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Pension Lump vs Monthly Annunity
Old 12-05-2014, 08:51 AM   #1
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Pension Lump vs Monthly Annunity

I know each case is different ...but looking for some feedback on taking a monthly annunity instead of of a lump. My thinking is to avoid the sequence of returns risk during the first 7-10 years of retirement. By taking the annunity combined with SS at 62 (health concerns) 85% of my expenses will be covered leaving me a 2% WR to cover the shortfall. Your thoughts?
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Old 12-05-2014, 09:01 AM   #2
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Sounds similar to my strategy, except I am planning to delay the SS draw until age 70.
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Old 12-05-2014, 09:03 AM   #3
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I am having a hard time delaying SS and increasing my WR during the most vulnerable period of retirement....am I over thinking this
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Old 12-05-2014, 09:25 AM   #4
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I am having a hard time delaying SS and increasing my WR during the most vulnerable period of retirement....am I over thinking this
likewise I need cash flow for about 10 years, then won't need any with pension and SS, at least for basic expenses plus a little scotch to keep the heart healthy.

I've planned for a SWR that looks at 35 year retirement, but only plan to pull that much for 10 years. It has me thinking perhaps I should pull little more in early years while we can still enjoy travel and perhaps leave less behind when we leave for good.

I think that looking for a 95% guarantee may not be as realistic as a plan to pay your basics if you are still around past your expected expiration date, and then a plan to cover living costs to get to that point. Spending more now and then cutback when your 85 or 90. My mom and step-mom are 83 and 93, neither spend hardly anything except utilities and groceries and Dr. They both live off pension and SS and have funds left over without spending from savings. owww what if that is a woman thing and I'm screwed at 90 better re-think this
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Old 12-05-2014, 10:01 AM   #5
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Originally Posted by macav933 View Post
I know each case is different ...but looking for some feedback on taking a monthly annunity instead of of a lump. My thinking is to avoid the sequence of returns risk during the first 7-10 years of retirement. By taking the annunity combined with SS at 62 (health concerns) 85% of my expenses will be covered leaving me a 2% WR to cover the shortfall. Your thoughts?
Since you're taking SS due to health concerns, that would suggest that you do not expect good longevity. If that is the case I would think that you would be better off with the lump sum rather than the annuity since the the likely result is that some of your annuity premium will go to provide benefits for policyholders who live long. This would be particularly true if you have heirs.

Also, the implicit interest rates in annuities these days are paltry by historical standards (2-3%). You can mitigate sequence of returns risk by investing what you would have invested in the annuity in online savings, bank CDs and near term target-maturity bond funds that will have relatively stable values.
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Old 12-05-2014, 11:11 AM   #6
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Since you're taking SS due to health concerns, that would suggest that you do not expect good longevity. If that is the case I would think that you would be better off with the lump sum rather than the annuity since the the likely result is that some of your annuity premium will go to provide benefits for policyholders who live long. This would be particularly true if you have heirs.

Also, the implicit interest rates in annuities these days are paltry by historical standards (2-3%). You can mitigate sequence of returns risk by investing what you would have invested in the annuity in online savings, bank CDs and near term target-maturity bond funds that will have relatively stable values.
I agree with this. If you have health concerns the annuity might not be your best option.......that's the hard and unvarnished truth. If we knew more about the numbers, like lump sum amount, monthly income, your age etc we could make a quantitative assessment and see if your interest rate for various periods is better than those commercially available.
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Old 12-05-2014, 12:23 PM   #7
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Originally Posted by macav933 View Post
I am having a hard time delaying SS and increasing my WR during the most vulnerable period of retirement....am I over thinking this
Well.... you can probably safely increase your WR as long as your assets are growing or at least not falling a lot. If things head south (or north if you live in Australia), you can always apply for and get SS as long as you are at least 62.
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Old 12-05-2014, 12:32 PM   #8
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It may be that I am misinterpreting your terminology, but have you already compared the monthly pension amount to the monthly payout you'd get if you bought an annuity with the lump sum? Many people start with an online quote using https://www.immediateannuities.com/. That's usually the first step in evaluating the pension vs lump sum question. If there's a big disparity in the monthly amounts, the best decision might become readily apparent...
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Old 12-07-2014, 08:26 AM   #9
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Don't know if there is room here for a dumb question, but...

DW and I are comfortable with what is an ultra conservative look at the neartime future. I Bonds paying an average of 5+%, a small annuity paying 4%, and a mix of money markets and stocks that go with the flow.

I still have no interest in changing this, but purely out of curiosity, looked at a five year certain annuity, to see what the cost or income would be. Looking at one of the annuity websites that had a calculator, here's what the formula brought up for an investment of $100,000 for two of us at our current age. For an instant payout beginning right away, the monthly amount would be $1689. Over the five years, this total payout would be $101,340.

So the dumb question is: For what possible reason would any company even offer this as a product?
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Old 12-07-2014, 08:40 AM   #10
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....So the dumb question is: For what possible reason would any company even offer this as a product?
Remember that P.T. Barnum saying that there is a sucker born every minute?

Because they think that there are some suckers out there who would buy it and they can invest the $100k and earn more than the paltry 0.53% they are paying on the period certain annuity and make a small profit.

Those suckers would be much better off just plunking their $100,000 in a 0.9% online savings account and setting up an automatic withdrawal of $1,705 (and hoping that the inline savings account interest rate doesn't drop below 0.53%)
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Old 12-07-2014, 09:57 AM   #11
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I'm 68 and annuitized my after tax annuity from TIAA-CREF last year. For me personally, and I'm sure there are others out there that feel the same, it is a relief not to have to worry about how to invest a lump sum of money. I remove that headache by having a pension that increases 1 to 4% yearly, due to the nature of my particular pension.

I am encouraged to stay healthy by doing this. Again, for me this works- I am being paid a "salary" to stay healthy, and fit. It is a motivator for me. I'm not sure if I would feel the same way if I had a large sum of money to play around with, and get income from that.

I still have a pretty good chunk of other investments with TIAA-CREF to play around with and take chances, knowing that I won't be burned to much if I lose money. For me, the "pension" allows me to concentrate on having fun, relaxing, and just enjoying old age. Others my find playing around with the bond market and stock market fun. I really don't.

Rob
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Old 12-07-2014, 10:18 AM   #12
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So the dumb question is: For what possible reason would any company even offer this as a product?
Because there are many many people who cannot do simple math and buy dumb products like annuities.
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Old 12-07-2014, 10:40 AM   #13
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Because there are many many people who cannot do simple math and buy dumb products like annuities.

I wonder if these people have ever noticed that there is a huge tax on people who did not study their math. Sometimes it's called an easy payment plan, sometimes it's called an annuity, and sometimes it's called the state lottery.
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Old 12-07-2014, 11:06 AM   #14
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My former employer is massively underpricing the lump sum pension amount verses the annuity payment option.

Check the numbers to see what makes more sense.
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Old 12-07-2014, 11:11 AM   #15
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My former employer is massively underpricing the lump sum pension amount verses the annuity payment option.

Check the numbers to see what makes more sense.
Your ex-employer should be using the IRS segmented interest rates. Have you checked your numbers using those rates, the lump sum, monthly benefit and life expectancy?
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Old 12-07-2014, 11:13 AM   #16
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Because there are many many people who cannot do simple math and buy dumb products like annuities.
People must do the maths to see whether an annuity fits into their retirement plan. There are good annuities and bad annuities, it's wrong to characterize all annuities and dumb.
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Old 12-07-2014, 11:14 AM   #17
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I'm 68 and annuitized my after tax annuity from TIAA-CREF last year. For me personally, and I'm sure there are others out there that feel the same, it is a relief not to have to worry about how to invest a lump sum of money. I remove that headache by having a pension that increases 1 to 4% yearly, due to the nature of my particular pension.

I am encouraged to stay healthy by doing this. Again, for me this works- I am being paid a "salary" to stay healthy, and fit. It is a motivator for me. I'm not sure if I would feel the same way if I had a large sum of money to play around with, and get income from that.

I still have a pretty good chunk of other investments with TIAA-CREF to play around with and take chances, knowing that I won't be burned to much if I lose money. For me, the "pension" allows me to concentrate on having fun, relaxing, and just enjoying old age. Others my find playing around with the bond market and stock market fun. I really don't.

Rob
Did you buy the COLA TIAA annuity?
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Old 12-07-2014, 11:16 AM   #18
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Your ex-employer should be using the IRS segmented interest rates. Have you checked your numbers using those rates, the lump sum, monthly benefit and life expectancy?
Yes. The implied rate they are using is 8%, which brings the amount way down.

Is this regulated in some way? Seems they are using an unrealistic rate.
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Old 12-07-2014, 11:38 AM   #19
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Yes. The implied rate they are using is 8%, which brings the amount way down.

Is this regulated in some way? Seems they are using an unrealistic rate.
The IRS specifies the interest rates and mortality tables to be used when calculating a lump sum. Maybe if your ex-employer was a Government or state organization they might have different rules and rates.

Minimum Present Value Segment Rates
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Old 12-09-2014, 02:47 PM   #20
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Originally Posted by macav933 View Post
I know each case is different ...but looking for some feedback on taking a monthly annunity instead of of a lump. My thinking is to avoid the sequence of returns risk during the first 7-10 years of retirement. By taking the annunity combined with SS at 62 (health concerns) 85% of my expenses will be covered leaving me a 2% WR to cover the shortfall. Your thoughts?
You might also consider delaying pension and SS until you see what the market returns look like. If we hit a bad year, start up pension and SS right then. You don't want to avoid good returns.

On the other hand, with health concerns a lump sum pension payout and early SS may work better for you.
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