Lump Sum vs. annuities?

[albireo13]

Yup, another thread on this topic.

I've been running Firecalc for two cases of our pensions:
100% lump sum or 100% annuities. In both cases Firecalc gives us 100%.

These are estimates based on retirement in a few years.

Lump sum: $2.6M in tax deferred savings + $71K/yr SS income
Annuity plan: $1.45M tax deferred + $161K/yr from SS and pensions

All pension annuities are not COLA.

An investment advisor we know recommends going the annuity route. He argues that its good to have a steady cash flow that's not dependent on the market. Plus, your pension assets are protected from dumbass ideas like buying his and hers Porches and expensive condos!! We tend to be frugal so, I really am not worried about that.

On the other hand, annuities leave nothing to your estate. Once we both pass on, the annuities stop. With the lump sum approach, the pension assets go to our estate and our kids. We have 5 grown children and would like to leave something for them.

My wife considers this a deal-breaker for the annuity approach. I am not so sure, and go back and forth.

Any words of wisdom or real life stories?

Thx,
Rob

 

[Independent]

I'm not following the numbers. You say "100% annuities" in the second case, but I see $1.45 million in lump sum.

I also see the word "pensions" where I expected "annuities".

Are you planning to use $1.15 million to buy annuities with $90,000 annual incomes?

I assume you've gone to Vanguard or to immediateannuities.com to be sure you're getting a competitive premium.

 

[Perryinva]

Seems straightforward to me. Either 90k in annuity from pension OR a 1.15M lump sum. With that large of a lump sum number, the lump sum seems the best bet, but you don’t state ages, expenses, etc. Though I admit, 1.15M seems a little low for lump sum in place of 90k income.

 

[street]

I'm not here is convince you either way but I can tell you my thoughts and experience with your decision.

In my thinking I want to leave a legacy for heirs and charity. My lump sum has grown about 38% in 5 years or so, and I don't need the money, so the up and down stuff doesn't bother me I want it to grow and be there when I'm gone.

The real deal breaker for me is, if my wife and I would die early in life and ALL that money is gone if we took the pension.

The other reason I have control over that money at all times and I don't want a monthly check, I want it all and I want to make the decisions on that money.

Annuities/penisions for me is not a good choice. I have a small one and to this day regret having one.

 

[joeea]

We have 5 grown children and would like to leave something for them.

My wife considers this a deal-breaker for the annuity approach. I am not so sure, and go back and forth.

If your primary goal is to leave a legacy and if you are frugal enough that you don't need the annuitized cash flow, then it could be reasonable to go with the lump sum approach. Plus, happy wife, happy life.

If you were instead looking at it mathematically $90k/year versus $1.15M lump sum is a relatively easy comparison, once you estimate your lifespans, expected expenses and expected investment returns. You didn't indicate how much (if any) of the $90k/year is joint and survivor - that would be a factor as well.

It's quite possible that taking the annuity instead of the lump sum would leave more of your nest egg to your heirs. But then apparently you wouldn't have a happy wife.

 

[MarieIG]

There are a lot of factors that come into play.

Yes, I would plug the numbers into immediate annuity and check what it would cost you to buy the same pension with the same amount.

Is the pension a joint and survivor? 100%?

Your respective ages?

The flexibility of the lump sum vs. pension.

When does spouse intend to take SS? When do you tend to take SS? Which one is the higher earner, and is the higher earner delaying?

What is your tax strategy going forward? Are you considered the "tax bomb."

Conversely, another leg on the retirement stool.

The ability of spouse to manage investments? (There are people who manage lump sums beautifully. There are others who blow through them and/or panic and sell when the markets crash.)

Whether you have trusted persons to manage your investments if second surviving spouse becomes incapacitated?

What is your/ your spouse's game plan for downturns in the markets?

Does the pension allow you the ability to leave your assets untouched to grow, and if so, what is the projected value of their growth.

Do you have LTC insurance?

Since you have an adviser, make a list of questions.

 

[njhowie]

If you were instead looking at it mathematically $90k/year versus $1.15M lump sum is a relatively easy comparison, once you estimate your lifespans, expected expenses and expected investment returns. You didn't indicate how much (if any) of the $90k/year is joint and survivor - that would be a factor as well.

It's quite possible that taking the annuity instead of the lump sum would leave more of your nest egg to your heirs. But then apparently you wouldn't have a happy wife.

I began writing a similar reply, and noticed yours just before hitting the Submit button.

The wife could be happy if shown the calculations. That the extra $90k/year could easily be directed in to a new account to rebuild what will be left for the kids.

The annuity is "longevity insurance", it's going to pay out no matter how long you live. If you are healthy and believe you've got more than 13 years (the break even point), the annuity is worth serious consideration - it's going to produce those annual payouts no matter what the markets do.

Now, the biggest drawback, is if you unexpectedly pass away in the early years before reaching the break even point at 13 years. This is the flip side of the longevity insurance policy.

 

[zinger1457]

An investment advisor we know recommends going the annuity route. He argues that its good to have a steady cash flow that's not dependent on the market. Plus, your pension assets are protected from dumbass ideas like buying his and hers Porches and expensive condos!! We tend to be frugal so, I really am not worried about that.

Based on your numbers your yearly income would more than double with the annuity. Assuming you don't need all that extra income it would seem like choosing the annuity might be the worst choice for protecting yourself from 'dumbass ideas'. OTOH, without knowing ages etc. if your retiring and collecting SS at 62 then the pension ($90k for $1.15M) is almost 50% higher than what you could get purchasing a joint immediately annuity today for a couple 62yo so it does sound like a pretty good deal.

 

[Red Badger]

There are a lot of factors that come into play.

Yes, I would plug the numbers into immediate annuity and check what it would cost you to buy the same pension with the same amount.

Is the pension a joint and survivor? 100%?

Your respective ages?

The flexibility of the lump sum vs. pension.

When does spouse intend to take SS? When do you tend to take SS? Which one is the higher earner, and is the higher earner delaying?

What is your tax strategy going forward? Are you considered the "tax bomb."

Conversely, another leg on the retirement stool.

The ability of spouse to manage investments? (There are people who manage lump sums beautifully. There are others who blow through them and/or panic and sell when the markets crash.)

Whether you have trusted persons to manage your investments if second surviving spouse becomes incapacitated?

What is your/ your spouse's game plan for downturns in the markets?

Does the pension allow you the ability to leave your assets untouched to grow, and if so, what is the projected value of their growth.

Do you have LTC insurance?

Since you have an adviser, make a list of questions.

^^^^Very Good Questions^^^^

In my case DW is not interested in managing $$, just interested in having it. So, for me, my pensions and our SS will ensure that DW is at least okay if I assume room temperature first. She could panic and sell our portfolio or p!ss it away on an origami collection and she'll still be all right.
So, I probably left some coin on the table with pensions (1=100%/1=50%), but it works for us. YMMV!

 

[Chuckanut]

Can you use some of the money to buy annuities that give you a 'floor' income? Then invest the rest of the money in a way that will provide for more income, inflation protection, and something for the heirs.

It doesn't have to be all or nothing.

 

[street]

I began writing a similar reply, and noticed yours just before hitting the Submit button.

The wife could be happy if shown the calculations. That the extra $90k/year could easily be directed in to a new account to rebuild what will be left for the kids.

The annuity is "longevity insurance", it's going to pay out no matter how long you live. If you are healthy and believe you've got more than 13 years (the break even point), the annuity is worth serious consideration - it's going to produce those annual payouts no matter what the markets do.

Now, the biggest drawback, is if you unexpectedly pass away in the early years before reaching the break even point at 13 years. This is the flip side of the longevity insurance policy.

Does that 13 year break even point include the gains you can make on the lump sum over those same 13 years??

 

[njhowie]

Does that 13 year break even point include the gains you can make on the lump sum over those same 13 years??

No, it was the obvious quick and dirty break even analysis... $1.15M/$90k

By the same token, it also doesn't include the gains on the extra $90k/year that could be saved.

 

[OldShooter]

Y ... a steady cash flow ...

Without weighing on the question, I want to point out a serious fallacy: There is no such thing as a fixed annuity. Every day that passes, the supposedly-fixed annuity loses buying power.

Suppose you expect to live 25 years after retirement; the last 30 years of inflation was IIRC abut 2.7%. In your 25th year, that annuity's purchasing power is half.

The last 40 years' inflation, which adds the late 70s/early 80s excitement, IIRC the number is 4.2%. Year 25? Purchasing power is one-third.

For most of us, I think that high inflation is the largest risk to our comfortable retirement. People can argue about the probability of that happening, but if it does the impact will be huge.

(Now weighing in.)Take the lump sum and find a finanical advisor who can help you design a home-made annuity using bond ladders. Look especially hard at TIPS, which are guaranteed inflation proof.

 

[albireo13]

Thanks to all for your inputs.
Yes, I realize the eroding value of the annuity due to inflation. That's one thing I don't like about it.

A bit ,more info ... I am 63, wife is 59.
Our retirement assets/income will consist of the following:
tax deferred savings (401K, 403b, IRAs, HSAs, etc). ~$1.46M today
SS income $71K at both our FRA
pensions lump or annuities

I am very much leaning towards lump sum now, considering all inputs.

A good idea from this thread is to create a "floor" income using some of the pensions as annuities. The rest can be invested. I'll look into this.

 

[savory]

I took the pension based on the same advice your adviser provided and it made sense in terms of return vs lump sum. It is for the lifetime of me and DW.

In the meantime, the rest of my savings are simply invested and growing. We share the objective of living well in retirement and leaving something behind. Because my pension and SS pays for the majority of my expenses, my other savings are growing untouched. Even with a major market drop, my lifestyle remains and I expect the market to bounce back to leave money for an inheritance for kids/grandkids. So far I haven't needed to dip into my savings but even if I wanted to make another big trip or some spending spree, it would not be a major impact to my plans. For perspective, this approach started in about 2006.

How this is working for me so far? I am glad I selected the pension.

 

[bada bing]

I am mulling over a similar decision with my pension, but fortunately I don't
have to choose until age 70. My pension pays reasonable "interest rate credits"
of 5% or 30 year treasury rate (whichever is higher) while I wait. Perhaps your
pension has a similar flexibility ? The annuity calcs on my pension are a little
better than I can buy on the open market and the return while waiting is a
better fixed income investment than I could find outside the plan, so waiting is a
no-brainer in my situation.

If your pension doesn't have any flexibility within the plan, IMO it would
require a better than market annuity payout to be forced into taking the
annuity before age 70. Conventional wisdom with respect to buying annuities
- which is what you are doing when you elect to take a pension instead of a
lump sum - is that the choice is better made later in retirement. Not in early
60's. I'd take the lump sum and revisit considering buying an annuity later.

Another factor that needs considering is your SS strategy. Delaying SS is
equivalent to buying additional COLA'd annuity at better than market rates.
Also probably much better than the payout percent on taking your pension
as an annuity. If you want more annuity, delay SS first. Then if you still want
more annuity you could consider the pension. Taking SS early while also
taking the pension is less than optimum because you could use the lump sum
to delay SS, which is a better payback than taking the pension.

An additional factor is optimizing your taxes through retirement. Just seat-of-
the-pants, but it looks like you will have a pretty substantial "tax torpedo"
when you reach RMD age. Starting either SS and/or pension before age 70 is
going to impede any Roth conversion plans.

 

[BigNick]

Can someone tell me where one can get 90K income per year from a 1.15M annuity? Unless the OP is 75 years old, that sounds like an insurance company whose stock I would like to short...

 

[njhowie]

Can someone tell me where one can get 90K income per year from a 1.15M annuity? Unless the OP is 75 years old, that sounds like an insurance company whose stock I would like to short...

Excellent point.

More reason to take the annuity over the lump sum.

 

[BeachOrCity]

From a pure financial point of view at your ages the annuity is a much better deal unless you are both in poor health.

As for leaving an inheritance, if you take the annuity I would imagine that it and your SS cover your spending? If so then your existing assets (and home?) are the inheritance.

 

[CardsFan]

Maybe I missed it, but when would the pensions start? Now? 65? Survivor benefits? 100%? 50%? 0%?

According to your post SS won't start until FRA, so you have few years to fill.

And, without a spending number, it is impossible to even guess at good advice.

 

[pb4uski]

The problem I have with annuities is if you or you and your spouse die then the premium is totally wasted.... in OPs case that is $1.15 million flushed down the drain. I know the risk is small but it does happen... a work colleague lost both parents in a bus accident while traveling the world shortly after they retired.

That risk can be mitigated by buying an annuity with guaranteed payments... for example, if both annuitants die then payments continue until at least the cumulative payments are equal to the premium paid... or in another form benefits continue for 10 years if both annuitants dies before 10 years of benefits have been paid... there are various forms.

That said, a 7.8% payout rate looks pretty good.

 

[MarieIG]

My DH's pension has the option of ten years certain. The big hit to his monthly income is not choosing the ten years certain, it is taking survivor option. Adding on the ten years certain is only a few extra dollars a month.

 

[BeachOrCity]

One more thing for the OP. Your benefit is over the pbgc. Insurance limit. Check your plans funding level and rate of return assumptions before taking the annuity. Otherwise you could be exposed.

 

[pb4uski]

... Adding on the ten years certain is only a few extra dollars a month.

You mean that the life or 10 years, whichever is longer is only a few dollars a month LESS than a straight life annuity..... right?