M* Pension or Lump Sum?

[Midpack]

An article on a topic that comes up from time to time...M*'s five decision points.

I'd add if you take the lump sum, and then have second thoughts 2 months, 2 years or 20 years later - you can still "buy" a pension income (annuity) whenever. If you take the pension, you're locked in! And at a historically bad time (#4 below).

But of course you should compare the employer pension and lump sum amounts vs available annuity income costs first and foremost. They should be comparable - if not, the rest may not matter.

• The first is the all-important pension health.
• The second are the other income sources that you have.
• Consideration three, my longevity--how long I think I am going to live.
• The next is timely, that's interest rates, we all know they're very low right now.
• Number five, if you do take the lump sum, that money is not going to invest itself, so my skills as an investor should also play a role in this decision.

Pension Lump Sum or Annuity: 5 Swing Factors

 

[SumDay]

Wow, thanks for posting this! We had to make this decision last fall, and I do, on occasion, have waves of regret for taking the lump sum. I consulted with an actuary friend who made that same point - this is an historically bad time to buy an annuity. Take the cash and later down the road you can buy one if things improve. And PBGC's health has been a huge concern for me for quite some time.

The waves of regret subside when I look at the 401(k) balance, but I do miss that monthly auto deposit into our checking account. We will survive.

 

[HighRoller]

I'd add if you take the lump sum, and thenmhave second thoughts 2 months, 2 years or 20 years later - you can still "buy" a pension income (annuity) whenever. If you take the pension, you're locked in!

Honestly, the monthly pension was an attractive option but as you say, if you take the pension you are locked in, if you take the lump sum you can buy an annuity later. (anytime you want) Plus, with a lump sum you can buy the annuity (or annuities) of your choice for as little or as much of your lump sum that you desire or whatever fits your situation best. Recognizing this made the decision an easy one for me. Now that I've taken the lump sum (about a year ago), I haven't felt the need to run out and buy an annuity "yet".

 

[LitGal]

Took the State Teacher's Pension

Did the math. Could not buy an annuity (for the monthly income provided by STRS) with the lump sum I would receive. CA' s STRS is funded by state statute, so there would be major !#@% to pay if it went belly up.

Granted, this monthly check is only about half of what most CA teachers get, since much of my career there was half-time, and I left in '96. But it, along with my husband's pension and SS, allowed us to RE, using our retirement savings as back-up, possibly for future annuities.

My Catholic school pension is the one I'm concerned about, since it's not covered by the pension guarantee corporation. It will be very modest, but I do need to collect it at 65, when it reaches its highest monthly amount. (It should at least cover groceries and some utilities.)

 

[Animorph]

The interest rate they are allowed to use for pension lump sum calculations is higher than actual current interest rates applied to real annuities. It may be that the pension monthly income will be much better than what you can purchase with an SPIA now. If a pension provides a promised monthly income, the interest rate is only important when calculating the lump sum, and the lower the rate the higher the lump sum. When they are allowed to use a higher rate, the lump sum is lower than it should be.

All that goes out the window if you have the lump sum and are purchasing the annuity. Then you want the higher rate.

 

[ERhoosier]

Should include item #6 in decision analysis- stability of pension guarantor. Not rare these days for pension funds to cut (or end) benefits, and gov't insurance funds often do not cover full pension benefit payments. Pension from an unstable company may not be as good as it seems.

 

[Midpack]

The interest rate they are allowed to use for pension lump sum calculations is higher than actual current interest rates applied to real annuities. It may be that the pension monthly income will be much better than what you can purchase with an SPIA now.

Operative word "may be." The lump sum I was offered was within 0.5% of the SPIA quote from Vanguard (and immediateannuities.com) to purchase the same monthly (pension) income & terms. And others here have reported similar findings. But it's the first thing a potential recipient should check as I noted in post #1. "But of course you should compare the employer pension and lump sum amounts vs available annuity income costs first and foremost. They should be comparable - if not, the rest may not matter."

Should include item #6 in decision analysis- stability of pension guarantor. Not rare these days for pension funds to cut (or end) benefits, and gov't insurance funds often do not cover full pension benefit payments. Pension from an unstable company may not be as good as it seems.

How is that different from the first point from M*?

An aside, but what I still don't know is how many employers pay pensions vs those who just buy annuities on behalf of retirees - and are no longer the guarantor? When I went back to my previous Megacorp pension admin and told her how close the lump sum they offered was to an equivalent annuity, she told me she wasn't surprised as they just bought annuities for retirees to end their future responsibilities. If I'd taken the pension, Megacorp would have been off the hook entirely, it would have been between me and the annuity provider from then on.