Lump Sum Versus Annuity

[Big_Hitter]

Quote:

Originally Posted by street The company that holds the pension could tank then what do you do?

private pensions are insured (to certain limits) by the PBGC

[Cobra9777]

I took the annuity on a small non-COLA pension with a payout ratio of 6.5%. At the time, I remember running the numbers in FIRECalc and other tools. If you believe FIRECalc's rich history is indicative of the future, then I definitely traded off some long-term upside potential for more predictability. But our objective was to reduce the risk and uncertainty of relying too heavily on market performance and portfolio withdrawals to cover retirement expenses, especially early on. DW and I are more confident to spend on travel and hobbies early in retirement with a diversity of income streams. Not sure, but I think we might have been more frugal early on without the pension. With SS X2 still to come and a sizable portfolio outside the pension, inflation is not a major concern.

DW has a larger partial-COLA government pension that only had a partial lump-sum option, and it was not a very good option. So she took the annuity as well. By the time we take SS, our 3-legged stool will have 3 roughly equal-sized legs, which means about two-thirds guaranteed income, although that drifts lower over time due to the non-COLA/partial-COLA nature of the two pensions. Still, that may seem high to some, but we're comfortable with it. We are now 57 and 58 and I'm still a bit negative about the long-term viability of SS. And my own spreadsheets are less bullish than FIRECalc's history. Both pensions are well funded and well managed. So FWIW, that was our thinking on lump sum vs annuity.

[njhowie]

In all the replies, I don't see any which raise the possibility that the pensioner/survivor could pass away long before collecting anything close to the breakeven point of the lump sum. I always reminisce about the thread from someone who did everything "right", delayed taking SS until age 70, and then a few months before hitting 70, he gets diagnosed with pancreatic cancer.

Of course, we don't regularly consider the possibility, and you may conclude "Well, if I do pass away earlier than anticipated, what do I care, I can't spend it anyhow". However, it could be a significant amount which would be available to your family/heirs if you had taken the lump sum. Depending on the payout option you choose for the pension or annuity, you may only be guaranteed a certain minimum payout amount, or possibly no guarantee at all.

[Big_Hitter]

Quote:

Originally Posted by njhowie In all the replies, I don't see any which raise the possibility that the pensioner/survivor could pass away long before collecting anything close to the breakeven point of the lump sum.

valid concern, however....

like you said, if you (and your spouse) die before the break even point then you didn't outlive your assets, which is an important criterion in retirement planning: avoiding actuarial ruin

[Chuckanut]

Quote:

Originally Posted by Big_Hitter valid concern, however.... like you said, if you (and your spouse) die before the break even point then you didn't outlive your assets, which is an important criterion in retirement planning: avoiding actuarial ruin

Good point.

It's about assuring a financial situation that gives best retirement, not squeezing the last dollar out of whatever pile it's hiding in.

[FIREHAPPY]

I had a similar situation / decision to make in 2015. My company gave employees a choice between lump sum or annuity. Unfortunately, the employees didn't know which firm would win the bid to provide the annuity prior to making a decision.

A large insurance company (contributor to the financial crisis) was on the list of possible annuity providers and I wasn't comfortable with the firm as a stable counterparty. I took the lump sum and invested the money in a total market index fund. I have been very fortunate with my decision given the stock market performance the last several years. It has worked out well for me thus far.

I might have chosen the annuity had i known which firm would win the annuity contract but have been very happy the $ in my 401k.

The lump sum option should offer (at least historically) best ROI if you are willing and able to manage through a downturn which WILL happen eventually.

I retired in 2016 and haven't looked back. Good luck on your decision!

[bada bing]

I have vested for 4 different mega-corp pensions. I have been bounced around a lot in my career. I was given the opportunity to lump sum out of 2 of the old pensions a couple years ago. In both cases I took the lump sum even though the annuity terms offered were slightly better than I could find on the open market. Both of these pensions were "Defined Benefit" type plans, which makes the prevailing interest rates an important component in calculating a lump sum.

I have one remaining old DB pension that I have not been offered a buyout of yet. I also have a current active Cash Balance plan with my current employer. I probably will take the annuity on the current plan, but wait until age 70 to annuitize. I'm probably stuck with the annuity on the remaining old DB pension.

The arbitrage strategy of taking the lump sums on the old DB pensions is working so far for me. If I can get better than interest rate returns in the interim and if interest rates increase in the interim, I will have the opportunity to buy an annuity in the future with better terms and with money that appreciated at a greater rate outside of the pension plan. So far the returns on my lump sums are well above annuity interest rates and the market interest rates are increasing.

I sort of doubt I will buy an annuity in the future, but the arbitrage play is a useful concept to evaluate a current annuity/lump sum decision.

[gwraigty]

Quote:

Originally Posted by FIREHAPPY I had a similar situation / decision to make in 2015. My company gave employees a choice between lump sum or annuity. Unfortunately, the employees didn't know which firm would win the bid to provide the annuity prior to making a decision. A large insurance company (contributor to the financial crisis) was on the list of possible annuity providers and I wasn't comfortable with the firm as a stable counterparty. I took the lump sum...

This sounds like a similar situation to what my husband found himself in shortly after AIG got bailed out. The employees were not given a list of potential providers. They were told that they'd find out what firm would be servicing the annuity after the deadline for making a decision had passed.

There were other factors involved in his decision to take the lump sum, but that was a significant part of it.

[kyzymurgist]

One more thing that I don't think has been mentioned is the effect on ACA subsidy. If we had taken the full pension instead of partial lump sum, we would not qualify for Silver Plan CSR which would have a large negative effect on our finances. And our income would have been pushed over the tax subsidy cliff in many years.

This is a big consideration that is easy to overlook for those retiring before Medicare that must purchase health insurance in the market. It can be much easier to engineer your income without a big pension.

[Jerry1]

Again, thanks for all the comments. I’ll definitely have more questions for the FA and, I’m going to loop back with the company(employer) to make sure I understand the annuity. Especially what company is managing it. I know the pension obligation is funded, but I’m not sure if they purchase an annuity or if the pay out the annuity. I’d be more comfortable if a major insurance company manages the annuity and to make sure it’s PBGC insured.

From the FA, I’ll make sure the model my plan both ways so I can have a better basis for decision. I was only thinking of the market comparison, but I also want to look at the tax consequences of the cash flow in both cases.

[deserat]

Quote:

Originally Posted by Car-Guy I went through this same decision some years ago. Even read about this topic on this forum at the time (and many times since then). Same question, and it seems the same concerns/answers each time. My first impression was to take the lump sum. I thought about it until my head hurt but in the end I went with my first impression and have never regretted it. I think it gets down to personal situations and preferences for the most part but of course payout values and risk tolerance play into it.

Just went through this a couple of years ago for a much smaller sum. I ran the numbers and found that the break-even point was age 82 - I'm 54 now. It was an early-retirement buy-out that gave me a lump sum or small pension. I took the small pension.

It was also a timing thing. I have several other 'streams' of income that will be turning on at different times throughout the rest of my life. I figured starting a small one a bit early would be a way to ease into the RE. So far, so good.

To the OP, there are more than just financial reasons and many here have made great points about their preferences. Not everyone is super savvy about how they would manage their withdrawals and/or funds when they retire. Having a way to automate it can be a relief.

I have another sum of after tax money and looked into a SPIA...then realized I could 'roll-my-own' by taking out a certain amount every year and 'simulate' an annuity and realize even more spending power.

In any case, it's good to make an informed decision, which you are attempting to do. As with most things, except LBYM, YMMV.

[FinancialDave]

I tend to side with taking the guranteed annuity, especially since you said you also have other available funds. What you want to do is have guaranteed income for most of your normal retirement expenses and for most this takes having a pension or annuity.

What I would want you to find out from your work is if some of this pension was paid for with your own funds making then some of the pension tax-free.

Even if it is all taxable income I would still err on the safe side and take the pension.

[Jerry1]

Quote:

Originally Posted by FinancialDave What I would want you to find out from your work is if some of this pension was paid for with your own funds making then some of the pension tax-free. Even if it is all taxable income I would still err on the safe side and take the pension.

None of this was paid for with my funds. All company money. Tax free would be nice. It would almost be a no brainer to do the annuity if I could pull that off.

[Lancelot]

I took a lump sum on a non-cola pension of a modest sum several years ago. I reasoned that I could earn a higher return in the market. My rate of return since 2003 has been 7.04%; I hold some cash and bonds which are a drag. However if I had made this post around 2011, my rate of return would have been significantly lower- and the annuity would have been the better deal.

I will evaluate annually, but my current plan is to defer SS to age 70; the 8% from Uncle Sam is better than I have achieved to date. I don't regret taking the lump sum or deferring SS past 62.

[pb4uski]

Quote:

Originally Posted by Jerry1 Again, thanks for all the comments. I’ll definitely have more questions for the FA and, I’m going to loop back with the company(employer) to make sure I understand the annuity. Especially what company is managing it. I know the pension obligation is funded, but I’m not sure if they purchase an annuity or if the pay out the annuity. I’d be more comfortable if a major insurance company manages the annuity and to make sure it’s PBGC insured. From the FA, I’ll make sure the model my plan both ways so I can have a better basis for decision. I was only thinking of the market comparison, but I also want to look at the tax consequences of the cash flow in both cases.

Most commonly, the pension plan just makes the pension payments from the pension plan assets and there is no insurer involved. Sometimes, the plan might buy a SPIA from an insurer as a plan asset and then they relay the benefit payments to you but that is rare. In both these cases there would likely be PBGC insurance, but just know that the PBGC is very underfunded so I'm not sure how much comfort you should take from that.

There are some cases where they effectively offload their obligation to an insurer and some big plans have done that in recent years. If an insurer is directly on the hook to you then state guaranty funds woud come into play. After some reforms in the mid 1990s, insurers are very financially sound and it is very unlikely that an insurer will default.

[street]

One thing if a person doesn't need the pension to live on and wants to leave a legacy for a charity or heirs then a lump sum would be a better option I would think.

[Big_Hitter]

Quote:

Originally Posted by pb4uski but just know that the PBGC is very underfunded so I'm not sure how much comfort you should take from that.

isn't the PBGC financially sound from a single-employer perspective?

[pb4uski]

Not the last time that I looked, but I'll have to check that.

[Big_Hitter]

https://www.pbgc.gov/about/projections-report

[Big_Hitter]

Quote:

Originally Posted by street One thing if a person doesn't need the pension to live on and wants to leave a legacy for a charity or heirs then a lump sum would be a better option I would think.

there is also the concept that having a fixed income source significantly improves the probability of avoiding actuarial ruin