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Pension: annuity vs. lump sum?
Old 03-06-2018, 05:23 AM   #1
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Pension: annuity vs. lump sum?

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?
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Old 03-06-2018, 06:26 AM   #2
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How important is your pension to your retirement plan?
How well funded is your company's pension plan? How solid is your company?
How does a SPIA using the lump sum compare to the pension payments?
Is your pension COLA'd?

Do either of you have conditions that would likely shorten life?
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Old 03-06-2018, 06:36 AM   #3
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Has anyone taken a lumpsum pension and regretted it?
In general most people convince themselves that whatever decision they made was the best one. Try not to worry much about regret.

There are two main factors involved here - math and risk.

The math is rather straightforward. You can bring the choices to a fee-only financial advisor or to a CPA and get help with it.

You'll need to asses the risk that the annuity will be honored by the company servicing it. Understanding the company history and financials can help.

The only other consideration is - what are you doing regarding the rest of your portfolio? If your wife is dependent on this pension, then the 100% survivor benefit might be critical. If the pension represents only a small percent of your portfolio, then it might not be as critical. You probably want to consider this pension decision within the context of your overall financial plan.
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Old 03-06-2018, 06:44 AM   #4
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I had a nice size pension that I took as a lump sum when I left my last employer 5 years ago. I also have a tiny pension with another employer from my very first corporate job 30+ years ago which I have no choice, I have to take the annuity - no option for lump sum.

With the lump sum, I put in to my rollover IRA and invested. Obviously it has done extremely well with the market in that time - so absolutely no regrets, and thankful it worked out.

Companies do play with pensions, and it is never to the benefit of the pensioner. Pensions are a liability to companies and it's not at the forefront of what they think about day to day. Companies will cut pension benefits over time, and if the company does go bankrupt, you are not guaranteed full value of your pension. I also remember articles maybe 20 years ago, at times when the markets were doing well - many companies were skimming money from their pension funds because they were overfunded at the time as a result of market returns. Those same companies (that are still around) find their pensions underfunded today, even with the markets near all-time highs.

100% survivor benefit for your spouse in your case seems excessively high. With my tiny pension, if I begin taking payments in 2 years, at the earliest possible date (age 55), the reduction for the 100% survivor benefit is only 4%. If I wait to normal retirement age at 65, the reduction is 10%. So a 23% reduction seems high - but if you're older, it may be reasonable.

Remember, nobody looks after your money better than you. I would take the lump sum if you have the option.
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Old 03-06-2018, 08:13 AM   #5
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A pension/annuity you pay/cost for certainty and can be risky option. The company isn't going to pay you more in your life time when opting for the pension. When you run the numbers the pension they may seem like a no brainer BUT they still aren't gone to pay you more.

The lump sum is in your control to invest and is less risky IMO. A lump sum isn't for everyone.

I have done the numbers for my options and with the markets the way they have been the lump sum has done way better in my case.
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Old 03-06-2018, 08:19 AM   #6
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For me and with my situation, the best option was to take the pension annuity. No regrets. If the company defaults, PBGC will take up the slack. Else, we have a backup plan...
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Old 03-06-2018, 08:24 AM   #7
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For me and with my situation, the best option was to take the pension annuity. No regrets. If the company defaults, PBGC will take up the slack. Else, we have a backup plan...
PBGC will take up the slack...up to their cap...and then you lose the amount you are over.
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Old 03-06-2018, 08:31 AM   #8
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For me and with my situation, the best option was to take the pension annuity. No regrets. If the company defaults, PBGC will take up the slack. Else, we have a backup plan...
+1 In most cases the lump sum is significantly less than the actuarial present value of the annuity benefits... in my case it was about 70% less by both my calculations and also in the judgement of the pension's former actuary (a friend).... so I chose the pension.

I'm not at all worried about default... pension is well funded and sponsored by an insurance company... and even in the rare event of a default my benefits are far below the PBGC limit.
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Old 03-06-2018, 08:40 AM   #9
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+1 In most cases the lump sum is significantly less than the actuarial present value of the annuity benefits... in my case it was about 70% less by both my calculations and also in the judgement of the pension's former actuary (a friend).... so I chose the pension.
What was the interest/discount rate you used at the time to determine present value?
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Old 03-06-2018, 09:05 AM   #10
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Has anyone taken a lumpsum pension and regretted it?
Took lumpsum ~6 years ago and have no regrets.
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Old 03-06-2018, 09:15 AM   #11
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I took the lump sum 6 yrs ago as well, no regrets. With family and personal history of cardiac issues and estate hopes for DW and kids it was the right choice for me.
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Old 03-06-2018, 09:21 AM   #12
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I haven't had to make the decision yet, but one thing I have done in my deliberation is to run Firecalc with the two scenarios. I keep everything the same but in one I take the annuity, the other the lump sum. I use the investigate tab to see which will support a higher spending level - in my case the lump sum wins by quite a bit.

Still haven't decided which to do, as having all three legs of the stool is attractive to me and my pension fund is very healthy at this time. I have a few years before I have to make the decision.

Hope this helps.
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Old 03-06-2018, 10:53 AM   #13
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What was the interest/discount rate you used at the time to determine present value?
I benchmarked it to joint life SPIA pricing at the time since the pension benefit was joint life... the lump sum that was offered was about 70% of the premium for a joint-life SPIA paying the benefit that I received.

Based on what period certain annuities were paying at the time, as I recall the interest rate was about 2% +/-.
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Old 03-06-2018, 11:07 AM   #14
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I haven't had to make the decision yet, but one thing I have done in my deliberation is to run Firecalc with the two scenarios. I keep everything the same but in one I take the annuity, the other the lump sum. I use the investigate tab to see which will support a higher spending level - in my case the lump sum wins by quite a bit.

Hope this helps.

Bingo >>> in the short time of investing my lump sum in real time it has and will surpass an annuity by a long shot.
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Old 03-06-2018, 11:26 AM   #15
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Choose one or the other option then rationalize it when ever anyone else asks in the future. Worked for me.

Ditto as to when to take Social Security, pay off mortgage, or fly first class.
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Old 03-06-2018, 11:32 AM   #16
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Much like SS, the choice between a non-cola'd pension vs a non-cola'd annuity vs lump-sum investments using 4% WR (with cola increases) will depend on your planned age of death. The longer your outlook, the better a lump-sum looks.

But as said, most will tell you whatever personal decision they made was right for their situation. Me, I took the lump sum and rolled it into my IRA's. it was the right decision for me and my situation.

njhowie, if your 1st company's pension ever decides to transfer that obligation to an insurance company, you may get to make the lump-sum decision at that time.
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Old 03-06-2018, 11:34 AM   #17
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The math is rather straightforward. You can bring the choices to a fee-only financial advisor or to a CPA and get help with it.
This is what we did in ~2012. We found our planner here: http://www.napfa.org

We ended up taking the lump sum. The market has been very good to us.
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Old 03-06-2018, 11:42 AM   #18
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njhowie, if your 1st company's pension ever decides to transfer that obligation to an insurance company, you may get to make the lump-sum decision at that time.
Thanks - will keep it in mind.

However, again - it is tiny...will just cover my monthly pocket change/allowance. I'm not concerned about it.
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Old 03-06-2018, 12:43 PM   #19
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The company isn't going to pay you more in your life time when opting for the pension. When you run the numbers the pension they may seem like a no brainer BUT they still aren't gone to pay you more.
The annuity provider may indeed pay you more over your lifetime when you opt for the pension versus the lump sum. It depends on the length of your lifetime.

Quote:
The lump sum is in your control to invest and is less risky IMO.
Of course that depends on how you invest it.

Absent defaults, a pension is a predictable amount. Investments are typically not. Thus the investment risk is more risky.

Quote:
I have done the numbers for my options and with the markets the way they have been the lump sum has done way better in my case.
The key phrase here is "with the markets they way they have been".
Going forward, there is no assurance that the markets will continue to be the way they have been. In fact, it's almost certain that they won't be the way they have been in recent years.
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Old 03-06-2018, 12:48 PM   #20
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Choose one or the other option then rationalize it when ever anyone else asks in the future. Worked for me.

Ditto as to when to take Social Security, pay off mortgage, or fly first class.
LOL! So true!
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