Mortality salience: why retirees tend to choose lump sums

[kcowan]

I was offered an immediate pension in 92 at age 49. I took it! The next year they had another offer and the immediate pension was not included. I think they realized what I had. The immediate pension was by far the best deal.

I think they were working on retirement statistics but had no experience with such young retirees. Apparently, retiring at 49 increases your longevity compared to 65. So their assumptions were wrong! Meanwhile I am still collecting after 25 years with no end in sight. My Dad lived to be 95.

 

[imoldernu]

Reading this thread made me take another look at the small annuity that DW's mom left to each of her kids.

The more I read, the more I get confused. Anyway, here's the status:
Annuity bought in 1990 for $8000. (Inflation since then would make that $14K, today).

Just received a statement that lists this:
Inception to date $8000.00
NonQualified Annuity Type
Guaranteed Income Account $0.00

Fixed Account
Ending accumulated value... $55,030.00
Surrender Value... $51,390.00
Annuity Value... $60,685.00

A year ago, I called to see what my options were. At first I was told that I could take the full amount out over a 5 year period, but got a call back saying that it would have to be over a 10 year period.

Since we've been in a balanced income tax situation (no taxes) for the past 24 years, am not sure what we'll be looking at 'taxwise" by withdrawing the surrender value, but think unless we win a lottery, that we'll be in the lowest tax bracket.

Taking the annuity over the 10 years? Not likely to live that long. At the present, no need for the money, so thinking to just leave it as a reserve and add the guaranteed 4%/yr. Plus... no aggravation.

At age 80, with reasonable health, but not great genes, this isn't a big deal, but wonderin' if there's a simple way to make sense of the options, and what the difference is between Annuity, Accumulative and Surrender values.

 

[MBSC]

Annuity bought in 1990 for $8000. (Inflation since then would make that $14K, today).

Fixed Account
Ending accumulated value... $55,030.00
Surrender Value... $51,390.00
Annuity Value... $60,685.00

A year ago, I called to see what my options were...I could take the full amount out over...a 10 year period.

...wonderin' if there's a simple way to make sense of the options, and what the difference is between Annuity, Accumulative and Surrender values.

Accumulated Value: Initial investment plus gains.

Surrender Value: Accumulated value less surrender charges. This is the amount you would receive if you cashed out. Some contracts will allow you to withdraw 10% each year without penalty. If you do not need the principal, just continue to earn the safe 4% return.

Annuity Value: If you take the 10 year payout, you have converted the deferred annuity into an immediate annuity. This is the present value of the immediate annuity.

 

[gerntz]

We opted for the annuity over a lump sum for a number of reasons:

The lump sum was a modest amount, and by using the Immediate Annuities website, we could see that the monthly payout amount that the company offered was better than what could be purchased on the open market.

The pension payment amount is low enough to be protected under the Pension Benefit Guarantee Corporation, should the pension fail in the future.

The lump sum break even amount, not adjusted for inflation, was 16 years. We have a good likely hood of living at least that long, especially since we are separated in age by nine years.

We liked the idea of having three legs of the retirement stool in place: a pension, ss, and retirement savings.

The only downside to taking the annuity was that the monthly amount is not adjusted for inflation.

Sounds well thought out & you're satisfied. Pretty much all that matters. Good job.

 

[gerntz]

Maximizing our SS annuity is enough annuity for us we believe.

 

[Danmar]

Well, I was given an offer to annuitize my retiring allowance. I made the decision 3 years before I actually retired. I chose the pension and very glad I did. This pension represents almost 50% of our income in retirement with a full survivor benefit. I think they were pretty generous in the offer, but disregarding that, having a large pension gives me the ability to take a more aggressive investing position. So far ( 10 years into retirement) it has worked out very well in all respects. Pensions are great to have if the cost is fair.

 

[pb4uski]

Reading this thread made me take another look at the small annuity that DW's mom left to each of her kids.

The more I read, the more I get confused. Anyway, here's the status:
Annuity bought in 1990 for $8000. (Inflation since then would make that $14K, today).

Just received a statement that lists this:
Inception to date $8000.00
NonQualified Annuity Type
Guaranteed Income Account $0.00

Fixed Account
Ending accumulated value... $55,030.00
Surrender Value... $51,390.00
Annuity Value... $60,685.00

A year ago, I called to see what my options were. At first I was told that I could take the full amount out over a 5 year period, but got a call back saying that it would have to be over a 10 year period.

Since we've been in a balanced income tax situation (no taxes) for the past 24 years, am not sure what we'll be looking at 'taxwise" by withdrawing the surrender value, but think unless we win a lottery, that we'll be in the lowest tax bracket.

Taking the annuity over the 10 years? Not likely to live that long. At the present, no need for the money, so thinking to just leave it as a reserve and add the guaranteed 4%/yr. Plus... no aggravation.

At age 80, with reasonable health, but not great genes, this isn't a big deal, but wonderin' if there's a simple way to make sense of the options, and what the difference is between Annuity, Accumulative and Surrender values.

One thing that doesn't make sense in what you posted is the surrender value... it would be very unusual in my experience that a 26 year old annuity would still have surrender charges... they typically grade out over 10-15 years.

Nonetheless, if the only premium was the single $8k in 1990 then you have done quite well. If the guarantee is 4% then I would leave it where it is if you don't need the cash.

 

[brett]

I had the option of non inflation adjusted DB pension or a commuted value. I took the DB pension for three reasons and am happy with the decision.

The DB pension formed a guaranteed leg on my three legged financial plan. It was one I could count on if my investments went south. It also had the benefit of life insurance for my spouse given my selection of a 75 percent survivor pension. I also had a supplementary pension but was unable to take this as an annuity. It had to be paid out in annual lump sums over three years and taxed as income. We may choose to annuitize the after tax amount in our later years IF the interest rates are higher.

The other benefit it has provided is that we feel free to spend money on travel etc. without the worry of what will happen to our income if the market goes south. This has actually made our retirement more enjoyable and certainly more worry free.

I am in excellent health and there is longevity in my family. Certainly, if this had not been the case, I would have opted for the commuted value, notwithstanding the tax implications for me with this decision.

 

[rodi]

I just pulled the trigger on my pension to start the month after my 55th birthday (soon). I did the analysis again - and the lump sum was the opposite of a good deal. If I were to use the lump sum to buy a fixed annuity non-cola - it would by about 1/2 the amount/month of the fixed annuity non-cola being offered. I'm taking the pension/annuity.

We're not talking huge numbers here... Less than $500/month... But, hey, it's something.

 

[pb4uski]

Whenever those various lump sum or annuity threads pop up I am always thankful that my former employer's DB plan did not offer a lump sum so I didn't have that decision to make. So today I receive a mailing from them that they will be offering a "lump sum window" in August to October.

They will be sending me details later but I fully expect that it will be a raw deal so I won't take the lump sum, but only time will tell.

Update - I got the lump sum offer in the mail the other day... as I suspected, it was a rip off.

We're likely to select the 100% survivor with 10 years guaranteed.

If I input the pension benefit amount into Vanguard's annuity quote website, the values of the annuity (single premium) are 130% to 144% of the amount offered for the lump sum. If I input the lump sum as a single premium like I was using the proceeds of the lump sum to buy a joint life annuity with 10 years guaranteed, then the monthly annuity benefit is 68% to 75% of what my monthly pension benefit would be.

Unless one is in really poor health, you would be a fool to take the deal.... but I am sure some of my former co-workers will be bug-eyed by a big honking number and go for it.

 

[Big_Hitter]

Seems like you are being offered the minimum lump sum, which is based on the annuity payable at your NRD (typically 65. )

 

[pb4uski]

I don't think so in that my age 61 benefit is 86% of my age 65 benefit.

If I took the lump sum and bought a 5 year deferred annuity the monthly benefit starting at age 65 would be 75% of my pension plan benefit.

 

[fishndad42]

I'll be taking the lump sum in a few months specifically because I have thought about mortality - a lot. Turns out it is very difficult to estimate your own mortality when you have known health issues. DW and I both have ongoing fights with cancer - successful for now but it creates an unlikely long term future. Given that multiple models show our plan could carry us through another 30 plus years and we don't anticipate making it 10, taking the lump sum will either carry us to the end or take care of our offspring quite nicely.

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