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Need help with investment strategy!
Old 05-16-2012, 07:02 AM   #1
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Need help with investment strategy!

I'm 55, and have over 31 years with the same company which qualifies me for full retirement benefits. I have a pension worth $430K that I can take as a monthly annuity paying $2100/Month with a 75% survivor benefit, but with no COLA, or I can take it as a lump sum.

If I do the lump sum, the 72T distribution (to avoid paying 10% early withdrawal penalty) is only about $1500 per month. I'm leaning towards the annuity, but the non-COLA'd aspect is troubling.

I also have a VA pension of $43K per year (tax free), and will begin receiving Army Reserve retirement of about $10K per month at age 60. Also I can start Social Security at age 62 with an estimated benefit of $17K per year.

Opinions please,.... Lump sum or annuity?
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Old 05-16-2012, 07:15 AM   #2
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Forgot to mention that I also have a company sponsored 401K (Profit sharing) plan currently worth $530,000. I believe I can avoid paying the 10% penalty on any withdrawals from this account after I retire,.. correct?
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Old 05-16-2012, 07:31 AM   #3
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Do you think you'll live until 70 or 90? You've got a lot of monthly income as you age.....but, don't forget about inflation. Think back 25 years to what it cost to live and what you made. That's what today's "fixed" payment will look like then. If you're from a family that lives a long time, I'd look at options that grow with the cost of living. I'd look at holding off Social Security until later since at ads 8% a year to your monthly check. And, would you like to splurge on anything, now? If so, grab the check and have some fun. Or, divide it out on a monthly basis until you're 65 so you can delay Social Security and then have a 25% better benefit for the rest of your life.

My point? More important than a few bucks, now or later, is the lifestyle differences you'll have over the next many, many years. Now, there may be substantial financial differences between a distribution or not.....others will have to tell you that. Good luck, you're in far better shape than most on this forum......You are lucky!
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Old 05-16-2012, 07:43 AM   #4
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Well,.. I hope to make 90! I feel really good right now health wise, but I have had mulitple DVT's (blood clots) and will be on blood thinners for life. Also been diagnosed with Polycystic Kidney disease, but no symptoms so far so wish me luck on that!

A realistic expectation might be closer to 80?

The VA pension and Army retirement are COLA'd so after SS kicks in I'd have 3 COLA'd sources of income that my wife and I could proably live comforably on by themselves.

Thanks for your response.
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Old 05-16-2012, 07:43 AM   #5
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I also have a VA pension of $43K per year (tax free), and will begin receiving Army Reserve retirement of about $10K per month at age 60. Also I can start Social Security at age 62 with an estimated benefit of $17K per year.
You must have held one hell of a rank to get $10K per month from the Army Reserve. As a taxpayer, I hope you meant per year.

To evaluate a SPIA (which is what your pension would be) I suggest to go to Vanguard and see what price you'd have to pay them for the same income stream. With the currnt very low interest rates, cash outs are very favorable for anyone believing that interest rates will be going up in the near future.

Other things you didn't include are your heath, any other savings and your cost of living. You have a pretty good income with just the VA and Army reserve pensions and these are COLA'd. Obviously, the pension is worth much less if you and/or your DW's health is not excellent and you both don't have a good family history of longevity.

Have you run your retirement plans through FireCalc?
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Old 05-16-2012, 07:46 AM   #6
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Well,.. I hope to make 90! I feel really good right now health wise, but I have had mulitple DVT's (blood clots) and will be on blood thinners for life. Also been diagnosed with Polycystic Kidney disease, but no symptoms so far so wish me luck on that!
I would take the cash. You are not a good candidate for an annuity.
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Old 05-16-2012, 08:09 AM   #7
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OOOPS! I did mean $10K per year (not month).
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Old 05-16-2012, 08:20 AM   #8
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OOOPS! I did mean $10K per year (not month).
I was pretty sure of that. My FIL retired as a Brig. Gen. and got around $20k/year. I'd have to pull up his files to see the exact number so that's only a rough guess.
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Old 05-16-2012, 09:13 AM   #9
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OOOPS! I did mean $10K per year (not month).
You had me going too for a minute. I thought perhaps you were an ex-JCS!

I agree that to evaluate the fairness of the lump sum vs the annuity you could compare the benefit per month of the annuity with the benefit per month of a SPIA based on a single premium for the lump sum amount.

Your OP mentions a 75% survivor benefit to the pension. Are you married? If so, how old is your wife in relation to you and how is her health?

If it is just you given your health issues I agree that the lump sum might be better. Tough call you'll need to make based on your expected longevity.

However if you are married and DW is younger and/or expected to live long that might bias it toward the annuity (assuming the annuity is fair or better).
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Old 05-16-2012, 09:17 AM   #10
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Money wise the annuity is probably "worth more" Given you already have plenty of COLA'd annuity inocme, if I were you I'd take the cash. However, you would want to look at spouses income if you die first.

From the TSP web site: ( no 75% option)

Joint Life Annuity With Spouse, Level Payments, No Additional Features, 50% to SurvivorAmount used to purchase annuity$430,000When you are age of55Your spouse or joint annuitant will be age55This is the estimated monthly annuity payments based on an annuity interest rate index of: 2.125%$1744
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Old 05-16-2012, 09:20 AM   #11
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Wife is 12 years younger than me (43) and in good health. This is one of the main reasons I was considering the annuity.
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Old 05-16-2012, 09:42 AM   #12
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Well,.. I hope to make 90! I feel really good right now health wise, but I have had mulitple DVT's (blood clots) and will be on blood thinners for life. Also been diagnosed with Polycystic Kidney disease, but no symptoms so far so wish me luck on that!

A realistic expectation might be closer to 80?

The VA pension and Army retirement are COLA'd so after SS kicks in I'd have 3 COLA'd sources of income that my wife and I could proably live comforably on by themselves.

Thanks for your response.
The bold is the key to me. You can't make a wrong decision here because you have a base that provides a comfortable lifestyle. It's largely a matter of what "feels right" to you.

I'd ask myself, would we spend money any differently if I took the lump sum vs. the annuity?

If so, which pattern of spending seems right for my situation?

If not, I'm just asking which will leave the bigger estate or safety net, and that's based on my estimate of expected investment returns and date of death (how long will it take before the accumulated annuity payments exceed the accumulated lump sum, compared to when I'd expect to die or have a large cash need)
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Old 05-16-2012, 09:49 AM   #13
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Wife is 12 years younger than me (43) and in good health. This is one of the main reasons I was considering the annuity.
The best way to help your wife is to use the lump sum to live on while you defer SS to age 70. If you have any cash left when she turns 70, that might be a good time to see about a SPIA for her.
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Old 05-16-2012, 10:05 AM   #14
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begin receiving Army Reserve retirement of about $10K per month at age 60.
Was this reserve unit based in Illinoise by any chance?
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Old 05-16-2012, 10:20 AM   #15
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Was this reserve unit based in Illinoise by any chance?
Nope,... Arkansas
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Old 05-16-2012, 10:44 AM   #16
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I recently faced the same decision and took the lump sum, it was a no-brainer for me. However, everyone's circumstances are different.

I took the lump sum after I got a quote to buy an annuity in the open market. The lump sum my company was offering was without a few thousand (for the same non-COLAd income the company offered). The company was just going to buy an annuity on my behalf if I opted for the pension, so it was a wash to them. I'd first check out this aspect. If the options you're being offered are not comparable, the decision branches into other areas than I describe below.

From there, do you need the income immediately? I did not. If you need the income now/soon, the decision branches into other areas than I describe below.

So my logic, if I took the pension now, I'd be locked in with no other options (you can't get the lump sum money back). If I took the lump sum, I could put it aside to grow long term and then buy an annuity at a later date whether in a few years or decades. Some people worry that you might lose the lump sum in the market, if that's a concern, there are safer ways to invest that money. By taking the lump sum, I still had all the options in my control. The upfront cost of annuities is relatively high right now due to low interest/bond rates for a given income provided. Since I can wait, if I buy an annuity when interest/bond rates increase (and they will, though who knows when, and it could be a long while), I can pay less and/or get a higher monthly income for the same money. And irrespective of interest rates, an annuity will decrease as we age all else equal, since the income will be provided for fewer years (buying an annuity for a given income at 65 is cheaper than the same income annuity at age 60 - all else equal).

Again, the decision is unique for each of us.
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annuity is probably "worth more"
Old 05-16-2012, 11:01 AM   #17
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annuity is probably "worth more"

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Money wise the annuity is probably "worth more" Given you already have plenty of COLA'd income...
If I were you I'd take annuity option and skip the lump sum. Your 401k may give you opportunity for growth. It's great to have so many income streams.
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Old 05-16-2012, 12:12 PM   #18
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Not to hijack the thread, but I am curious if anyone here is aware of or is receiving VA pension benefits. In googling that I found this link: VA Pension for Wartime Veterans and Surviving Spouses and while I am not 65 or disabled in anyway, it would seem to apply if that happened in the future. It appears the key requirements are to have served during wartime (vietnam vet for me), be at least 65 and need additional care at home or via assisted living and does not need to be from a war related injury. There is also be an income threshold after medical expenses but I do not know what that is.

I had never heard about this and it appears many are not aware of this benefit.

Edit: appears your income has to be very low to receive this, so maybe not useful to many on here
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Old 05-16-2012, 02:00 PM   #19
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Not to hijack the thread, but I am curious if anyone here is aware of or is receiving VA pension benefits. In googling that I found this link: VA Pension for Wartime Veterans and Surviving Spouses and while I am not 65 or disabled in anyway, it would seem to apply if that happened in the future. It appears the key requirements are to have served during wartime (vietnam vet for me), be at least 65 and need additional care at home or via assisted living and does not need to be from a war related injury. There is also be an income threshold after medical expenses but I do not know what that is.

I had never heard about this and it appears many are not aware of this benefit.

Edit: appears your income has to be very low to receive this, so maybe not useful to many on here
My FIL was a WWII/Korea/Viet Nam era veteran and he was getting a DOD pension. We saw that there was a program for helping to pay for assisted living and nursing care but, as you found out, the income limits were pretty low. I don't remember the numbers but his income would have been so low that with the support he'd still be in a Medicaid facility. I don't remember all of the details. I only know that he didn't qualify.
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Old 05-16-2012, 04:20 PM   #20
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You are fortunate that you have a range of options and you are financially set for life. As others have commented above everyone's situation and thinking process is different. I was faced with the annuity vs lump sum and after a great deal of thought, calculations, discussions etc. I chose the monthly payment. I am only 57 and we are blessed to have longevity on both sides of the family. I felt that with the monthly payment I could be a bit more aggressive with my 401k to compensate for the non COLA annuity. The financial planner said it was really a toss up--what sealed it for my wife and I is he said with the annuity you and your wife will have a monthly payment along with SS until we die. It is a very personal decision which requires a great deal of thought, planning and financial analysis.
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