Pension Lump Sum vs Annuity Decision help

[Foxtails]

Hi All,

DH’s pension is being sold by megacorp to an retirement services/annuity company. We have a month to decide if we want to take a lump sum or let it roll to the annuity company.

Lump sum now is $443k Annuity with 100% survivor is $1298. No COLA
Lump sum at 65 is $745k. Annuity with 100% survivor is $4139. No COLA

If we don’t take the lump sum now we can take the money or annuity anytime between now and 65 years of age.

Part of me wants to let it roll to the annuity company as sort of an “insurance policy” for our future if we wait until 65 to take it. On the other hand if we wait and decide to take the lump sum at some point in the future the amount will go down as interest rates rise which I’m assuming they will. If DH passes before we collect anything I would get half of the lump sum or the annuity.

We have children and it would be nice to leave them this extra money if something should happen to us. Our other investments include $1.2m in retirement accounts and $7m in taxable accounts. WWYD?

[joeea]

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Originally Posted by Foxtails Lump sum now is $443k Annuity with 100% survivor is $1298. No COLA Lump sum at 65 is $745k. Annuity with 100% survivor is $4139. No COLA

It would help to know your spouses current age.

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If we don’t take the lump sum now we can take the money or annuity anytime between now and 65 years of age.

And do the lump sum and annuity payment increase each year?

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Part of me wants to let it roll to the annuity company as sort of an “insurance policy” for our future if we wait until 65 to take it.

Why do you feel the need for an insurance policy?

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On the other hand if we wait and decide to take the lump sum at some point in the future the amount will go down as interest rates rise which I’m assuming they will. If DH passes before we collect anything I would get half of the lump sum or the annuity. We have children and it would be nice to leave them this extra money if something should happen to us. Our other investments include $1.2m in retirement accounts and $7m in taxable accounts. WWYD?

What do you anticipate for expenses in retirement?

With assets that size, wouldn't you already be able to leave considerable assets to your children?

I tend to prefer taking a lump sum. But you haven't provided enough details to make a financially sound decision.

[Foxtails]

Here’s more info:

DH is 54, I am 55. He is looking to retire this year.

Yes, the lump sum and annuity payments increase between 55 and 65. For example at 60 the lump sum is $571k and the annuity is $2354.

We are planning for $175k in expenses of which about $30k will be for healthcare as I don’t think there is anyway we would get any ACA subsidies. Doubt it’s even think it’s possible to manage MAGI with that amount in taxable assets.

I’m not exactly sure why I feel the need for an insurance policy. Our AA is 50/50 so even if the market tanks 50% we would still have $6m which should be more than enough to cover our expenses. I guess just the uncertainty of the future makes me a little nervous. DH is leaning towards taking the lump sum now and putting it all in the S&P 500.

Yes, I’m hopeful that either way there will still be a lot of $ left for the kids.

[joeea]

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Originally Posted by Foxtails We are planning for $175k in expenses of which about $30k will be for healthcare

With that much in assets, you should be fine no matter what pension choice you make.

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I guess just the uncertainty of the future makes me a little nervous.

The future is always uncertain. However with your assets, there's no need for nervousness.

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DH is leaning towards taking the lump sum now and putting it all in the S&P 500.

Seems reasonable. But then any decision would be similarly reasonable. An extra $445k won't change that.

[brett]

Keep in mind that the value at age 65 is most likely based on current interest rates.

As interest rates rise up, the commuted value goes down.

Other variables include your health situations and the stability of the company/financial position of the DB plan.

[travelover]

It doesn't matter. With $8 million in investments, you are golden. Plenty of money to live on with plenty left over for the kids.

[flintnational]

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Originally Posted by travelover It doesn't matter. With $8 million in investments, you are golden. Plenty of money to live on with plenty left over for the kids.

+1

OP, the current lump sum value is about 5% of your investable assets. You can choose either option. It will not make a material difference in your retirement either way.

[Big_Hitter]

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Originally Posted by travelover It doesn't matter. With $8 million in investments, you are golden. Plenty of money to live on with plenty left over for the kids.

I normally comment on these questions but decided not to once I read they have 8 mil .

Does this count as a comment?

[Foxtails]

Thank you to everyone who took the time to reply. I think we will go with the lump sum and invest it in the S&P 500. At least this way it will be in our control and we won’t have to worry about the stability of the annuity company.

[Dash man]

DW and I were in a very similar situation about three years ago. We decided for her to roll the lump sum into her 401k at Fidelity, where it remains. No regrets.

[Bogie]

I don't know how common this is but at my company the pernsion lump sum increases 40% when you reach 55 years of age. I seem to remember a discontinuity in the pension lump sum growth at age 55. Essentially the lump sum grew at say 6% oer year up to age 54 but at 55 the value increased 40% then the growth was 4% or so from that point up to age 65. You might want to check this out prior to cashing out before attaining 55 years of age. I think the gov't required this so companies wouldn't be inavertently encouraged to get rid of workers between 55 and 65 because pensions were growing so much at the end of careers. Of course, those getting to ages 50-55 were targets.

[RetireBy90]

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Originally Posted by Foxtails Hi All, Part of me wants to let it roll to the annuity company as sort of an “insurance policy” for our future if we wait until 65 to take it. On the other hand if we wait and decide to take the lump sum at some point in the future the amount will go down as interest rates rise which I’m assuming they will. If DH passes before we collect anything I would get half of the lump sum or the annuity.

I have been expecting interest rates to go back to “normal” since 2018 or so, and well, I’m still waiting. Given that I still expect them to return and given my track record, you should probably bet they will drop.

IMHO I would always take lump sum if the numbers are honest. Given that they have overhead and guaranteed you should be able to do better.

[pb4uski]

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Originally Posted by Foxtails Thank you to everyone who took the time to reply. I think we will go with the lump sum and invest it in the S&P 500. At least this way it will be in our control and we won’t have to worry about the stability of the annuity company.

I think that you might be wise to consider leaving it be and viewing it as a fixed income investment.

If I follow your posts correctly, your DH is 54 and the lump sum is $443k now but will grow to $745k in 11 years when your DH is 65... that is 4.84% APR over the 11 years... 10 year CDs are only returning a tad over 3%.

If the annuity company is well rated and your numbers are right then it seems that it might be good to just let the lump sum grow as part of your 50% bond allocation. Most highly rated annuity companies would have negligible credit risk so IMO there is little need to worry about the stability of the annuity company.

One question though... does the lump sum grow from $443k to $745k if he quits/retires now? or does he have to continue working to 65 to get the $745k lump sum?

[Foxtails]

The lump sum will continue to grow up until 65. This is a pension from a megacorp that he left 10 years ago. We would not put this into CDs but into equities where I think we could do better than 4.84% over the 11 years.

Your idea of leaving it to grow as part of fixed income was my initial thought as an “insurance policy” in case everything went south.

[Big_Hitter]

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Originally Posted by Bogie I don't know how common this is but at my company the pernsion lump sum increases 40% when you reach 55 years of age. I seem to remember a discontinuity in the pension lump sum growth at age 55. Essentially the lump sum grew at say 6% oer year up to age 54 but at 55 the value increased 40% then the growth was 4% or so from that point up to age 65. You might want to check this out prior to cashing out before attaining 55 years of age. I think the gov't required this so companies wouldn't be inavertently encouraged to get rid of workers between 55 and 65 because pensions were growing so much at the end of careers. Of course, those getting to ages 50-55 were targets.

This is not an uncommon feature in traditional DB plans. Typically, traditional DB plans provide a subsidy for those that work until they attain "early retirement age", usually around age 55 and 10 years of service in corporate plans or a combination of age and service "points" in public sector plans.

[Big_Hitter]

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Originally Posted by pb4uski If I follow your posts correctly, your DH is 54 and the lump sum is $443k now but will grow to $745k in 11 years when your DH is 65... that is 4.84% APR over the 11 years... 10 year CDs are only returning a tad over 3%.

if this is an interest-sensitive lump sum, the future values are merely guesses based on current interest rates and the current statutory mortality table, both of which could change materially between now and 2029.

remember the lump sum is an "optional" form of payment, it does not define the benefit - the accrued benefit payable at normal retirement age defines the benefit and the optional payment forms

[gauss]

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Originally Posted by Foxtails We have children and it would be nice to leave them this extra money if something should happen to us. Our other investments include $1.2m in retirement accounts and $7m in taxable accounts. WWYD?

In your case, assuming that the price being offered in lieu of the annuity is less than what it would cost you to purchase one retail as an individual, then I would take the annuity for diversification purposes given your other financial resources that have market risk. I would also defer SS to age 70.

The thinking that I apply to this, is once someone has 'enough' then lowering the risk profile becomes much more important than acquiring 'more'.

Personally I switched over in my thinking for myself the year that I retired and realized that preserving and sustaining my current (wonderful) life style was now more important than further acquisition of assets. Basically I have now won the game! I will still have plenty of assets to share with beneficiaries upon my demise.

I guess the other main issue is to consider what level does your state insure against the failure of insurance companies given the ERISA/PBGC insurance will no longer apply.

I suspect that your annuity may be in excess of these limits (at least for a few years until the NPV has decreased below your state threshold).


-gauss

[Big_Hitter]

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Originally Posted by gauss I suspect that your annuity may be in excess of these limits (at least for a few years until the NPV has decreased below your state threshold). -gauss

isn't it the state of domicile for the insurer?

[pb4uski]

I think it is the state of residence of the insured.

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State life and health insurance guaranty associations are state entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance in a state must be members of that state’s guaranty association. The guaranty association cooperates with the commissioner and the receiver in pre-liquidation planning. Once the liquidation is ordered, the guaranty association provides coverage to the company’s policyholders who are state residents (up to the levels specified by state laws—see below; any benefit amounts above the guaranty asociation benefit levels become claims against the company's remaining assets).

Keep mind that insolvencies are extremely rare... particularly after reforms put in place in the 1990s in the wake of Executive Life and Mutual Benefit Life insolvencies... both of which were largely are result of big sector bets by management on junk bonds and real estate, respectively. Surplus requirements today are stricter and are based on the risk of assets and liabilities and give regulators better early warning to intercede when needed.

https://www.nolhga.com/resource/code/file.cfm?ID=2559

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The relative strength of the insurance regulatory controls is reflected in the comparative failure rates during the financial crisis and recovery. While only five small life insurers have failed since 2008, no operating life insurer with an active block of annuity business failed during this period. By contrast, that same period saw the failure of 931 single-employer pension plans affecting more than 560,000 participants.

[gauss]

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Originally Posted by pb4uski I think it is the state of residence of the insured.

+1 - They needed to be licensed by each state that they sell policies in too.