Lump Sum or Annuity

[Moneygrubber]

I plan on ER ing at 53 in the Fal, my dilemma is Ls vs annuity for my pension. My lump would be 364k or 1848 per month with 100% survivor for the wife. We are from a long lived family. I have a large taxable portfolio and do not need the annuity income to survive. My tbinking us to invest the ls for 10 years and then take 4% withdrawals and maintain the principal. Fidelity's RIP shows 4.1 mil remaining with lump vs 5.1 mil left with annuity at end of plan with 90% success rate. No kids, no need to worry about legacy issues. Seems lump sum is the way to go but still agonize over the choice. Thoughts appreciated.

 

[Animorph]

I plan on ER ing at 53 in the Fal, my dilemma is Ls vs annuity for my pension. My lump would be 364k or 1848 per month with 100% survivor for the wife. We are from a long lived family. I have a large taxable portfolio and do not need the annuity income to survive. My tbinking us to invest the ls for 10 years and then take 4% withdrawals and maintain the principal. Fidelity's RIP shows 4.1 mil remaining with lump vs 5.1 mil left with annuity at end of plan with 90% success rate. No kids, no need to worry about legacy issues. Seems lump sum is the way to go but still agonize over the choice. Thoughts appreciated.

Check how it compares with annuities from Vanguard or other online sources. My quick calc says it's a 6.1% payout, which seems pretty good, if it is starting soon.

Did you mean $4.1M left with annuity and $5.1M with lump sum? Otherwise it seems like the annuity wins with more left over at the end.

 

[Moneygrubber]

4.1 left with lump sum, but was leaning in ls direction since annuity is fixed, taxed as ordinary income and not indexed to inflation.

 

[brett]

Since the number has a 100 percent survivor pension, you need to consider your spouse's age. Her age could have a significant bearing on the equation.

 

[Moneygrubber]

She is 53, the RIP assumes poor market performance , under average returns the lump sum blows away the annuity, i guess the annuity would be downside protection.

 

[heeyy_joe]

Annuity.

 

[David1961]

Normally, I'd say go with the LS. But having a large taxable portfolio, you could think about breaking your funds into two buckets. The first bucket is your existing portfolio which you could manage as a lump sum. For the second bucket, you could take the annuity when you ER and that way, you'd have a stream of income so you wouldn't have to withdraw as much from your portfolio. Also, it would give you some protection from a down market.

In the end, though, it has to be a decision that you feel comfortable with. It sounds like you cannot go wrong either way based on the Fidelity RIP.

 

[Midpack]

She is 53, the RIP assumes poor market performance , under average returns the lump sum blows away the annuity, i guess the annuity would be downside protection.

Then I would take the lump sum and roll it into a tax sheltered account. Annuities are very expensive today with historically low yields/payouts. They will improve eventually, and even if they don't soon enough, you will still pay less for the same monthly payout simply because you're annuitizing over fewer years as you age. You can buy an annuity (with then lump sum) next month, next year or 20 years from now if you like. If you buy now, you're locked in (with low yields).

I took a lump sum for much the same reasons...

 

[Moneygrubber]

Mid pack
I was thinking of doing that, what gives me pause is the 6% payout I would have now on the LS but I thought if I invested the LS for 10 years then bought an annuity or withdrew at 3
Or 4% I would be ahead of the game . I think a multi year down market would derail this so my quandary continues..

 

[Midpack]

Mid pack
I was thinking of doing that, what gives me pause is the 6% payout I would have now on the LS but I thought if I invested the LS for 10 years then bought an annuity or withdrew at 3
Or 4% I would be ahead of the game . I think a multi year down market would derail this so my quandary continues..

Then buy an annuity if you prefer, there is no right answer for everyone.

I don't know what terms you're using to evaluate the annuity offered, but I'm sure you realize the 6% payout is not return, it's return AND return of principal.

As for a "multi-year down market" - you could invest the lump sum in CDs or something safe. And of course your portfolio is exposed to downside risk as well, not restricted to the lump sum by any means...

Best of luck whatever you decide.

 

[Tandemlovers]

Moneygrubber, my husband and I were faced with a similar decision, and had assumed
for years that we would take the lump sum.

This post on the bogleheads forum changed our minds:

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=129811

The title of the post is "10 reasons to take your pension annuity over a lump sum"
by g$$, in case the post doesn't load properly.

Good luck in your decision!

 

[Dave J]

My wife had a similar question from retirement package severance pay 10 years ago. We took the lump sum and I have wished for years we had taken the annuity.
My vote is annuity.

 

[Moneygrubber]

I am sure I will be going back and forth right until the end.

 

[robnplunder]

If the money was a critical part of my RE, I'd take a lump sum to make it work harder for me. If not (Mr. Moneygrubber's case), I'd take annuity option and live more aggressively (take more investment risks, splurge, etc).

Seems like you have good problem to have, and either option will work anyway.

 

[Moneygrubber]

Thats what the financial planner said, either works so i have to find where my comfort zone lies.

 

[Free To Canoe]

An on line annuity quote purchased with your lump sum shows you could only get $1510 per month vs your $1848.
Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com

How is the lump sum taxed at the federal level? Is there a provision that allows you to spread it out over years? Otherwise, that could be a killer.

I vote annuity.

 

[Midpack]

I assumed the lump sum was from a 401k in which case it could be rolled into an IRA to defer and control taxes, but I notice the OP didn't state where the lump sum originates.

 

[Moneygrubber]

The lump sum would have to stay in rollover land until 59.5 I am 53. Unlikely I would touch it then as I have a taxable portfolio of 1mil that can easily take me to 66 or. 67 plus large inheritances that I never included plus 2 mil in iras and 401ks

 

[Moneygrubber]

The LS originated fr my employee pension funded by a large electric utility I can take the annuity or LS when I go

 

[daylatedollarshort]

We took annuities for our pensions. They give us diversified, PBGC corp insured income streams independent from our portfolio, stock market returns, interest rates and our own money management skills. We looked at other factors beyond just the terminal values.

Unless your annual expenses are really high, I wouldn't agonize over the decision. You've got a very high net worth compared to most people either way you go.

 

[Animorph]

For a cost of $364k and a monthly benefit of $1848, Excel says you have a negative return until you've received payments for 16.5 years. At 20 years you have made 2.04%. At 25 years it's 3.63%. At 30 years it's 4.52%. At 35 years it's 5.05%. At 40 years it's 5.39%. At 100 years it's 6.08%.

So if you can do better, take the lump sum. Otherwise take the annuity.

 

[rayinpenn]

I had this lump sum vs annuity conversation with good friend recently the consensus was
1. Annuities may make sense if you partner isn't financially astute and you are worried that they couldn't properly manage a lump sum.
2. Inflation is the enemy of the fixed annuity and it exposes the annuity holder to a tremendous an often under appreciated amount of risk
3. Purchasing a portfolio of dividend stocks may prove to be a better alternative. The ETF IDV pays roughly 4.5% - if you lived on the dividends there is no reason you couldn't live to be 100 and be financially fit. Most importantly the dividends and principle will grow over time.

 

[racy]

Thats what the financial planner said, either works so i have to find where my comfort zone lies.

It doesn't have to be either/or: it could be both. You could take the lump now and annuitize half of it at a time of your choosing. (Personally, when faced with this decision, I took the lump. Just felt it gave me more options and control).

 

[Moneygrubber]

I would consider annuitizing the in the future, but no sure if i would need to, i guess the only thing bugging me on the ls is investing in the market at these levels. I know i can dollar cost average, and i am sure the market will be higher 10 years from now, maybe I am answering me own questions...