Help! Annuity or Lump Sum Decision

[flintnational]

Quote:

Originally Posted by CRLLS 4th) now..... the way the pensions are currently running, in some cases, the PBGC(?) is allowing pensions to short pay everyone, even those already collecting before they default. This prevents the pensions from going bust and defaulting to the PBGC. So future payment at promised levels is no guarantee anymore. I'll take my lump sum at 75(ish)% now, thank you.

Thanks. I was not aware of this.

FN

[flintnational]

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Originally Posted by GalaxyBoy Bogleheads wiki has this on the subject: https://www.bogleheads.org/wiki/Lump_sum_vs_pension

The bogleheads wiki was helpful. The article's decision tree and my responses follow.

"Is your offer a fair deal? In other words, can your offered lump sum buy the pension? No
Have you considered delaying your claim on Social Security, and how might this lump sum enable you to do so? Not needed
What is your opinion on your own mortality? Do you want to plan beyond a life expectancy of 83 years? Yes, one or both of us will likely make it.
What do you think of the viability of the provider, be it your company for your pension, your insurer for your annuity, or the Federal Government for Social Security? Average risk
Have you considered and planned for the income streams you will need in retirement? Yes, the annuity offsets riskier stock investments
Do you think you can do better with a lump sum by investing it yourself? Better than a guaranteed income stream for the rest of your life?" No because of the current high stock allocation of other assets

FN

[racy]

Personally, I'd take the lump. I'd be nervous about the company's ability to honor the pension (any company's ability). The fact that companies are offering buyouts, and some are off-loading their pension plans to insurance companies, makes me think they're concerned, too. I'd take control of the money myself. Just my 2 cents...

[Running_Man]

The calculation for this is straightforward. The hurdle rate is 5.75%, which is the amount the 405K would have to earn each year in order to begin taking 36K per year at age 63 until you turn 98 - 35 years. If you earn over the 5.75% you will do better taking the lump sum, if you and your wife die before 35 years it would have been the better financial decision. If you earn under 5.75% it will be unfavorable.

If you earn 7% by year 35 you are 1.6 million dollars to the better

[Running_Man]

Quote:

Originally Posted by racy Personally, I'd take the lump. I'd be nervous about the company's ability to honor the pension (any company's ability). The fact that companies are offering buyouts, and some are off-loading their pension plans to insurance companies, makes me think they're concerned, too. I'd take control of the money myself. Just my 2 cents...

The actual reasons companies look to offload pensions are employees overwhelmingly will choose a lump sum over the annuity resulting in 30 - 40 percent of the accrued liability being reversed for the company's favor. Financially it is a no-brainer for the company. The long term feasibility of the pension plan is no factor in offloading them. In fact most companies that have pension plans that are going to fail are not offered buyouts because the companies have to have the funds in the pension plan to make them whole to the insurance companies or pay the employees. So that most of the buyouts result in income going to the companies with the best funded pensions.

However, those corporate decisions should have no influence to an individual deciding whether or not to take the lump sum or not, what affects the individual is much different than the myriad of reporting rules and regulations a company utilize and file to value their obligations. The simple regulation costs of holding a pension is typically over 1% of the asset value of the pension plan for most small- mid size companies and you free up much corporate time and reporting just by getting rid of the pensions

[flintnational]

Quote:

Originally Posted by Running_Man The calculation for this is straightforward. The hurdle rate is 5.75%, which is the amount the 405K would have to earn each year in order to begin taking 36K per year at age 63 until you turn 98 - 35 years. If you earn over the 5.75% you will do better taking the lump sum, if you and your wife die before 35 years it would have been the better financial decision. If you earn under 5.75% it will be unfavorable. If you earn 7% by year 35 you are 1.6 million dollars to the better

Thanks Running Man. Thats a good way to look at this.

FN

[Jerry1]

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Originally Posted by flintnational The bogleheads wiki was helpful. The article's decision tree and my responses follow. "Is your offer a fair deal? In other words, can your offered lump sum buy the pension? No Have you considered delaying your claim on Social Security, and how might this lump sum enable you to do so? Not needed What is your opinion on your own mortality? Do you want to plan beyond a life expectancy of 83 years? Yes, one or both of us will likely make it. What do you think of the viability of the provider, be it your company for your pension, your insurer for your annuity, or the Federal Government for Social Security? Average risk Have you considered and planned for the income streams you will need in retirement? Yes, the annuity offsets riskier stock investments Do you think you can do better with a lump sum by investing it yourself? Better than a guaranteed income stream for the rest of your life?" No because of the current high stock allocation of other assets FN

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.

[flintnational]

Quote:

Originally Posted by Jerry1 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.

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

[flintnational]

Quote:

Originally Posted by GalaxyBoy Bogleheads wiki has this on the subject: https://www.bogleheads.org/wiki/Lump_sum_vs_pension

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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Originally Posted by alaska55 +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 .

[Big_Hitter]

Quote:

Originally Posted by Blue Collar Guy 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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Originally Posted by Big_Hitter that's either bad math or a bad model

?

[Big_Hitter]

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Originally Posted by Blue Collar Guy ?

I think you input something wrong

[Blue Collar Guy]

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Originally Posted by Big_Hitter I think you input something wrong

let me retry , hahaha.

[Big_Hitter]

I would expect you'd get something around 50% success rate

[Blue Collar Guy]

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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Originally Posted by Big_Hitter that's either bad math or a bad model

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]

Quote:

Originally Posted by Running_Man 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.

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

[Cobra9777]

Quote:

Originally Posted by Running_Man 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.

+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]

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.