lump sum

[Midpack]

As all the experts are here on this, I thought I would throw mine out there.
I kept this with the Utility Co when I left as it had a 5.25% return.
For 2015 it will grow at 5%. Most everyone else rolled it into their IRA.
But I like the safe return. I can project it out into the future, but here is what it looks like if I were to take it today at 53. Non COLA. / Un Cola.
This was a huge part of the retirement plan when I joined the Co in 84.
Then it was whittled down through the yrs. based on age rather than yrs of service. Or a combination of both. Point systems etc.

Cash balance $267,959.14

annuity option.
Spouse`s Pension: $1,329.84 / $664.92
75% Contingent Annuity: $1,241.54 / $931.16
100% Contingent Annuity: $1,214.68 / $1,214.68

I have talked about this here in the past, still undecided as to which way to go.
How does this look compared to most? About average? Below average?
Thanks!

I'd encourage you to look for yourself, starting here https://www.immediateannuities.com/.

While I don't think anyone would deliberately give you bad advice, there are some "experts" here who provide [-]outright wrong[/-] poorly thought out answers some times. I'd want to "see the work" myself if it was me, too important to trust to strangers...

 

[almost there]

Thanks!
Its a hair better than the link. $154.00 / mo.
Back to square one.
Funny it only took 29.6667 yrs. to acquire.

 

[nun]

As all the experts are here on this, I thought I would throw mine out there.
I kept this with the Utility Co when I left as it had a 5.25% return.
For 2015 it will grow at 5%. Most everyone else rolled it into their IRA.
But I like the safe return. I can project it out into the future, but here is what it looks like if I were to take it today at 53. Non COLA. / Un Cola.
This was a huge part of the retirement plan when I joined the Co in 84.
Then it was whittled down through the yrs. based on age rather than yrs of service. Or a combination of both. Point systems etc.

Cash balance $267,959.14

annuity option.
Spouse`s Pension: $1,329.84 / $664.92
75% Contingent Annuity: $1,241.54 / $931.16
100% Contingent Annuity: $1,214.68 / $1,214.68

I have talked about this here in the past, still undecided as to which way to go.
How does this look compared to most? About average? Below average?
Thanks!

What you have sounds a bit like TIAA-Traditional, can you keep it and just take out annual interest or systematic withdrawals and pass the principal on to your heirs? That would be a nice option.

Your age is needed to do any annuity calculation. Check out
https://www.immediateannuities.com/ to see if your numbers are good. Or use a present value calculator.

 

[Big_Hitter]

one thing to note - a lump sum equivalent is not a present value of an annuity certain to life expectancy - it's a discounted mathematical expectation over the probability of survival to each age

 

[nun]

one thing to note - a lump sum equivalent is not a present value of an annuity certain to life expectancy - it's a discounted mathematical expectation over the probability of survival to each age

For the person faced with the choice it's useful to think of the interest rate you'd need to get on the lump sum to generate the income up to a certain age. It allows for some comparison, but of course you need to factor in the different nature of an annuity compared to a self managed portfolio.

 

[ReadySkiDaddy]

I am NOT a fan of annuities by any means, but not all annuities are created equal, so your generalization may not apply. With annuities you're always paying for the privilege, but some are ripoffs and others not as much. You have to look at each case.

Sometimes people are offered annuity monthly payouts that are far more valuable than the lump sum option they're offered, for whatever reason the institution does not want to pony up a lump sum so they make the monthly payout offer clearly better for the recipient.

"Avoid annuities" may not apply in that situation...

Most people would consider immediate annuities one of the few that CAN be a "better deal." Variable annuities are more often considered "smoke and mirrors."

They offer high INTEREST payments but their PRINCIPAL gets eroded. Their return on investment winds up being low. Really it's a case of "chasing yield". Investors are focused on the annual payment rate but don't realize that they need to keep their eye on the BALL (their principal). Immediate annuities wind up screwing over heirs. And if the annuitant ever needs to get back that money they are screwed. Can't get it. I would never screw over my heirs in exchange for an inferior ROI, kissing my principal goodbye, and screwing over my heirs.
Annuities are usually sold to investors who are ignorant of how a diversified portfolio performs over time. Nothing wrong with earning 5.6% from 1999 through 2013 AND still having your original principal (unlike the immediate annuity).

 

[golfnut]

That's good advice....I own psst Wellesley.....but that would not stop me from having a pension or annuity. Annuities are not investments, they are insurance, so to compare them with Wellesley is not very useful.

I only mentioned Wellesley as a good (useful) option for somebody who opts to take a lump sum.

 

[nun]

They offer high INTEREST payments but their PRINCIPAL gets eroded. Their return on investment winds up being low. Really it's a case of "chasing yield". Investors are focused on the annual payment rate but don't realize that they need to keep their eye on the BALL (their principal). Immediate annuities wind up screwing over heirs. And if the annuitant ever needs to get back that money they are screwed. Can't get it. I would never screw over my heirs in exchange for an inferior ROI, kissing my principal goodbye, and screwing over my heirs.
Annuities are usually sold to investors who are ignorant of how a diversified portfolio performs over time. Nothing wrong with earning 5.6% from 1999 through 2013 AND still having your original principal (unlike the immediate annuity).

Annuities provide an income stream, the rest of your portfolio can grow and be left to your heirs. Annuities have no principal, you buy them and for that you get an income stream for life or some contracted period, they have been shown to be interesting alternatives to bonds and bond funds in a portfolio.

Not all annuities/pensions are equal, I just cashed one in that did not have a COLA and will be buying one with a COLA. I would certainly not annutize my entire portfolio, but up to 20% to provide a foundation of income is worth considering. I advise you to read the recent analysis of this topic by the likes of Wade Pfau.

 

[ReadySkiDaddy]

Annuities are a place where you put your money. It really doesn't matter how you want to classify them. "Annuities should not be compared to bonds and stocks" is what insurance salesmen say to eliminate the competition. How convenient! When you put your money somewhere you want LIQUIDITY, lower taxes, heirs to benefit most and the BEST return for the amount of risk you are taking. Investing in 67% AGG and 33% VOO is hardly going to drop to zero. That's the point of the chart that I posted. If you only took out 5.5% per year, after 14 years you STILL HAD your original principal, then you could take out more per year. AGG and VOO provide an income stream and if it's not enough you simply sell off a portion of your ETF's which are GROWING. Simple.

 

[nun]

Annuities are a place where you put your money. It really doesn't matter how you want to classify them. "Annuities should not be compared to bonds and stocks" is what insurance salesmen say to eliminate the competition. How convenient! When you put your money somewhere you want LIQUIDITY, lower taxes, heirs to benefit most and the BEST return for the amount of risk you are taking. Investing in 67% AGG and 33% VOO is hardly going to drop to zero. That's the point of the chart that I posted. If you only took out 5.5% per year, after 14 years you STILL HAD your original principal, then you could take out more per year. AGG and VOO provide an income stream and if it's not enough you simply sell off a portion of your ETF's which are GROWING. Simple.

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

 

[Sunset]

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.

 

[ReadySkiDaddy]

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.

 

[nun]

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.

 

[nun]

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.

 

[pb4uski]

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.

 

[Sittingduck]

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.

 

[nun]

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?

 

[Sittingduck]

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?

 

[Big_Hitter]

what was the "relative value" of the lump sum to the immediate annuity they offered you? it should be in the packet

 

[nun]

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.

 

[Big_Hitter]

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

 

[nun]

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.

 

[Big_Hitter]

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.

 

[Sittingduck]

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.

 

[nun]

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.