Lump Sum vs Annuity

[Moneygrubber]

Hi All

I greatly respect the opinions of the board members in this forum. Again I am struggling with the question of LS vs Annuity for my pension.
The particulars:
DW and I 54, plan on ER at 55 in April 2016
Working for megacorp for 32 yrs, pension, 401k and ss
Large utility co in Northeast.
Wife plan to retire also, no pension but ss.
Pension at 55 is 396,000 lump sum or $34,512 per year, no cola with 100% survivor for DW.
Both in good health from very long lived families.
Non retirement =1.5 mil
Retirement =1.8 mil (roths,ira's, 401k)
I can withdraw from 401k at 55 (1.25mil bal)
Essential expenses =$62,500
Full boat with golf vacations etc: $92,300
Fidelity RIP says 10 mil at end of plan for Annuity, 8.9 mil with LS
Also will inherit another 1.2 mil not included in plan.
Taxable divvys $44,000 to 15k cap gains
401k can generate another 30k in divvys.
I like being able to cover all essential expenses with annuity and divvys but still dont like giving up principal. Opinions, thoughts analysis welcome. What would you do?
60/40 asset allocation

 

[Big_Hitter]

the annuity looks very attractive

 

[pb4uski]

+1 looks too good to be true. 8.7% payout rate for a full and survivor annuity for a 54 year old couple is a great payout rate.

 

[Donzo]

I'm taking the co. annuity (not yet, gets better each year not taken) and it's not quite as good as your payout even at 65 yo!

 

[robertf57]

NPV of that income stream for just thirty years discounted at 4% is almost 600k. Unless you need the lump sum for something, seems like the math very much favors the annuity.

 

[samclem]

The numbers favor the annuity. The only question would be the likelihood that the employer or annuity company will/will be able to hold up their end of the bargain. Is this money from your employer or a private annuity, and how do things look?

 

[Rothman]

Annuity if held by trustworthy issuer. Congrats on your whole plan, its a very nice position and clearly you are good to go and enjoy 40 healthy years of retirement fun!

 

[Moneygrubber]

Annuity held by State Street Bank and well funded.


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[nun]

The annuity because of the excellent payout rate, survivor benefit and diversity it gives. If you can provide a substantial portion of your retirement income from SS and pensions it makes you a lot more sanguine about the ups and downs if the stock market.

 

[Moneygrubber]

So far annuity 6 ls 0.


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[Moneygrubber]

Nun- my thoughts exactly, no kids so Legacy who cares? If we both get hit by a bus on day 1, irresponsible nephews out 400k...


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[Katiek]

Another annuity vote. Good payout and I think you and your wife would enjoy the security of the survivor benefit.

 

[Moneygrubber]

Thanks for all the input, with the latest 1300 point drop in the dow, yes, the annuity wins...


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[Delawaredave5]

So your Megacorp (NE utility) has a DB pension benefit - and yours is $34,512/year.

Are you saying that your Megacorp contracted /outsourced the payment of this to State Street bank annuity ?

So if your Megacorp goes bankrupt (maybe not possible as a regulated utility), your "annuity" is not affected ?

Sounds like the "best of both worlds" - DB pension without the company bankruptcy risk. Congrats.

 

[Big_Hitter]

State Street is probably just the trustee.

 

[tcaron20]

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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[MRG]

State Street is probably just the trustee.

+1

 

[Moneygrubber]

Tcaron, i would probably take the ls also if my payout was that large at 62, my ls has been steadily dropping over the past yr, i have been told its somehow tied to the 10 yr bond rate from the previous 2 months.


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[tcaron20]

Hi Moneygrubber,

If you have a true pension fund, which is insured by a federal PBGC fund, then they no longer peg the value to treasuries. That expired a few years ago. It is now based on the CCBR or Constant Commercial Bond Rate. Google CCBR and you will find the IRS tables, which list the rate for every month. Your source or pension advisor is incorrect when they point to treasuries for the lump sum rate factor.

The government changed to the CCBR because it is a higher rate, which means less money to the employee. This was suppose to help companies lower their pension liabilities, of course at the expense of the pensioner.

I suggest that you do a bit more research. Our pensions amounts are similar so our lump sums should be also.

BTW - rates are falling right now, which should increase the lump sum amount dramatically.

Good luck!


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[Midpack]

I put this together from several sources. FWIW

 

[tcaron20]

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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[samclem]

I still do not see the big advantage to these things[deferred annuities]!?

They have a very significant advantage--to your "advisor".

 

[nun]

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.

 

[Big_Hitter]

what is the amount and form of payment of the qualified plan annuity?

 

[robertf57]

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.