might be helpful...
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Old 04-25-2011, 11:41 PM   #15
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Part of our reasoning was that if DH took the pension he couldn't ever decide to go back and get a lump sum. However, if he took the lump sum he could always buy an annuity later from a variety of insurers (so as to spread the risk of an insurer going under) if that seemed warranted.
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Old 04-26-2011, 09:57 AM   #16
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"if he took the lump sum he could always buy an annuity later"

Agree, but I cant find anything "guaranteed" that would pay (either) of us $1670 from 335k @ 55 / till were pushing up daisy's.

That said, still leaning towards the lump sum.......
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Old 04-26-2011, 10:04 AM   #17
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This is a close call. Clifp's numbers show they're giving you a financially "fair" choice.*

The primary issue I see is inflation. I've got a non-COLA'd pension. I've figured it would pay for the "extras" I want in retirement, while savings followed by SS would pay for the basics. Since I'm assuming my desire for "extras" will tend to decrease over time, the non-COLA pension structure looks okay for me.

If I felt that I needed an inflation protected income stream from my pension, I'd consider the lump sum if I saw a way to reposition it to provide inflation protection. That depends on personalities. Some people would buy real estate, others stocks, others TIPS, others commodities, others a private CPI adjusted annuity. I'm pretty sure there's no free lunch there - any inflation protection comes at the cost of lower initial yield or more risk. I don't know whether that line of reasoning fits your situation.


*IMO, in a perfect world pension payouts would be slightly greater than individual annuities bought with the same lump sum. The individual annuity has higher costs (mostly in sales) and lower expected mortality (the handful of people who buy individual annuities tend to be very healthy). So your numbers look reasonable.
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Old 04-26-2011, 10:37 AM   #18
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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.........
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Old 04-26-2011, 10:39 AM   #19
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Originally Posted by Katsmeow View Post
Part of our reasoning was that if DH took the pension he couldn't ever decide to go back and get a lump sum. However, if he took the lump sum he could always buy an annuity later from a variety of insurers (so as to spread the risk of an insurer going under) if that seemed warranted.
Yes. Same thing I did - spread the "risk", which most folks don't consider at the time of retirement, IMHO.
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Old 04-26-2011, 11:21 AM   #20
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Good point.
But for me the annuity would be spreading the risk as its fixed.
Un like the 2 Roth IRA's, 401k & CD's.

Then 8 yrs later SS would kick in for a little mad money........

Still leaning towards the LuMp
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