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lump sum
Old 12-12-2014, 10:19 AM   #1
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lump sum

I am 57. My pension lump sum would be $364,000 or I can get a monthly payout of $2,700. At first I thought the lump sum is the way to go. However, my calculations get that 2,700 a month is = to $32,400 per year which is about 9% a year return on the $364,000. That is way better than what I can get investing .. at least more consistent. Anyone else making this type of choice ?
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Old 12-12-2014, 10:26 AM   #2
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Is the monthly payout COLA protected? Can you get it TODAY? Then I would certainly say that the monthly is a better choice...but there are LOTS of variables out there. How much are your monthly expenses, etc, etc? But on the surface...pension.
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Old 12-12-2014, 10:30 AM   #3
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You are making an often made mistake. That 9% you calculated is the pay out rate and is a combination of growth and return of capital. Your actual investment return will be less. If we assume that you will live to the age given by the IRS life expectancy tables you will live another 28 years. Putting that into a present value calculation your pension represents an interest rate of 7.8%....still great! If you are in good health I would take the pension rather than the lump sum....although your other assets should also be considered.

FYI I just cashed in a small pension that had a 5% interest rate, but will be buying into a pension with a COLA as it has a growth rate of 7% assuming 3% inflation and that I live to 84.
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Old 12-12-2014, 10:42 AM   #4
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There are two issue to consider:

1) what is the net present value of the expected cash flow of the annuity and how does that compare to the lump sum. My "back of the envelope" assessment has this cash flow (to an expected mortality at age 85) generating an internal rate of return at ~7.9%. No way you can reliably get that return, safely anywhere. (This assumes the annuity company has the ability to pay...).

2) Is there a real need for the lump sum to cover an anticipated large expense? And the opposite, is the "longevity insurance" an important consideration...


I would take this annuity in a heartbeat!
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Old 12-12-2014, 10:47 AM   #5
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Originally Posted by robertf57 View Post
There are two issue to consider:

1) what is the net present value of the expected cash flow of the annuity and how does that compare to the lump sum. My "back of the envelope" assessment has this cash flow (to an expected mortality at age 85) generating an internal rate of return at ~7.9%. No way you can reliably get that return, safely anywhere. (This assumes the annuity company has the ability to pay...).

2) Is there a real need for the lump sum to cover an anticipated large expense? And the opposite, is the "longevity insurance" an important consideration...

I would take this annuity in a heartbeat!
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Regarding nun's post, yes, some of the annuity payments are return of capital. But since you do not own the annuity, and the annuity in one is taxed in your hands as income, that is immaterial to your decision. The long term viability of the annuity payer is the only question that matters. All else equal, this payout rate is excellent.
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Old 12-12-2014, 10:53 AM   #6
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My "back of the envelope" assessment has this cash flow (to an expected mortality at age 85) generating an internal rate of return at ~7.9%. No way you can reliably get that return, safely anywhere. (This assumes the annuity company has the ability to pay...).
The worry I have is that this pension is so far above the usual rates. Who is running this pension? My state pension has an interest rate of 5.5% which goes up to an equivalent of 7% if I get a 3% annual COLA....I can't imaging getting much better than that anywhere......so 7.9% as interest sounds very rich to me.
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Old 12-12-2014, 11:06 AM   #7
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Many here have faced the same decision. The first thing to do is get quotes for what payout you could get if you purchased an annuity yourself (with the same terms as the company monthly payout) with the lump sum amount. Many here start with https://www.immediateannuities.com

All else equal, if the payout you can get by buying an annuity yourself is significantly higher, you should take the lump sum. However, if the company "monthly payout" is significantly higher, you might want to take the company payout. That appears to be the case in your example, so reading further may be of no value for you.

I faced exactly the same choice 3+ years ago. The payouts were essentially a wash, so I took the lump sum. Retail annuity payouts are historically low now, so you will be able to buy a higher paying annuity when interest rates increase (when is subject to debate). If all goes well I will never buy an annuity, but I haven't ruled it out, time will tell.

And you can always buy an annuity if you take a lump sum - next month, next year to 15 years from now. If you take the monthly payout, your options cease.

Best of luck.
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Old 12-12-2014, 11:17 AM   #8
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And you can always buy an annuity if you take a lump sum - next month, next year to 15 years from now. If you take the monthly payout, your options cease.
The OP will have to wait a long time to buy an annuity with better terms....in fact their terms sound almost too good.
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Old 12-12-2014, 11:24 AM   #9
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The OP will have to wait a long time to buy an annuity with better terms....in fact their terms sound almost too good.
I don't disagree, as noted in my second paragraph.

But I know I'd always rather understand why myself, so I was attempting to offer 'how to fish' instead of 'giving a fish' to the OP or other readers. Seems more in the spirit of this site, I've learned a lot here over the years from other members teaching.
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Old 12-12-2014, 11:32 AM   #10
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Originally Posted by Joe0401 View Post
I am 57. My pension lump sum would be $364,000 or I can get a monthly payout of $2,700. At first I thought the lump sum is the way to go. However, my calculations get that 2,700 a month is = to $32,400 per year which is about 9% a year return on the $364,000. That is way better than what I can get investing .. at least more consistent. Anyone else making this type of choice ?
Is the lump sum payout calculated with the IRS interest rates? something just doesn't add up with the numbers you have given.
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Old 12-12-2014, 11:33 AM   #11
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If it's a qualified plan the packet should show a "relative value" of the lump sum to the annuity. What is it?


It's possible that the lump sum is based on a deferred to 65 annuity factor and the immediate annuity is subsidized, or it's a plan not subject to 417(e).
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Old 12-12-2014, 01:22 PM   #12
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The numbers I provided are for retiring 11/2015 .. If I wait until 11/2016, then the lump sum value is 414,461 with a monthly payout of 3,167. Again, my calculations come out to 9% on the 414,461. I did talk to a financial advisor who says to take the lump sum (of course). But when I ask if he can give me that type of return, he really did not have an answer. I did verify these numbers with our HR area.

This is my first time in this forum and I appreciate the answers. There is so much valuable information here and I commend those who participate and maintain it.
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Old 12-12-2014, 01:32 PM   #13
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is this financial advisor credentialed?
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Old 12-12-2014, 02:08 PM   #14
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is this financial advisor credentialed?

Yes


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Old 12-12-2014, 02:37 PM   #15
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is this financial advisor credentialed?
I read "certifiable" there first. Seriously what FA would do other that suggest you take the monthly income with the deal you have described. Did the FA question the numbers? I'm still dubious about the numbers as they are just too good. Any pension fund with those payouts isn't organized in a sustainable way. What is the company? How many participants? It isn't following IRS rules and regs.
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Old 12-12-2014, 03:14 PM   #16
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there are qualified plans that aren't subject to 417(e) lump sum rules - church and public sector plans for example
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Old 12-12-2014, 04:04 PM   #17
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there are qualified plans that aren't subject to 417(e) lump sum rules - church and public sector plans for example
Yes, I have one of those plans,. It's a state plan, but nowhere near as generous as the OP's plan. Even if the plan is exempt from the IRS rules for calculating lump sums, this plan looks to be unsustainable without large amounts of risk or alternative funding.
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Old 12-12-2014, 04:16 PM   #18
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I'm not sure why you would think it would be unsustainable - the funding is probably based on the assumption that retirees take the life annuity - in his case the $32,400 a year. The benefit levels are probably based on his pay and service with that plan sponsor and the plan could require employee contributions as part of the funding.
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Old 12-12-2014, 04:28 PM   #19
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My wife and I have a couple lump sums we will be trading for annuities:

Mine is $12,000 per year for $123,000 non cola starting at age 51.

Hers is $12,000 per year for $200,000 with cola starting at age 50.

I think your deal is good and very similar to mine.
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Old 12-12-2014, 04:34 PM   #20
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Originally Posted by Joe0401 View Post
The numbers I provided are for retiring 11/2015 .. If I wait until 11/2016, then the lump sum value is 414,461 with a monthly payout of 3,167. Again, my calculations come out to 9% on the 414,461. I did talk to a financial advisor who says to take the lump sum (of course). But when I ask if he can give me that type of return, he really did not have an answer. I did verify these numbers with our HR area.

This is my first time in this forum and I appreciate the answers. There is so much valuable information here and I commend those who participate and maintain it.
I see your math, but I doubt they can buy an annuity with a 9% payout (investment return and return of capital). The two offers are on a different basis.

And without more detail, the monthly payout they seem to be offering appears to be way more generous than the lump sum. So I would be very suspicious of the FA's recommendation to take the lump sum, it's clearly in his/her best interest not yours.

Like others here, it sounds like we're missing some information.
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