OP
OP
Help! Annuity or Lump Sum Decision
- Thread starter flintnational
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So after you ran that decision tree, did it come to a recommendation? I ask, because I'm watching this thread. My situation is very similar to yours. My reason for considering the annuity is that with the annuity and SS, I have a "guaranteed" that is adequate for me to live on (about $80K/yr if I wait until FRA for SS). I like that security though I know it comes at a cost. I like you consider both the annuity and SS as average to lower than average risk especially compared to a high stock asset allocation portfolio.
Also, with what is left (about $1.5M) and a high stock AA, I can draw 4% ($60,000). I feel I could live on either so both should be good no matter what happens outside of a catastrophic financial failure.
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flintnational
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Jerry1, our situations are similar. At about age 64 or 65, our pensions (DW has a small pension), my pension and our two social security payments will cover our inflation adjusted budget. Like you, our withdrawal rate at that time will be 0% unless we decide to ratchet up our spending. As mentioned earlier, I am using pension/SS as stable investments that allow a 70% stock investment allocation. I would not be comfortable with this AA if I did not have the annuity. While there are some situations where the lump sum may make sense (early death/ high future investment returns) I am fairly certain I will keep the annuity option. I remember Bill Bernstein's advice, When you have won the game, why keep taking risk?(or something similar).
FN
OP
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flintnational
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The Bogleheads Wiki made another good point. They stated you need to determine if the lump sum option is "fair". They define fair as the lump sum amount needed to replace the pension with a SPIA. They went on to state, most public/government lump sum offers are "fair" and most private sector lump sum offers are not "fair". This may have a lot to do with why people view this issue differently. They also acknowledge there are certain situations where the not "fair" offer still might be the right choice.
FN
Blue Collar Guy
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+1 everybody that says take the lump sum is either bad at math or letting the lump sum blind them, or both.
How about explaining this bad math to me? Im willing to learn, but here is my math, take the 405k now, put it in a 75/25 AA , fire calc says in 6 years (jan 1 2024), he takes a non cola 36,700 for 30 years they will have a drum roll.... 97.4 % chance of winning the game with over 2 Million bucks left for the kids. BOOM. Factor in if they die before the 30 years . thats my math Ill take 97.4 % , Your turn
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Big_Hitter
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How about explaining this bad math to me? Im willing to learn, but here is my math, take the 405k now, put it in a 75/25 AA , fire calc says in 6 years (jan 1 2024), he takes a non cola 36,700 for 30 years they will have a drum roll.... 97.4 % chance of winning the game with over 2 Million bucks left for the kids. BOOM. Factor in if they die before the 30 years . thats my math Ill take 97.4 % , Your turn
that's either bad math or a bad model
Blue Collar Guy
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Big_Hitter
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I think you input something wrong
Blue Collar Guy
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Big_Hitter
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I would expect you'd get something around 50% success rate
Blue Collar Guy
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Hitter, I put 405000 in the portfolio line , I put 36700 in the spending line and I put 30 years. Thats was on the start here tab. Then I put 0 % for the CPI as it isnt cola'd. On the "not retired tab" i put 2024 . 75/25 portfolio. thats what I got. Can you re do it? Maybe I goofed ? hahah I did it again got the same results. Im hitting a lot of tabs, so Im sure Murphys Law and me might be messed up.
Running_Man
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Because you only need 5.75 to beat the annuity and stocks have historically returned 9%, and you are waiting years before you begin withdrawals, and the withdrawals need not be inflation adjusted a 75% stock model based on historic averages is going to destroy an annuity.
The future however is probably not the same probability as the past. But I think this case is a tough call, I don't see a really bad decision on either end, will be a win no matter what way the OP decides to go.
Big_Hitter
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only if you die early - like I said before no way that lump sum has a 97% chance of covering the payment for 30 years
+1
FIRECalc and it's decades of post-war prosperity will generally, if not always, favor the lump sum over a non-COLA pension annuity. Personally, I'm not so optimistic about the next few decades.
I faced the same decision 4 years ago. I compared a similar hurdle rate to FIRECalc success rates similar to what BCG posted. Yet I still took the annuity. In my case, it was just another way to reduce reliance on market returns and create a more stable 3-legged stool. I traded off some upside potential for more predictability. As I've said before, I'm not the type to risk the whole game to run up the score.
wmc1000
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BCG - I ran your numbers but left the CPI index checked and it returns a 58.1% success rate. Setting the inflation rate to zero IMHO doesn't allow prices to increase yet just because his pension is non-cola'd doesn't mean his expenses never increase.
Running_Man
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The proper treatment is comparing a non-indexed annuity against a lump sum not whether or not $405,000 can withstand a 36K per year inflation adjusted withdrawal 6 years from now. The idea is to understand the effect this one piece will have on the overall portfolio and the chance the portfolio will perform better than the annuity, not the OP's expenses. As such not having inflation is the proper factor in the analysis.
That's not correct. This analysis has nothing to do with OP's actual expenses. It's simply testing whether or not a $405K lump sum could support 30 years of $36.7K non-COLA withdrawals, given historical market returns. Big_Hitter says no way, while offering no analysis. BCG says yes-way and offered a FIRECalc-based analysis.
Having said that, I think there was a mistake in what BCG posted. He ran 30 years which INCLUDED the 6 years prior to starting the annuity, so only 24 years of payments.
I ran it differently... On the start page I put zero expenses, 405K and 36 years. I left the retirement date as 2017. Then I entered off-chart spending of 36.7k starting in 2023 with no inflation. Result was 83.8% and $675K average ending balance. Same result in ********.
Again, as I posted before, I'm not advocating the lump sum. I agree with Running_Man, this is a tough call. I just don't think there's an obvious case in favor of the annuity, especially if you believe that future market returns will be similar to the past.
Big_Hitter
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just to clarify, i said "no way" to the 97% success rate leaving 2M to kids
I'm also not advocating either decision.
I'm also not advocating either decision.
Blue Collar Guy
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I agree with the second half. I know his expenses will go up, thats what the rest of his nest egg is for. But the 405K will only pay out the 36.7K, and it never goes up.Its not 36.7k constant dollars. its 36.7 till death .
OP
OP
flintnational
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What happen to all the predictions of low return for the next 10-20 years. I'm pretty sure some of the same people saying take the lump sum are the same posters talking about low returns. I never said take the annuity, I said depends on the OP overall situation. BCG if you think you can make 405000 last 30 years with 36700 WD rate, i got a gold mine for sale. 36700 WD for 30 years is 9%. I put in 405000 for 30 years, 3% cpi, 60/40 with 5 year treasuries. Guess what 2.6 success rate.
pb4uski
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Here is my FIRECalc result looking that a scenario of taking the lump sum, investing it in a 75/25 portfolio and then beginning $36,700 benefit payments in 6 years.
Spending = $36,700, Portfolio = $405,000. Years is 43 (to age 100 since OP is 57). Then add a non-inflation adjusted pension of $36,700 a year in 2017 and non-inflation adjusted off-chart spending of $36,700 a year beginning in 2023... to offset that withdrawals will not start until 6 years from now when OP is 63. Set inflation to fixed at 0%. All other factors default, so 75/25 portfolio.
There is a 75.0% success rate... or a 25% chance that he will run out of money... vs a 0% chance if he takes the annuity. OTOH, if he takes the lump sum and invests it and things turn out favorable then he might have $3.6 million on average.
How lucky does he feel?
Then, using the Investigate tab, solve for the spending level with 99% success.
P.S. I used the pension/off-chart spending rather than $0 spending and just non-inflation adjusted off-chart spending beginning in 6 years so I could later solve for the spending level that equates to a 99% success rate.... if you use the $0 spending approach then that feature doesn't work.
Spending = $36,700, Portfolio = $405,000. Years is 43 (to age 100 since OP is 57). Then add a non-inflation adjusted pension of $36,700 a year in 2017 and non-inflation adjusted off-chart spending of $36,700 a year beginning in 2023... to offset that withdrawals will not start until 6 years from now when OP is 63. Set inflation to fixed at 0%. All other factors default, so 75/25 portfolio.
There is a 75.0% success rate... or a 25% chance that he will run out of money... vs a 0% chance if he takes the annuity. OTOH, if he takes the lump sum and invests it and things turn out favorable then he might have $3.6 million on average.
How lucky does he feel?
Then, using the Investigate tab, solve for the spending level with 99% success.
P.S. I used the pension/off-chart spending rather than $0 spending and just non-inflation adjusted off-chart spending beginning in 6 years so I could later solve for the spending level that equates to a 99% success rate.... if you use the $0 spending approach then that feature doesn't work.
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pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I messed up... updated to $36,700 above.... lowers success rate from 89.4% to 75%.... generally consistent with Cobra9777's analysis except I used 43 years (to age 100).
This is a good read by Jim Otar on annuities and Zone Strategy.
http://retirementoptimizer.com/articles/Article105.pdf
http://retirementoptimizer.com/articles/Article105.pdf
