Pension: annuity vs. lump sum?

[Chuckanut]

I agree with those who say take a look at how a pension fits into your overall income base. I took a pension and even bought a few extra years of service because I wanted all three of my stool's legs to be about equal - savings, pension, SS.

Pension was the short leg of the stool so I sawed off a bit of the savings leg and used it to lengthen the pension leg. So far so good.

Note: this decision was made prior to what has happened in Detroit in regards to people how worked for the city and had pensions. My guess is that buying the extra years of service is still a good idea, just not quite as good as before Detroit.

 

[Red Badger]

I used the formula on Clark Howard's web page. From a numbers perspective, my joint and 100% survivor was the best option. With SS and a couple pensions covering our modest fixed expenses, we can use our portfolio, for a new roof, beer $, travel, etc.

In any case pension decisions are excellent first world problems to deal with - good luck!

 

[Chuckanut]

I viewed it as using the lump sum to buy a joint-life annuity at better than market rates.... just like I view deferring SS as buying a COLAed annuity at better than market rates.

Anytime that I can buy $1 for 70c I give it serious consideration.

An excellent way to think about it, IMHO.

 

[Turboslacker]

Why trust a company or the government more than you need to? Take the lump sum and control of your destiny.

 

[savory]

I took the pension given 1) my research suggested that people with a pension feel better in retirement 2) the pension fund insurance.

I do have some angst. I had a lot of confidence in the company that I retired from. It has caused me concern that since my division was sold, the new company will have the funding to maintain the fund. It is also a large and fairly successful company so I am expecting the best. However, I expect I would not get 100% of my pension payment if the company defaults.

Having said that, if my pension ends tomorrow it would have more impact for my children since my pension pays a high percent of my expenses. While I was not able to take advantage of the recent market success with my pension, I have not used much of my savings. So, with that money I enjoyed the recent gains.

 

[DrRoy]

I chose the annuity.

 

[bclover]

I have a pension that I can pull either monthly annuity payments or lumps sum. I understand the arguments for taking the annuity, if I think I'll live 8+ or so.
My Dad is 93 and my Mom is 88, both still kicking.

Still, having heard bad stories of corporations squandering pension funds, or having them mismanaged, gives me pause.
Another thought is that picking 100% survivor benefit for my annuity drops the monthly payout about 23%. Taking the lump sum, my wife will be the beneficiary due to my trust and will arrangements.

Has anyone taken a lumpsum pension and regretted it?

No.
I took my late husbands pension as a lump sum because if I took it as an annuity and kicked the bucket the next day my sons would not inherit the remaining value.

I took the lump sum, rolled it over into an ira (unfortunately he died when he and were both relatively young) and now it's part of my estate. also since I invested it, the last couple of years saw it do really really well.

 

[racy]

... Has anyone taken a lumpsum pension and regretted it?

Nope.
I liked the idea of having something for legacy beyond our deaths.

 

[flintnational]

We took the pensions but the lump sum offers were not actuarially equivalent. Additionally, while I see the appeal of investing the lump sum, in our case the pensions added a significant safety net. Pensions and SS at age 65 will completely cover our budget. Finally, by taking the pensions (hopefully a stable investment) we are able to keep a more aggressive AA. IOW, taking the lump sum and investing it could increase your overall portfolio risk compared to the pension remaining in your overall portfolio.

 

[joeea]

Why trust a company or the government more than you need to? Take the lump sum and control of your destiny.

Nobody controls their destiny.

 

[street]

Nobody controls their destiny.

The impression I get from you is you can to fight. You are taking this statement way beyond what it was meant to make a point of.

 

[COcheesehead]

In general, but run your own numbers, the lump sum payout favors the payer, not the payee.

 

[njhowie]

Finally, by taking the pensions (hopefully a stable investment) we are able to keep a more aggressive AA. IOW, taking the lump sum and investing it could increase your overall portfolio risk compared to the pension remaining in your overall portfolio.

The potential issue (if you even want call it that) is for any pensions started relatively recently, the actuarial assumptions may "harm" you in the longer run. I say "harm" not that in you would lose anything, but that you will likely be receiving less than you might otherwise with no less safety.

You lock in to your monthly payout on day one, and that is the amount you will receive monthly for the remainder of your life, regardless of what happens. Yes, that is a safety net, that you are guaranteed what you will receive and there is (almost) no risk.

However, interest rates have been extraordinarily low. As someone mentioned in a prior comment, actuarial assumptions could have been made with a risk free interest rate of 2%. Today, looking back, that is a terrible time to have had annuity calculations performed. Today, one year CDs are going for 2.1%, two year are at 2.5%, five year are pushing 3% - these will continue moving higher over the next year or two. In all likelihood longer maturities will be moving higher as well. If you like, you could lock in to 30-100 year AA and AAA municipal bonds today yielding 4.7%.

My point is that though you have your safety, over the longer term, due to accepting the pension annuity during a period of extremely low rates, you have locked yourself out of higher returns which will likely be available with no less safety.

As interest rates continue to move higher, SPIA's will also have increasing payouts. The issue becomes when you lock in, and how much you lock in.

 

[pb4uski]

Why trust a company or the government more than you need to? Take the lump sum and control of your destiny.

Hate to break bad news to you, but if you take the lump sum and invest it then you are also trusting a company or the government.

 

[bclover]

Hate to break bad news to you, but if you take the lump sum and invest it then you are also trusting a company or the government.

lol and I know some family members who giving a wad of cash to would be disastrous.

 

[flintnational]

The potential issue (if you even want call it that) is for any pensions started relatively recently, the actuarial assumptions may "harm" you in the longer run. I say "harm" not that in you would lose anything, but that you will likely be receiving less than you might otherwise with no less safety.

You lock in to your monthly payout on day one, and that is the amount you will receive monthly for the remainder of your life, regardless of what happens. Yes, that is a safety net, that you are guaranteed what you will receive and there is (almost) no risk.

However, interest rates have been extraordinarily low. As someone mentioned in a prior comment, actuarial assumptions could have been made with a risk free interest rate of 2%. Today, looking back, that is a terrible time to have had annuity calculations performed. Today, one year CDs are going for 2.1%, two year are at 2.5%, five year are pushing 3% - these will continue moving higher over the next year or two. In all likelihood longer maturities will be moving higher as well. If you like, you could lock in to 30-100 year AA and AAA municipal bonds today yielding 4.7%.

My point is that though you have your safety, over the longer term, due to accepting the pension annuity during a period of extremely low rates, you have locked yourself out of higher returns which will likely be available with no less safety.

As interest rates continue to move higher, SPIA's will also have increasing payouts. The issue becomes when you lock in, and how much you lock in.

I posted the same question as the OP last fall. I ended up taking the annuity but at the time mentioned I was only about 60% in favor of this route as opposed to the lump sum. So I definitely see both sides. If the lump sum offer had been actuarially equivalent to the annuity, I probably would have gone that route. But, from what I could tell, the lump sum was discounted by about 20%. Additionally, the sponsoring company is sending a heck of signal about what they and their actuaries think about the annuity. They see it as more costly than their lump sum offer or they would not make the lump sum offer. Historically, my plan did not include a lump sum option. This was a buy out offer.

 

[Chuckanut]

Nobody controls their destiny.

No completely, that is true.

But, we can take steps to influence and point it in the right direction. Often it works!

FWIW, there are also psychological factors to take into account. Once one has a pension it is easier for many people to choose an AA that leans more towards stocks. After all if the market goes down the rent can still be paid and there is still food on the table.

 

[FI_RElater]

other considerations...

as noted above, most lump sum options significantly favor the company and NOT the employees. further, the experience of the market over the last few years is likely not repeatable...notice the current storm clouds in the market now.

a consideration in some states is the taxation of pension benefits- - in some states pensions have reduced tax costs which may favor them. also, pension income is less subject to attachment by creditors, but you should still have an umbrella insurance for coverage. obviously, the lump sum means that it would be part of your legacy account if you have kids (or a favorite charity).


OP, seriously consider waiting to at least the FRA (SS full retirement age) so as to not take a significant hit on SS income. remember that many states don’t tax SS income at all and that the fed doesn’t tax all of it either (85% is max). in addition, SS is COLA adjusted whereas you would need your portfolio to increase to provide you with the increase (while not a problem recently, that’s not a guarantee in the future)

 

[joeea]

The impression I get from you is you can to fight. You are taking this statement way beyond what it was meant to make a point of.

I don't know what you mean.

What I mean is that by definition, one's destiny cannot be controlled.