Lump Sum vs Pension Summary?

[Midpack]

Understandably, this question comes up often - but the answer is usually not nearly as simple as some replies suggest. So I've been meaning to provide a quick summary for later reference here and elsewhere.

I attempted to put them in some logical order, but other than #1, what's most important will vary for each individual. And there are undoubtedly other considerations as well, I quit at 10.

Though inflation is mentioned, the summary is only meant to deal with fixed income annuities vs pensions, as most (at least private sector) are not COLA'd.

I'd welcome any proofreading or other input/suggestions.

 

[Texas Proud]

Even before #1, I would want to know IF the mthly payments will grow if you do not do either...

IOW, is it like SS where you would get a higher payout if you delay starting the annuity

 

[SJ1_]

great summary!

Number 10 is the big one for me, I would rather invest it myself

 

[Big_Hitter]

^ PBGC guarantees private pensions (up to certain limits, of course)

 

[Midpack]

Even before #1, I would want to know IF the mthly payments will grow if you do not do either...

IOW, is it like SS where you would get a higher payout if you delay starting the annuity

#4 was meant to speak to that, though maybe not direct enough?

I found "while state and federal pensions are typically adjusted for inflation, most private pensions are not. A 2000 BLS survey reported that only nine percent of blue collar and service industry employees who are in traditional pension plans received an automatic cost of living adjustment in that year." I would assume the % has only dropped in the 13 years since that survey.

I stated in my OP "the summary is only meant to deal with fixed income annuities vs pensions, as most (at least private sector) are not COLA'd."

If an employee is offered a lump sum vs a COLAd pension, he/she would probably want to get a quote for a COLAd annuity (considerably more expensive), but then much of the summary would still apply no?

 

[Big_Hitter]

^ I think Tejas Proud may be implying that the annuity may grow during the deferral period due to any decrease in the early retirement reduction factor?

 

[HighRoller]

An interesting comparison. I never actually wrote them down when I had to make the decision last year but I do recall thinking through most of these considerations too. (I picked the lump sum - hands down) Interesting that your logical order isn't the same as mine would be. Matter of fact #9 and #10 would be MUCH higher on the list for me but as you said what's most important will vary for each individual. Also, #6 and #9 are very similar to me. (You asked for input )

 

[Midpack]

Appreciate the input so far. I plan to drop the numbers, there really is no universally right order. When I faced the lump sum decision almost two years ago, my priorities weren't even aligned with the table in post #1.

I didn't attempt to include COLA or deferred trying to keep it simple(r).

 

[Texas Proud]

^ I think Tejas Proud may be implying that the annuity may grow during the deferral period due to any decrease in the early retirement reduction factor?

Correct....


Some people have the ability to make this decision 'early', which affects the numbers... and I was surprised when I read about someone who had a 50% reduction for what seemed like a short timeframe... it that is the case, I would not take an annuity and leave the money alone to grow...


But I might have misinterpreted the original purpose... which might be that you have to make a decision right now.... so what will it be....

 

[Midpack]

Correct....


Some people have the ability to make this decision 'early', which affects the numbers... and I was surprised when I read about someone who had a 50% reduction for what seemed like a short timeframe... it that is the case, I would not take an annuity and leave the money alone to grow...


But I might have misinterpreted the original purpose... which might be that you have to make a decision right now.... so what will it be....

Thanks for the clarification, I misunderstood the first time around. Waiting another year(s) is an important decision indeed, but my table assumed the retiree had already decided to pull the plug and was only deciding between lump sum and pension now. I'll have to think about it, any suggestion re: how to include your decision point?

 

[twolfy]

I don't believe you can delay a private sector pension past when it is scheduled to start. Most seem to be at 62 or 65. There are usually something like 5 choices from taking lump sum, full amount pension with no survivory benefit and then 75 or 50% to surviving spouse etc. i would think the only way to delay would be to take the lump sum and get an annuity when you feel you would need it. I have a tiny pension of 180/mth that starts at age 62 and another one of 1300/mth that starts at age 65. I have quite a while to decide and most likely interest rates will be different than they are today. Thanks midpack for posting that table.
Tom

 

[rockyj]

Thanks for the clarification, I misunderstood the first time around. Waiting another year(s) is an important decision indeed, but my table assumed the retiree had already decided to pull the plug and was only deciding between lump sum and pension now. I'll have to think about it, any suggestion re: how to include your decision point?

Not sure how you would want to incorporate into your table, but the dynamic/consideration in our case (which I think is along the lines of what Texas Proud was alluding to and will be representative of others in similar situation) will be:

1) retiring earlier than full-retirement age in DB pension system - will select retirement date regardless (for the most part) of decisions below,
2) pension annuity payments will be non-COLA'd
3) will suffer an approx. 5% per year penalty for starting annuity payments prior to full retirement age
4) but... can delay start of annuity payments until sometime after retirement date to reduce the early retirement penalty (i.e. increase future non-COLA'd annuity payment by about 5% per year compounded for each year delay, up until full retirement age, at which point there would no longer be any early retirement penalty, but no additional years of service either, since I would have been retired during the delay).

So the main considerations will be "Do I have other assets to live off while delaying pension in order to reduce early retirement penalty?" and "Will the additional 5%/year increase in non-COLA'd annuity work out better long-term than having immediately taken the lower annuity while retaining and investing the assets that would otherwise have been drawn down during the delay in order to increase pension?"

Not unlike the decision of whether to delay SS, there are other considerations - expected longevity, investment returns, anticipated inflation, security of income stream, etc.

 

[Midpack]

I don't believe you can delay a private sector pension past when it is scheduled to start. Most seem to be at 62 or 65.

Hmmm, I thought it was common but really didn't know. In my case (former Megacorp pension frozen in 1994 - IOW very small):

Age|Pension/lump sum
56|75%
57|80%
58|85%
59|90%
60|95%
61 or more|100%

 

[Animorph]

DW can start her pension anytime after she turns 55. There is a boost of roughly 3% per year for waiting.

 

[Ken11]

Good stuff.
For ER the question of WHEN to take benefits is part of this.
To me a key poiint is the outlook for interest rates.
Last year my lump sum increased 15% cause rates declined.
This was essentially risk free.

Also point 2 always bothers me. ( I note your use of " ideally")
I believe in a total returns approach.
#2 seems counter to it.

 

[Midpack]

Good stuff.
For ER the question of WHEN to take benefits is part of this.
To me a key poiint is the outlook for interest rates.
Last year my lump sum increased 15% cause rates declined.
This was essentially risk free.

Also point 2 always bothers me. ( I note your use of " ideally")
I believe in a total returns approach.
#2 seems counter to it.

It's not one that's high on my list (yet), but to some folks and some very good albeit conservative financial gurus (Pfau and others), it's a key consideration. IIRC the thinking is if your "floor income" covers all your basic spending, you can take a lot more risk with your "liquid portfolio" which makes lump sum even more viable (and vice versa). I included it out of respect for those folks, there may be many of them...

Tweaks so far...

 

[ERD50]

I don't believe you can delay a private sector pension past when it is scheduled to start. Most seem to be at 62 or 65. ...
Tom

My MegaCorp allows anytime from 55-65 with a published table for the reductions for taking it early (50% reduction at 55 versus 65). They also allow you to delay past 65 and will make an actuarial adjustment (though I couldn't find this number published, I might need to call for that info).

You also need to take it no later than 70 1/2. I assume that is a federal requirement, along the lines of RMDs.


-ERD50

 

[SumDay]

^ PBGC guarantees private pensions (up to certain limits, of course)

In recent lump sum offerings by some megacorps, PBGC is no longer involved. The "risk" was sold off to an insurance company, who would be paying the annuity going forward All PBGC guarantees were lost. That was a consideration in our decision - don't know if that's worth including in the chart or not.

By the way, this is great MidPack. Well done!

 

[Big_Hitter]

In recent lump sum offerings by some megacorps, PBGC is no longer involved. The "risk" was sold off to an insurance company, who would be paying the annuity going forward All PBGC guarantees were lost. That was a consideration in our decision - don't know if that's worth including in the chart or not.

By the way, this is great MidPack. Well done!

then those obligations would be covered by state insurance guarantee associations if the ins co goes under

 

[Cessna5354]

Great Summary Midpack,

This is the second most item dwelled upon, after when to go. I have a DB plan, and would need to make 8+% on the lump sum, to match the monthly payments. But I have other investments of which I can live off the interest/dividends. Obviously my heirs would have the Lump Sum after I pass.

 

[Big_Hitter]

for a lump sum versus an actuarial equivalent immediate annuity, doesn't one have about a 50% chance of outliving the lump sum?