Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 12-17-2014, 12:19 AM   #61
Thinks s/he gets paid by the post
Sunset's Avatar
 
Join Date: Jul 2014
Location: Chicago
Posts: 4,726
I think anyone considering the lumpsum vs annuity deal should make sure they compare apples to apples.
Namely, if you take a lumpsum and die the next day, your spouse is protected.
Likewise the only annuity that is similar would be one with 100% spousal protection.

If you have a lot of other assets, then certainly a 50-75% spousal protection is ok, but you are gambling on living a long time.

comparing a single annuity to a lumpsum when you have a spouse is (IMHO) poor comparison as they are vastly different.
__________________

__________________
Sunset is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-17-2014, 02:16 AM   #62
Dryer sheet aficionado
 
Join Date: Jun 2012
Location: Los Angeles, CA
Posts: 48
Quote:
Originally Posted by nun View Post
Well for once a salesman has told the truth, annuities are very different from stocks and bonds. It's understanding the differences when planning for retirement that is important. If you haven't read Wade Pfau's article on annuities in an retirement portfolio this might be interesting.

Wade Pfau's Retirement Researcher Blog: An Efficient Frontier for Retirement Income

The person who buys an annuity will get consistent income and allow other assets to compound, so they don't necessarily end up with less to leave to heirs, especially if they live for a long time. You might look at anSPIA as a replacement for bonds in your portfolio
The person who invests in a bond heavy portfolio will also get consistent income. Look no further than the last 14 years. There was never cause for concern. In fact you could have been taking out about 5 1/2 percent -- not 4%. When stocks fall, money runs to the safety of bonds. That's why you own bonds (in the form of an index ETF) which are liquid unlike an annuity. Then when you get older, if you want you can take out more because you still have your principal. A SPIA will rob heirs of some or all of that inheritance money.
Really the OP needs to consult with a fee-only fiduciary -- not some insurance salesman or non-fiduciary who is also pushing commission-based products in order to earn big commissions. It's one big conflict of interest.
__________________

__________________
ReadySkiDaddy is offline   Reply With Quote
Old 12-17-2014, 07:54 AM   #63
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by ReadySkiDaddy View Post
The person who invests in a bond heavy portfolio will also get consistent income. Look no further than the last 14 years. There was never cause for concern. In fact you could have been taking out about 5 1/2 percent -- not 4%. When stocks fall, money runs to the safety of bonds. That's why you own bonds (in the form of an index ETF) which are liquid unlike an annuity. Then when you get older, if you want you can take out more because you still have your principal. A SPIA will rob heirs of some or all of that inheritance money.
Really the OP needs to consult with a fee-only fiduciary -- not some insurance salesman or non-fiduciary who is also pushing commission-based products in order to earn big commissions. It's one big conflict of interest.
This is all US conventional wisdom from the last 30 years and will probably work just fine in many circumstances as long as you have a sufficient stock percentage. I would not want to rely on a bond fund heavy portfolio in retirement given today's low interest rates and the fall in bond prices that rising rates would produce. You'd have to live off stocks to avoid crystalizing losses. But why do you dismiss the Pfau analysis of SPIAs in retirement income planning and Liability Matching Portfolios? His modeling suggests that you will be able to leave more to your heirs with a combination of stocks and SPIAs than stocks and bonds. A while back I tried to get at what implied interest rate (given an actuarial life span) would allow people to buy an SPIA......it is a bit like comparing apples to oranges as the insurance/life span aspect is crucial to the SPIA......and people start to consider them at 5%. Today's commercial rates are well below that so I can see your skepticism, but I'm not sure you have looked at all the arguments dispassionately.

I would be wary of using bond funds for income given current low interest rates.
__________________
So we beat on, boats against the current, borne back ceaselessly into the past.

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-17-2014, 08:09 AM   #64
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by ReadySkiDaddy View Post
Really the OP needs to consult with a fee-only fiduciary -- not some insurance salesman or non-fiduciary who is also pushing commission-based products in order to earn big commissions. It's one big conflict of interest.
I agree that one would never buy an SPIA from anyone that solicited them. If they have access to TIAA-CREF products I would go there first. People on here have also used Vanguard. With any financial product fees must be minimized.

This thread is actually about whether to take a lump sum buyout from a company pension and its important to know what you are doing in that circumstance. Some of the numbers with those can be quite attractive.

Personally I just took a lump sum from one pension that has a implied interest rate of 5% and bought into another that has a COLA and an implied 7% interest rate if I live to 83.
__________________
So we beat on, boats against the current, borne back ceaselessly into the past.

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-17-2014, 08:37 AM   #65
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,417
Quote:
Originally Posted by ReadySkiDaddy View Post
The person who invests in a bond heavy portfolio will also get consistent income. Look no further than the last 14 years. There was never cause for concern. In fact you could have been taking out about 5 1/2 percent -- not 4%. When stocks fall, money runs to the safety of bonds. That's why you own bonds (in the form of an index ETF) which are liquid unlike an annuity. Then when you get older, if you want you can take out more because you still have your principal. A SPIA will rob heirs of some or all of that inheritance money.
Really the OP needs to consult with a fee-only fiduciary -- not some insurance salesman or non-fiduciary who is also pushing commission-based products in order to earn big commissions. It's one big conflict of interest.
You are suffering from a combination of recency bias and not recognizing sequence of returns risk. The 57 yo OP's choice is a $548k lump sum or $2,700/month pension benefit. That is essentially a 5.9% withdrawal rate (but fixed benefits since withdrawals would not be inflated).

You initially suggested a 67% bonds/33% stocks portfolio. Firecalc indicates that if you have $548k in a 67% bonds/33% equities portfolio and withdraw $32,400 a year (with 0% inflation) that there is a 15.8% chance that you will run out of money (compared to 0% chance for the pension benefit option). Similarly, if the portfolio is 100% bonds then there is a 75.4% chance you will run out of money. If you increase equities to 67% then your probability of running out of money drops to 6.1% but many people would not sleep well at night with the volatility of a 67% equity portfolio.

I'm not a fan of most annuities either as I am comfortable with risk and between SS and a couple pensions a good percent of my living expenses are covered, but there is a place for immediate annuities in retirement planning (and perhaps even deferred annuities), especially for the risk-averse. However, I would agree with your skepticism for most other flavors of annuities.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-17-2014, 09:20 AM   #66
Recycles dryer sheets
Sittingduck's Avatar
 
Join Date: Jan 2013
Location: Northern IL
Posts: 124
Quote:
Originally Posted by nun View Post
Most companies will have to use the IRS segmented interest rates when calculating a buy out....the OP's original number did look far to low to be correct and when they looked again they found that it was actually a lot higher implying an interest rate of around 3.9% which is in line with what would be expected.
The numbers I posted are correct. I believe I will stick with the pension.
The lump sum is a low ball offer. I just was curious from the comments - it seemed like there might be some regulations governing how much they should offer as a lump sum. 10% payout vs the lump is just too good a deal if I feel I am going to last at least 10 to 15 years in retirement. Apparently they can offer what they want.

Thanks all for the discussion folks. It is very helpful in examining different ways to look at pensions / annuities.
__________________
"Friendships must be built upon a solid foundation of alcohol, sarcasm, inappropriateness, and shenanigans"
- Anonymous

I have the nature of a polymath and the memory of a Commodore 64
Sittingduck is offline   Reply With Quote
Old 12-17-2014, 09:45 AM   #67
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Sittingduck View Post
The numbers I posted are correct. I believe I will stick with the pension.
The lump sum is a low ball offer. I just was curious from the comments - it seemed like there might be some regulations governing how much they should offer as a lump sum. 10% payout vs the lump is just too good a deal if I feel I am going to last at least 10 to 15 years in retirement. Apparently they can offer what they want.

Thanks all for the discussion folks. It is very helpful in examining different ways to look at pensions / annuities.
There are actually IRS rules and rates that govern many pension plans....who is offering you such a good deal on the pension and such a bad deal on the lump sum? and why?
__________________
So we beat on, boats against the current, borne back ceaselessly into the past.

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-17-2014, 11:43 AM   #68
Recycles dryer sheets
Sittingduck's Avatar
 
Join Date: Jan 2013
Location: Northern IL
Posts: 124
Quote:
Originally Posted by nun View Post
There are actually IRS rules and rates that govern many pension plans....who is offering you such a good deal on the pension and such a bad deal on the lump sum? and why?
I am a reluctant to identify the company, but it is a global, multi-market component of the DJIA. It is cash rich, and has done an excellent job funding their pension plans ie at 103%

Having said that, management has been on a slash and burn cost cutting rampage since the recession. They stopped offering pension plans about 7-8 years ago and used the Affordable Care Act as a way to deleverage from retiree health care (they now offer a moderate lump sum in a HSA when you retire).

They just announced the lump sum payout option. In talking with Hewitt who handles their benefits to confirm the payout sum, I got a little bit of sales job on how attractive it was. They have been totally neutral in the past and I am getting the feeling that they have been directed to "push" the lump sum.

I was disappointed in the amount and can only assume they are hoping they get some people to buy in so they don't have to keep coughing up the
$100M+ contributions to the fund every year. I definitely need the income
"floor" as Midpack's questionnaire brought up - at least until SS kicks in. I am sticking with the pension option.

What gets me is a while back I heard someone from HR state how the average company retiree only draws their pension for a less than 2 years.
(Up until the last few years, it has been a company they had to push people out the door at mandatory retirement age. I can't wait to get out now.)
Maybe their lump sum figure is based on this assumption of low payouts?
__________________
"Friendships must be built upon a solid foundation of alcohol, sarcasm, inappropriateness, and shenanigans"
- Anonymous

I have the nature of a polymath and the memory of a Commodore 64
Sittingduck is offline   Reply With Quote
Old 12-17-2014, 11:51 AM   #69
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
what was the "relative value" of the lump sum to the immediate annuity they offered you? it should be in the packet
__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Old 12-17-2014, 02:15 PM   #70
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Sittingduck, the numbers you gave make the pension the way to go if you are in reasonable health. Something still does not add up though because the pension and lump sum amount don't line up with the IRS rates that should be used to calculate the lump sum. These are now based on 30 year corporate bonds. I would ask HR what rates were used to calculate the lump sum. There might even be something about it in your buy out package, there was in mine that I got from UTC. They use the latest IRS rates and those rates, my pension, life expectancy and lump sum all hang together. Yours should too.
__________________
So we beat on, boats against the current, borne back ceaselessly into the past.

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-17-2014, 02:22 PM   #71
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
the lump sum may be based on a deferred to 65 annuity while the immediate annuity is subsidized - that's why I was asking about the relative value that must be disclosed
__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Old 12-17-2014, 03:05 PM   #72
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Big_Hitter View Post
the lump sum may be based on a deferred to 65 annuity while the immediate annuity is subsidized - that's why I was asking about the relative value that must be disclosed
Yes, I agree. If the lump sum is payable now and the pension is deferred then the numbers could add up. But both being available on the same date just doesn't add up.
__________________
So we beat on, boats against the current, borne back ceaselessly into the past.

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-17-2014, 03:27 PM   #73
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
The lump sum may be the actuarial equivalent of a deferred to 65 annuity (calculated using IRS segment rates) - that's why there is the "relative value" disclosure. Note that both are payable immediately.


The minimum lump sum payable is the AE of the annuity payable at NRD. Nothing says that the lump sum has to include the value of an early retirement subsidy unless that's specified in the plan document.
__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Old 12-17-2014, 04:28 PM   #74
Recycles dryer sheets
Sittingduck's Avatar
 
Join Date: Jan 2013
Location: Northern IL
Posts: 124
Quote:
Originally Posted by nun View Post
Yes, I agree. If the lump sum is payable now and the pension is deferred then the numbers could add up. But both being available on the same date just doesn't add up.
I talked to Hewitt again requesting how the calculation was done.
(We really don't have an HR dept anymore - everything is outsourced.)

The first level rep couldn't tell me and is processing my request. Will report back when I hear. Just knowing there are established guidelines for calculating lump sumps has my curiosity peaked now.

Thanks again - it's very helpful.
__________________
"Friendships must be built upon a solid foundation of alcohol, sarcasm, inappropriateness, and shenanigans"
- Anonymous

I have the nature of a polymath and the memory of a Commodore 64
Sittingduck is offline   Reply With Quote
Old 12-17-2014, 04:42 PM   #75
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Big_Hitter View Post


The minimum lump sum payable is the AE of the annuity payable at NRD. Nothing says that the lump sum has to include the value of an early retirement subsidy unless that's specified in the plan document.
If that's so then Sittingduck should take the pension.

For those interested here are the IRS rates used to calculate lump sum payouts

Minimum Present Value Segment Rates

My ex employer's recent lump sum offer used the October 2014 rates. I'm 53.5 and they offered $35k or an annual pension of $2.2k right now or I could just keep my vested accrued benefit of $5.6k when I reach 65. The numbers hang together. I took the lump sum because I already have more than enough SS and other COLAed pension income set up.
__________________
So we beat on, boats against the current, borne back ceaselessly into the past.

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
upcoming changes
Old 12-17-2014, 05:14 PM   #76
Recycles dryer sheets
Louis2's Avatar
 
Join Date: Jan 2014
Posts: 54
upcoming changes

As mentioned above, I think companies are required to use the IRS information for mortality tables. I did read however that the Society of Actuaries released a study updating mortality rates for the first time since 2000. (Americans are living almost 2 years longer). Some companies are moving out in 2014 to recognized increases in pension liabilities, while others will likely wait until the IRS released new tables that reflect these findings, in 2016 or 2017.

So it seems that a buyout using TODAYS IRS tables may be cheaper than seeing the new rates take effect.

The article also mentions higher premiums being paid to PBGC as another reason to get people off the books and onto an annuity.

Link to the article:

Updated Mortality Tables to Boost Pension Liabilities

Separately, it seems to me that if your pension calculation is tied to US Treasury 30-year yield (or similar) that now might be a "cheap" time for companies to unload, although maybe this is a wash between the company and the insurance company backing the annuity.

Anyway, interesting.
__________________
I reserve the right to change my mind as I get smarter.
Louis2 is offline   Reply With Quote
Old 12-22-2014, 11:22 PM   #77
Recycles dryer sheets
 
Join Date: May 2014
Location: Yuma AZ
Posts: 270
Aspects to consider:

If you take the lump, do you pay tax on the entire distribution in one year, for a net one time yield of?

If you take the monthly, how long does it continue if you die?

If you take the lump, and purchase an annuity, what are the terms for the end of the annuity?

What is your health?

Do you need/want to leave assets to heirs?

Personal babble:

$364,000 (assumed full payment without tax). We've bought rentals with numbers like the following:

In early 2013 we purchased a rental house for $77,500. It is a 2 bedroom, 1 bath, 1 car garage, red brick structure. It is rented for $805/month. After tax, insurance, etc. its providing around $7000 a year ($583/month). The net rent represents around 9% annual "cash flow", with (hopefully) additional inflation return in the value of the property.
$364,000 divided by $77,500 would be 4.7 such units. Call it just 4 units, with $54,000 of spare cash in an account. It is "only" $2332/month net income. Yes, less than a $2,700 monthly pension. But how does owning 4 physical assets, with potential for rent increases, which can be left to heirs compare to the potential pension?
__________________
unno2002 is offline   Reply With Quote
Old 12-23-2014, 11:19 AM   #78
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
unless you roll it over that lump sum is generally taxable with a 10% excise tax in certain situations
__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Old 12-23-2014, 11:19 AM   #79
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
(please don't take that as tax advice)
__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Old 12-27-2014, 07:51 PM   #80
Confused about dryer sheets
 
Join Date: Dec 2014
Location: Martinez
Posts: 2
Quote:
Originally Posted by unno2002 View Post
$364,000 (assumed full payment without tax). We've bought rentals with numbers like the following:

In early 2013 we purchased a rental house for $77,500. It is a 2 bedroom, 1 bath, 1 car garage, red brick structure. It is rented for $805/month. After tax, insurance, etc. its providing around $7000 a year ($583/month). The net rent represents around 9% annual "cash flow", with (hopefully) additional inflation return in the value of the property.
$364,000 divided by $77,500 would be 4.7 such units. Call it just 4 units, with $54,000 of spare cash in an account. It is "only" $2332/month net income. Yes, less than a $2,700 monthly pension. But how does owning 4 physical assets, with potential for rent increases, which can be left to heirs compare to the potential pension?

Just curious - where are you finding properties like that?
__________________

__________________
kgryfon is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Lump sum to invest, DCA in or go lump? Olav23 FIRE and Money 4 03-03-2007 04:22 PM
Lump Sum or Not? *Should.... Tommy_Dolitte Young Dreamers 4 07-25-2004 04:53 PM
Lump sum investment Billy FIRE and Money 7 04-17-2004 05:13 PM
Annuity vs Lump Sum Pension moguls FIRE and Money 5 05-26-2003 03:09 PM

 

 
All times are GMT -6. The time now is 09:47 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.