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Lump Sum vs Annuity
Old 08-29-2015, 08:08 AM   #21
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Lump Sum vs Annuity

Currently 62 with planned retirement at 64.

Will be taking lump sum of $602,000. Advisor, one I and considering, is recommending two single payment deferred annuities. One pays monthly check in in 4 years, second in 10 years. First modeled at 3% return, second at 5%, 0% return for worst case, which has scary low payouts.

When I do the math, it looks like I could do the same thing by investing the funds myself in dividend paying stocks. Returns should not be hard to match in the years to come. I do understand that at age 85 when the original investment has run out that the annuity continues to pay.

Both kick in bonus money that ups the "Protected Income Value Acct/death benefit" which I still do not understand and does not seem to be part of the earning calculation. The historical returns do not seem to mirror the market since both use an index from third party sources, I.e. Citibank, etc.

I still do not see the big advantage to these things!?

Any opinions would help.

Thanks,

Tom



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Old 08-29-2015, 08:12 AM   #22
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Originally Posted by tcaron20 View Post
I still do not see the big advantage to these things[deferred annuities]!?
They have a very significant advantage--to your "advisor".
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Old 08-29-2015, 10:17 AM   #23
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Quote:
Originally Posted by tcaron20 View Post
Currently 62 with planned retirement at 64.

Will be taking lump sum of $602,000. Advisor, one I and considering, is recommending two single payment deferred annuities. One pays monthly check in in 4 years, second in 10 years. First modeled at 3% return, second at 5%, 0% return for worst case, which has scary low payouts.

When I do the math, it looks like I could do the same thing by investing the funds myself in dividend paying stocks. Returns should not be hard to match in the years to come. I do understand that at age 85 when the original investment has run out that the annuity continues to pay.

Both kick in bonus money that ups the "Protected Income Value Acct/death benefit" which I still do not understand and does not seem to be part of the earning calculation. The historical returns do not seem to mirror the market since both use an index from third party sources, I.e. Citibank, etc.

I still do not see the big advantage to these things!?

Any opinions would help.

Thanks,

Tom



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I would not buy any annuity recommended by an "advisor". Do your own research and get your own quotes. Where is the lump sum coming from? If its from a company pension make sure you are making the right choice as often a company pension can still be a good deal.

When you quote 3% and 5% are those actual interest rates assuming your life expectancy or payout rates?

If you decide that the guaranteed income of an annuity is more important to you than their poor investment returns then only buy a fixed annuity and don't annuitize all your lump sum.....maybe keep it to a max of 25% of the lump sum to provide a stable income base along with SS.
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Old 08-31-2015, 09:29 AM   #24
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what is the amount and form of payment of the qualified plan annuity?
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Old 09-01-2015, 10:19 AM   #25
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What Big_Hitter asked... What would you get for a payout from the qualified plan? The income stream from the plan is usually significantly better than you could find in the annuity market.
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Old 09-03-2015, 12:04 PM   #26
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Lump sum versus payments, which is better?
Old 09-03-2015, 02:23 PM   #27
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Lump sum versus payments, which is better?




https://www.calcxml.com/calculators/lump-sum-or-payments?skn=#results

Here's a calculator that helped me get some answers to the question:

Lump sum versus payments, which is better?

I found this very helpful.
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Old 09-03-2015, 02:29 PM   #28
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^ It's a great tool if you know when you are going to die and exactly how much you will earn year after year on your lump sum amount.

All it's doing is calculating the pv of the payment stream (based on user inputs) and comparing it to the lump sum.
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Which is better: Cash up front or payments over time?
Old 09-03-2015, 08:22 PM   #29
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Which is better: Cash up front or payments over time?

Here's how easy it was for me.

I plugged in the lump sum amount.

Next was the % return on investment. I started out small, then worked my way up. This was an IMPORTANT variable for me. I had to know this in order to answer the lump sum vs payments question.

Next was compounding frequency. I chose 'Annual' since I hopefully have a very long time horizon.

Next was Annual payment. Plugged in the annual pmt from pension plan.

Next I entered Zero since my pension has no COLA.

Next plugged in the number of years between now and my end of life estimated age. I used 29 years.

In the graph, when the green and red bars are equal or nearly equal, then you know the rate of return % it would take for your Lump Sum, when invested, WITH you taking annual withdrawals, with your money lasting only until end of life.

For me the rate of return was 11.5%. This was too high of a rate for me to take a chance that I could average this between now and death while receiving a "regular paycheck".

Under Explanation of Results you get the following recommendations. Either:

You would be better off receiving payments as the value today of your discounted payments today is $----- compared to $------ up front.

OR

You would be better off taking a lump sum today as the value today of your discounted payments is $----- compared to $----- up front.



Valuable tool to use for this decision? Yes.


"It's a great tool if you know when you are going to die and exactly how much you will earn year after year on your lump sum amount."
A: Yes, these are 2 of the variables involved. Calculators help you with your what-if questions by allowing you to adjust the variables. Don't you understand this?

For me the rate of return was THE important variable. Yes, end of life age is truly an unknown. Who knows the answer to this question? Next to no one. I used age 95 in mine and am happy with that choice.

"All it's doing is calculating the pv of the payment stream (based on user inputs) and comparing it to the lump sum."
A: Yes! That's the math that's required to reach a decision on this question. Wow!

Jeez! Comments like yours may keep people from trying this tool and other tools like it. I would hate for people to not try them based upon your comments. People often need help with making this decision... it's an important decision. People.... please ignore this guy and try the tool! It (and others like it) will help you.

It's a difficult decision to make for many. A tool like this one helps to easily answer some questions. You can what-if with it. This is EXACTLY WHAT I NEEDED AND MANY OTHER NEED when working through the variables.



Enjoy the tool. I didn't write it, but was sure glad that someone had and made it available free of charge for what-if variable testing to help with this decision.
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Old 09-03-2015, 09:55 PM   #30
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In the graph, when the green and red bars are equal or nearly equal, then you know the rate of return % it would take for your Lump Sum, when invested, WITH you taking annual withdrawals, with your money lasting only until end of life.

For me the rate of return was 11.5%. This was too high of a rate for me to take a chance that I could average this between now and death while receiving a "regular paycheck".

For me the rate of return was THE important variable. Yes, end of life age is truly an unknown. Who knows the answer to this question? Next to no one. I used age 95 in mine and am happy with that choice.

It's a difficult decision to make for many. A tool like this one helps to easily answer some questions. You can what-if with it. This is EXACTLY WHAT I NEEDED AND MANY OTHER NEED when working through the variables.
That's too much trial and error just to figure out the rate based on life expectancy.

Excel's IRR function actually works better for figuring out the breakeven point between lump-sum and annuity. That's what I use to figure where the breakeven point is for SPIA to see whether they're even worth considering.
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Old 09-03-2015, 10:07 PM   #31
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Originally Posted by tcaron20 View Post
Very interesting. My numbers are almost identical but I am 62 and working in new position without any retirement options.
Currently have a $34,000 with survivor benefits also but the lump sum number is $602,000 currently. The new CCBR 2016 lump sum calculation is based on this August, September and Octobers numbers. The lower they go, the higher the lump sum. Current direction favors waiting to take it in 2016.

I am surprised that your lump sum is so low. Maybe based on age?

I am favoring a lump sum since there is no pension COLA and a premature death of me or my spouse results in the pension balance going back to my employer as a credit and not to my survivors.

Just me 2 cents. Oh wait, just checked my portfolio, it is now 1.5 cents!










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I just went through this and my lump sum / annuity ratio is much closer to OP's than to yours. Also, the lump sum offer and annuity payment are almost exactly equal to what's available from immediateannuities.com or Fidelity for a single life annuity. The kicker for me was that my Megacorp subsidizes the survivor benefit so it is much much less expensive than what I could obtain elsewhere. My pension documents include a relative value calculation and the Lump Sum calculates to 105%, the Surviving Spouse Coverage is 104%. The Baseline relative value is the Single Life Annuty = 100%.

I do believe taking the Lump Sum now and holding it to purchase an annuity after interest rates rise would be the most bang for the buck, but I took the Megacorp annuity for peace of mind among other reasons.
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Old 09-05-2015, 02:29 AM   #32
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You are being suckered into the annuity with the fixed payment that seems high now, but down the line it will put you in poverty.
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Old 09-05-2015, 01:33 PM   #33
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You are being suckered into the annuity with the fixed payment that seems high now, but down the line it will put you in poverty.
actually lump sum distributions cause poverty - I started another thread on that topic


http://crr.bc.edu/working-papers/the...derly-poverty/
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Old 09-05-2015, 02:29 PM   #34
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Just recently I received from benefits calculations for my pension options. Corporation I retired from added lump sum option to our benefits. I have option to take lump sum or annuity at 55, or higher payout lump sum or annuity at 60. I entered those numbers into calculator and in both cases I am better off to take annuity. I used 3% return, and 0 annual increases.
Thank you for posting link to this calculator. Very helpful tool.
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Old 09-05-2015, 05:53 PM   #35
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Yes, we had a good discussion, here's the thread. It might be true that lump sum distributions are associated with poverty (when compared to a monthly check), but this poorly done study does a crummy job of indicating there's an association, much less causation.
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Old 09-05-2015, 08:08 PM   #36
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It really doesn't matter what the influence of the transition of DB to DC pensions have on elderly poverty because, like it or not, DB pensions are going the way of the do-do bird. Companies don't want to take the investment risk.

I have both DB and DC and I actually prefer the DC plan I had but I'm probably more risk accepting than most people.
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Old 09-05-2015, 08:30 PM   #37
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It is true that DB plans are disappearing; but annuitization of a portion of ones nest egg may immunize some retirees from panic and other financial mistakes while providing longevity insurance. I don't ascribe to the apparent general opinion of this forum that all annuities are bad. I think there is a place for SPIA is many retirees' plans.
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Old 09-05-2015, 09:01 PM   #38
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It is true that DB plans are disappearing; but annuitization of a portion of ones nest egg may immunize some retirees from panic and other financial mistakes while providing longevity insurance. I don't ascribe to the apparent general opinion of this forum that all annuities are bad. I think there is a place for SPIA is many retirees' plans.
+1. Particularly so if the retiree is likely to blow through the lump sum quickly if left to their own devices.
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Old 09-05-2015, 09:25 PM   #39
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I posted this on another thread recently. Not good news about the future of Lump Sum Payout options, or (eventually) Traditional Pensions. Could see corporations moving further away from Traditional Pensions with stricter regulations in place.

Treasury Curtails Lump Sum Pension Payouts

Edited to remove link to Pension Retirement Ctr as I could no longer find the reference link on their front page regarding this issue.
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Old 09-06-2015, 12:14 AM   #40
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Originally Posted by emerytura View Post
Just recently I received from benefits calculations for my pension options. Corporation I retired from added lump sum option to our benefits. I have option to take lump sum or annuity at 55, or higher payout lump sum or annuity at 60. I entered those numbers into calculator and in both cases I am better off to take annuity. I used 3% return, and 0 annual increases.
Thank you for posting link to this calculator. Very helpful tool.
You will only be "better off" in the short term with an annuity. But eventually you'll be living in poverty with an annuity. It's the only guarantee you get with an annuity -- inflation eats away at the fixed payment rate. As far as ROI the annuity will wind up paying between 0% and 3% if you're lucky. Not good for beneficiaries.
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