Pension Lump or Annuity? (and Firecalc Investigation)

[hornet99]

Long time lurker, infrequent poster here. I’m looking to leave my current employer in the next several months and would like some help with my pension analysis.

First is the standard question about taking a lump sum or annuity from the non-COLA’d Mega Corp db pension. For the purposes of this discussion, let’s assume that the pension is well funded and my life expectancy is 78-82 (sadly that’s the historical range for males in my family going back generations). Single, no spousal benefit to consider.

Options:
i. $210k lump at current age of 48, rolled into tIRA.
ii. $436k lump at age 65.
iii. $34k annual payment, starting at age 65

A quick calculation shows an IRR of 4.4% of the lump now vs. age 65

Secondly, the Firecalc Investigate analysis (selecting “Spending Level” option with 95% success). I’m keeping this model as simple as possible so I’ve kept all defaults except what I’ve noted below and starting with a base $1M portfolio.

a. $210k lump now (add to $1M portfolio = $1.21M). Shows annual spending level of $48.1k now
b. $436k lump at age 65 in 2033. Shows annual spending of $53.9k now
c. $34k annual payment starting at age 65 in 2033. Shows annual spending of $42.6k now

According to Firecalc, the lump at age 65 is the clear winner, with the annuity a distant third. I repeated with same analysis with ******** and got similar results. My dilemma is around the common advice of the three legged stool: portfolio, db pension, SS (which I have but didn’t include to keep this as simple as possible). Are the historical returns in Firecalc driving the significant difference? Perhaps a Monte Carlo simulation would show less contrast? Is it a question of how much risk I’m willing to take with the elimination of this third leg? Or is the choice simply as clear as these numbers indicate? I feel like I'm missing something obvious here.

Thanks in advance!

 

[kcowan]

I would go for the lump sum but invest in a discount broker portfolio. I went for an immediate pension at age 49 but had some deferral options. I did not trust my money with some trust company. The lump sum was not as preferable. But it seems to be in your case.

 

[DrRoy]

FC is a monte carlo sim, but it does use historical returns. That may be the place it has some weakness today. I personally believe that the drivers of future investment returns ar going to be weaker than they were over the last 30-50+ years. That would likely make the annuity look better relative to the lump sum options.

 

[nun]

Assuming you live to 82 I agree that for both lump sum options you'll need just over 4% annual return to equal the pension.

If you like the insurance aspect of the the pension then use that, particularly if you have other assets that you can invest more aggressively.

You could just think of the pension as fixed income allocation. If I had $210k in a fixed income product today that was guaranteed to return 4.4% from age 48 to 65, I wouldn't be crying about it.

 

[REWahoo]

FC is a monte carlo sim, but it does use historical returns.

Actually, FIRECalc is the opposite - it is not a Monte Carlo simulator, it uses actual historical returns as a default. However, it does have a Monte Carlo option (the "random performance" option under the Your Portfolio tab), but using that option eliminates the ability to compare your planned withdrawal strategy against actual history - the real value of FIREcalc.

 

[pb4uski]

According to immediateannuities.com, a life annuity for a 65 yo male in NY with a $436k premum pays $29k a year. If a 48 yo male in NY pays $210k and receives payments at 65, the payments total $29k a year, so based on today's annuity and deferred annuity pricing, the 65 yo options are about the same.

One option would be to keep the pension, let it grow at 4.4% for 18 years and then decide based on what annuity pricing is at that time.... 4.4% for 18 years with negligible credit risk and no interest rate risk isn't bad in today's low interest rate environment. For AA purposes you could consider it to be a 4.4% 18 year bond and invest your $1m portfolio more aggressively. Can you take the lump sum at any time between 48 and 65 if you wish to?

Given your family history, it doesn't sound like a life annuity would be a good choice.

 

[nun]

According to immediateannuities.com, a life annuity for a 65 yo male in NY with a $436k premum pays $29k a year. If a 48 yo male in NY pays $210k and receives payments at 65, the payments total $29k a year, so based on today's annuity and deferred annuity pricing, the 65 yo options are about the same.

One option would be to keep the pension, let it grow at 4.4% for 18 years and then decide based on what annuity pricing is at that time.... 4.4% for 18 years with negligible credit risk and no interest rate risk isn't bad in today's low interest rate environment. For AA purposes you could consider it to be a 4.4% 18 year bond and invest your $1m portfolio more aggressively. Can you take the lump sum at any time between 48 and 65 if you wish to?

Given your family history, it doesn't sound like a life annuity would be a good choice.

+1. Keep the pension accruing from age 48 to 65, invest aggressively with your other money and make a decision at age 65.

 

[hornet99]

+1. Keep the pension accruing from age 48 to 65, invest aggressively with your other money and make a decision at age 65.

Yes, I think this is the best option. And yes I can defer the lump vs. annuity decision right up until my 65th birthday. I just need to find out what happens if I die suddenly before then. That is, is there a payout to my estate or is the money just gone. I'll have to check with MegaCorp on that. Thanks everyone!