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Re: Take a lump sum or pension payout
Old 06-06-2006, 06:45 PM   #21
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Re: Take a lump sum or pension payout

Rollie

You have a 3 year window to retirement, as I see it.

A few more 1/4% increases in the prime and the 650k Lump Sum will be under 500k. I think that the Lump Sum option will become less and less viable before you could retire, just looking at the interest rates.

But, your 100% funded joint annuity is not as likely to be impacted in the next three years - you know better than I about the viability of MegaCorp.* I'm assume that MegaCorp will use your pension money to go to an Ins Co and fully fund the joint annuity and will be completely out of the picture after you retire.

Actually, it looks to me that you can meet your stated financial goals with the annuity and other retirement funds (as discussed in earlier RE topics) with some judicious firecalc analysis and projections including SS without likelihood of going back to work.

Best regards

JohnP
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Re: Take a lump sum or pension payout
Old 06-06-2006, 09:37 PM   #22
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by MasterBlaster
Bosco:

After thinking about my approach I believe that you are correct in that my 7.5 % non-inflation adjusted SWR won't work.

However I stand by the comments about making comparisons between annuities and lump sums on an equal footing (apples to apples). My comments about not spending all of your fixed annuity so that you have a reserve against inflation is also valid and should not be ignored by the OP.
I was only responding to the 7.5% comment. I agree that your other arguments could make sense depending on the individual's situation.
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Re: Take a lump sum or pension payout
Old 06-07-2006, 09:12 PM   #23
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Re: Take a lump sum or pension payout

Thank you all for the great feedback. My DW does not have a pension plan or profit sharing...she had a full time job raising our kids...now working just part-time. So we are counting on my company pension and profit sharing. I requested a SS estimate with me retiring at 55...the est. is $17800/yr. I am looking at that as hopefully an inflation hedge along with what she will get. She is now 48...and will get at 62 about 33% of my benefit. My profit sharing should be about $500K+...so if I do not take the pension annuity and take the lump sum I would have to work a number of more years. That is not a good alternative. I have only $40K outside of this...as most of my after tax money is and has been going to 529 plans for my kids college. All bills and mortgage will be paid for when I hit 55. Medical is a retiree benefit...Mega Corp contributes 50% of premiums. After 30 yrs with the company I am looking forward to getting off the treadmill.

While I am an infrequent poster...I am an avid reader of the forum...thanks again for all your feedback...more thoughts are always welcome.
Rollie
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Re: Take a lump sum or pension payout
Old 06-07-2006, 09:57 PM   #24
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Re: Take a lump sum or pension payout

Now is the time to look at the spending side of the family balance sheet.* Set yourself a goal to be debt free, pay off your mortgage.* If you don't start managing your expenses now the lack of inflation protection will do it for you when you have the fewest options.

IMHO, because the both of will be relatively young, the lack of inflation protection is a major issue- particularly for her.* Even if it were to result in less current income for ~ 10 years, taking the lump sum and investing it in a balanced portfolio with a 4% withdrawal rate may be prudent.

(FYI, I am a female.* I have known long-lived women in my circle to have resorted to moving into mobile homes just to survive.* When they become frail then their only option is adult foster care.* Not what you would want for her.)
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Re: Take a lump sum or pension payout
Old 06-08-2006, 08:56 AM   #25
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Re: Take a lump sum or pension payout

Rollie,

Have you looked at whether your retiree medical benefits will be affected if you take the pension vs. lump sum?

- Alec
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Re: Take a lump sum or pension payout
Old 06-08-2006, 11:44 AM   #26
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by Rollie
What is everyone's opion on takeing a lump sum vs. pension.* My dilema is that a lump sum payout (base on a 30 yr tres. rate of 6%) is $650K...my joint annuity option is $3674/mo.* No inflation rider on it.* At 4% SWR. my lump sum will deliver $2166/mo.* *I am currently 52...going for 55 ER.* I have other investments...but need about $3500 from my pension benefit.* The Mega corp I work for is in a steady industry...been in business 75 years...pension is funded 100%.* What do you all think...any options that do not require me working past 55?* Thanks for your feedback.
Rollie
Quote:
Originally Posted by Rollie
Thank you all for the great feedback. My DW does not have a pension plan or profit sharing...she had a full time job raising our kids...now working just part-time. So we are counting on my company pension and profit sharing. I requested a SS estimate with me retiring at 55...the est. is $17800/yr. I am looking at that as hopefully an inflation hedge along with what she will get. She is now 48...and will get at 62 about 33% of my benefit. My profit sharing should be about $500K+...so if I do not take the pension annuity and take the lump sum I would have to work a number of more years. That is not a good alternative. I have only $40K outside of this...as most of my after tax money is and has been going to 529 plans for my kids college. All bills and mortgage will be paid for when I hit 55. Medical is a retiree benefit...Mega Corp contributes 50% of premiums. After 30 yrs with the company I am looking forward to getting off the treadmill.

While I am an infrequent poster...I am an avid reader of the forum...thanks again for all your feedback...more thoughts are always welcome.
Rollie
A FIRECalc run using the numbers: $42,000 annual W/D; 40 yr plan length; your SS of $17,800/yr starting in 2016; wife's SS of $5900/yr starting in 2020; fixed pension of $44,088/yr starting in 2009; $40,000 current portfolio invested at the defaults; starting your retirement in 2009; shows a 70.8% success rate.

This could be improved if you put some more money into your portfolio between now and 2009, reduced your expected retirement expenses or worked longer (either part time or full time).
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Re: Take a lump sum or pension payout
Old 06-08-2006, 12:03 PM   #27
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Re: Take a lump sum or pension payout

Wife and kids...whether you want to leave them something is a major hinge on the decision. Up until this point, every comparison of a joint annuity with a very conservative self investment pointed to the self investment as being a better returner and better at fighting inflation.

I see a lot of assumptions in a plan to retire on the largesse of the soon to be former employer - whether they'll pay any pension or profit sharing, whether they'll continue to pay the medical benefit, etc. As some other posters have pointed out, those things can be modified or eliminated.

Annuities leave nothing at all for your kids.

As Dory's original chart points out, even a conservatively invested lump sum will produce a steady income stream - admittedly not as predictably as the annuity - with better upside towards inflation protection, a "full benefit" to your surviving spouse on your demise (which hopefully is a long time from now), and a "full benefit" to your children when you both pass on.

The flip side is if you and your wife both live past 90, your megacorp keeps paying out...in a percentage of scenarios you might win out. But still leave nothing to your kids.

Every scenario for my own situation shows that when the comparison is kept apples to apples, the income from the annuity is 20-30% lower over the long haul than a self invested lump sum. I want my wife to get 100% of what we're getting now if I get hit by a bus. And my kid should inherit a couple of million bucks in todays dollars when we both go, and he should be in his 40's by then. We get to pass the gift of financial independence to him at the time in his life when he should already be settled in with a family and a career. No spoiled trust baby problems.

As pointed out, persistent predictable income streams can be handy things, but they depend on the persistency and predictability of the health of the payee.
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Re: Take a lump sum or pension payout
Old 06-10-2006, 08:57 AM   #28
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Re: Take a lump sum or pension payout

Remember that the 17k SS figure is in today's dollars so you should consider the wage growth until age 60 and COLA growth from 60 on when you consider your initial SS at 62 or 66.

I think a big question is whether the annuity is purchased with an insurance company from the pension plan..If it is, then you have state guarantees backing it up and reserve requirements..If it is not, then you have the PBGC maximum of approx 45k for an age 65 benefit backing it up.

If you live a long retirement or your spouse does, you could end up in good shape with the annuity as you pay a "mortality premium" to get a higher return in later years. The "mortality premium" is that you give up income (or assets) if you die and therefore subsidizes the income for those that are still living and receive retirement income.

On the other hand, you could end up in a better situation with a SWR if your investments provide decent returns and you (and potentially your spouse) can stick with it and ride the ups and downs of the capital markets for 40 years..Easier said than done for many, I would think. You need to analyze your risk tolerance. Maybe split the difference as one poster suggested..Take the lump sum, buy an immediate annuity (without a commission included) and think of this as the bond/fixed income component of your SWR strategy.
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Re: Take a lump sum or pension payout
Old 06-10-2006, 09:30 AM   #29
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Re: Take a lump sum or pension payout

It was interesting reading all of the posts. The possible math analytical approaches all have merit. I must be more jaded than most or, at least, more suspicious.

In my view the annuity will be underwritten by an insurance company. That means they are making a nice profit on the transaction. Therefore, the lump sum will be a better choice. If you want fixed income. Set up laddered bonds or CDs off into the far future (up to 30 years). I'm willing to bet that you would get a better income stream when compared to the insurance company mortality tables. Many people make the mistake that they will live forever so the annuity will always look better. I have a secret for you ..... you won't.

Do this analysis. If someone gave you $650K would you buy an annuity? My answer would always be "NO." I take that back. My answer would always be "HELL NO."
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Re: Take a lump sum or pension payout
Old 06-10-2006, 09:51 AM   #30
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by 2B
It was interesting reading all of the posts. The possible math analytical approaches all have merit. I must be more jaded than most or, at least, more suspicious.

In my view the annuity will be underwritten by an insurance company. That means they are making a nice profit on the transaction. Therefore, the lump sum will be a better choice. If you want fixed income. Set up laddered bonds or CDs off into the far future (up to 30 years). I'm willing to bet that you would get a better income stream when compared to the insurance company mortality tables. Many people make the mistake that they will live forever so the annuity will always look better. I have a secret for you ..... you won't.

Do this analysis. If someone gave you $650K would you buy an annuity? My answer would always be "NO." I take that back. My answer would always be "HELL NO."
no, you are less suspicious. You think you already know the answer because someone is making a profit. NEWS FLASH--someone also making a profit when you invest in CDs or anything else. So by your logic, it is a better deal to put your money under the mattress.

Insurance companies are pooling risk. You cannot as an individual. They make a huge profit on a few who die next year, and use that to fund the centennarians.

Cynicism is great, I indulge in it often. But I still say....run the numbers. Show me. I agree, usually annuities are a bad deal. But if they are such a bad deal, it's not necessary to presuppose the conclusion. If they are that bad of a deal, the numbers will readily show it. And in a few cases, they make sense.
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Re: Take a lump sum or pension payout
Old 06-10-2006, 10:27 AM   #31
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Re: Take a lump sum or pension payout

Based on Rollie's post of June 7, it seems cash flow for Rollie and his wife will be important. That means sleep-at-night factor. Whether he and his wife leave anything for the kids is a personal choice they can make at a later date. They could potentially suffer in their retirement from a cash flow squeeze caught in a cycle of maybe 5 years in a bear market just so their kids can have a fat cheque when they die? Or they can live their retirement life to the fullest helping their kids as they wish with excess cash flow while they are alive and then let the kids fend for themselves later. I would select this latter choice in a heartbeat.

And nowhere has it been mentioned that the annuity would be from a commercial entity. Many DB plans from megacorps stand on their own 2 feet and there is no middleman involved. It consists of investments including 30 year bonds. What is important is that if he takes the annuity route, the annuity be a joint annuity assuring his dear wife a continued income.

Clearly he has the time to make the choices when it comes time to do so. I did not make up my mind whether to take lump sum or annuity until the month I actually retired (this last April) and had to make a choice. Keep the options open.
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Re: Take a lump sum or pension payout
Old 06-10-2006, 10:31 AM   #32
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by bosco
If they are that bad of a deal, the numbers will readily show it.* And in a few cases, they make sense.
I have had a number of real life examples of annuities due to my involvement of my father's and in-laws financial affairs. *Both had a scattering of annuities. *None of them were "good" investments. *They (and their heirs) would have been a lot better off if they had done anything else. *In my father's case, his estate would have been much better off if he had put it under his mattress. *He derived no benefit from it during his life.

I have looked at various annuities and have never found one worth the cost. *There always seems to be a way for the annuity to get reset to a lower interest rate if the initial rate is "too good to be true" and, from my experieces, they always are. *True fixed payment annuities have less that exciting real rates of return when mortality is considered. *Here the insurance company pools risk, I agree, but they take a huge cut when they do. *If you know that you will outlive your life expectancy by a decade or more, then an annuity can be a great deal.

I have the reputation of being the "anti-annuity troll" and I proudly wear it. *I don't want to get into another "exchange of fire" with the annuity defenders on this forum. *I've stated my position on the original post and I'll now move on.
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Re: Take a lump sum or pension payout
Old 06-10-2006, 11:59 PM   #33
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by 2B

I have the reputation of being the "anti-annuity troll" and I proudly wear it. I don't want to get into another "exchange of fire" with the annuity defenders on this forum. I've stated my position on the original post and I'll now move on.
if you had read my post you would have realized that I was defending the concept of running the numbers, not the concept of annuities.

Some of us have to do that. Others, evidently, have the gift of just knowing. Personally, I'd rather run the numbers myself than take someone's word for it, especially when it appears that someone has an axe to grind.
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Re: Take a lump sum or pension payout
Old 06-11-2006, 08:35 AM   #34
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Re: Take a lump sum or pension payout

There are different types of annuities. Immediate annuities do not have interest rates that reset and can be a good solution for some.. Dr Jeffrey Brown had a good paper that described why immediate annuities and risk-pooling can be advantagous. Of course the insurance company makes some profit but most of the "loss" of a mortality premium goes to those who are living. And, as mentioned above, even bank CDs and Money Market Funds provide some profit to banks too..From Dr. Brown's paper.

"Equally important, a life annuity has the potential to provide a higher
level of sustainable income than can be achieved with other financial assets.
This is because a life annuity is an insurance product that pools resources
across a large number of annuity buyers, essentially using the resources
of those who die earlier than expected to pay higher benefits to those
who live longer than expected. The “cost” of this approach is that assets
that are converted into a life annuity stream are no longer available to
leave as a bequest. In exchange, however, the life annuity provides
surviving individuals with a higher rate of return than the individual
could get on an otherwise similar, but unannuitized, portfolio.
The extra rate of return that a life annuity can pay is sometimes called a
“mortality premium” because it is essentially an extra rate of return that
annuitants can earn in return for giving up their claim on their assets at
death. To illustrate this concept in a simple, hypothetical example, suppose
that at the beginning of the year 100 people each invest $1 in bonds
earning 5 percent interest, and that 95 of them are still alive at the end
of the year. Each of the 95 survivors would have $1.05 to consume,
while the five decedents would leave $1.05 to each of their estates. If
instead, each of these 100 individuals had pooled his or her money
through an annuity contract, each of the 95 survivors would receive
$105/95 = $1.10 to consume. Thus, the annuity contract provides an
extra 5 percent rate of return – the mortality premium – in exchange for
reducing the resources available for a bequest."

They are not for everyone, but they can provide a higher income than a SWR due to the risk-pooling.
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Re: Take a lump sum or pension payout
Old 06-11-2006, 09:36 AM   #35
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Re: Take a lump sum or pension payout

Hmm...as far as the quoted paragraph, the word 'potential' is used one too many times. Further, the implication that annuities pay more than you can get with a self invested lump sum simply doesnt bear out in any analysis that I've done. Even with fairly conservative investments that are unlikely to drop much.

I'm reminded of Penn gesturing wildly and yelling and using a lot of provocative words while Teller hides the rabbit under the table...
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Re: Take a lump sum or pension payout
Old 06-11-2006, 10:24 AM   #36
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by Cute Fuzzy Bunny
Hmm...as far as the quoted paragraph, the word 'potential' is used one too many times. Further, the implication that annuities pay more than you can get with a self invested lump sum simply doesnt bear out in any analysis that I've done.
I know we've been around with this, but I find the citation to be more or less accurate.

My take: IAs work great under certain assumptions; they really do.

1. You gotta be alive. They work lousy if you're dead. Non-IAs investments work great for you heirs when you are dead.

2. IAs get you more cash flow than an equivalent amount traditionally invested in similarly conservative options.

3. If you prefer a more sophisticated comparison, consider self-annuitizing a comparable amount of cash at 5% or so. To provide comparable "protection" in the form of life-long payments, you have to assume a long, long amortization schedule, like 40 years at age 60, and a very safe investment vehicle. On my analysis over a wide range of assumptions, IAs always win (cash flow wise) handsomely.

Down side (along with some risk management strategies):

1. the solvency of the insurance company (spread risk by buying contracts from 3 or 4 companies;check their ratings)

2. flat real value is are eroded by inflation; nature of the product. You need to compensate by spending less, buying more annuities, or relying more over time on other income sources. No antidote - the inflation protection offered by some contracts is very expensive and I do not find these nearly as interesting.

3. rates vary with interest rates in general (DCA in over a year or two)

As with all strategies, unforeseen risks must be presumed. I wouldn't invest more than 25% or so of assets for that reason.

In the end, I agree you are better off with self-investments elsewhere since the insurance company will always extract their pound of flesh. But as a product insuring against volatility and longevity, this premium may well make a lot of sense for many, as well as increasing cash flow. The latter may allow you to allocate more to your riskier equity investments, to boot.

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Re: Take a lump sum or pension payout
Old 06-11-2006, 12:49 PM   #37
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Re: Take a lump sum or pension payout

Yep, we've been over it 30 times with the same conclusions...as far as I can see. Annuities make some sense for some class of people, providing you get a quality product and avoid the scumbag sales people.

I still havent seen a case for a true early retiree with 35+ years to go "on the clock" where more than a small percentage of an ER's portfolio in an annuity makes sense, if you exclude the emotional issues.

Wellesley Income Fund, ~11% annual returns since inception 36+ years ago. 4.5% yield. Never a double digit losing year, no back to back losing years, always yielded ~4% or better. Through high inflation, stagflation, high oil prices, high interest rates, low interest rates. No "great depression" scenarios, but I wouldnt count it out.

Show me the annuity that tops that. And like I've said before, if this type of investment keeps you from sleeping at night, you probably should consider staying at work.

If you dont like that one, pick any of a dozen investment mixes that survive 100+ years of economic history while paying more than most annuities, keeping pace with inflation, and going through events like the depression and long sideways markets and never running dry.

That having been said, 99.9% of people who already decided an annuity is right for them will buy one. And 99.9% of people who already decided they dont make a lot of sense will continue to not buy one. And 110% of the people who think the world is about to end will continue to think that.

And we'll have this same talk 30 more times in the next year or two. With exactly the same results. :P
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Re: Take a lump sum or pension payout
Old 06-11-2006, 01:11 PM   #38
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by bosco
Some of us have to do that.* Others, evidently, have the gift of just knowing.* Personally, I'd rather run the numbers myself than take someone's word for it, especially when it appears that someone has an axe to grind.
Bosco --

If you had read my post, you would have seen that I have "run the numbers." This includes both annuities bought by others and offerred to me. The only axe to grind I have is that I've never seen one that comes close to being a good financial decision unless you are one of the lucky few that will live a decade or more beyond their actuarial longevity. I take that back. It is a good financial decision if you take the perspective of the salesman. They have wonderful commissions.

I have to question whether you have an axe to grind.

For the record, Vanguard has the best fixed annuity returns of any I've seen. If someone absolutely must get an annuity, that is where I'd send them. I still believe a better financial decision is to create a personal annuity using laddered CDs.


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Re: Take a lump sum or pension payout
Old 06-11-2006, 01:55 PM   #39
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Re: Take a lump sum or pension payout

Quote:
Originally Posted by 2B
Bosco --

If you had read my post, you would have seen that I have "run the numbers." This includes both annuities bought by others and offerred to me. The only axe to grind I have is that I've never seen one that comes close to being a good financial decision unless you are one of the lucky few that will live a decade or more beyond their actuarial longevity. I take that back. It is a good financial decision if you take the perspective of the salesman. They have wonderful commissions.

I have to question whether you have an axe to grind.

For the record, Vanguard has the best fixed annuity returns of any I've seen. If someone absolutely must get an annuity, that is where I'd send them. I still believe a better financial decision is to create a personal annuity using laddered CDs.


I have no axe to grind, nor have I purchased any annuities myself. They don't make any sense for me. I personally believe they probably don't make sense for many if not most people. What I was reacting to was a (possibly mistaken on my part) sense that what you were saying is that the numbers will NEVER work out for anyone because somebody is making a profit. I may have been wrong in that interpretation and if so, I apologize.

When you say things like
Quote:
In my view the annuity will be underwritten by an insurance company. That means they are making a nice profit on the transaction. Therefore, the lump sum will be a better choice.
this seems to imply that it is not even worth the bother of plugging in the numbers. Perhaps this was an incorrect conclusion on my part. Perhaps if the word if 'probably' had been inserted before the word 'better' I would not have reached that conclusion.

similarly, statements like
Quote:
I have the reputation of being the "anti-annuity troll" and I proudly wear it.
might lead a reasonable person to conclude that you do, in fact, have an axe to grind.

Some people have no heirs. Some people have longevity in their genes and have a pretty good shot at outliving the longevity tables. Some people would just plain sleep better at night knowing they have an income stream that isn't dependent on their investment choices. Some can use a fraction of their portfolio to cover very basic expenses and then feel better about taking on more risk with the rest. I think people need to run the numbers. If, in fact, you believe that too then we probably don't have much to argue about and it is "just semantics."
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Re: Take a lump sum or pension payout
Old 06-11-2006, 02:34 PM   #40
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Re: Take a lump sum or pension payout

Hey Rollie - I hope you'll stay around while we hash out our thoughts on annuities.

I believe that the safe-sounding concept of the pension "annuity" has been hijacked to sell the variable annuities that are so deservedly disliked by the RE community.* Pension annuities can be very* beneficial to the recipient if megacorp is responsible during the working life of the retiree;* many corporations, for one reason or another, have chosen to drop their responsibility to retirees - but hopefully not our MegaCorp.

Retail annuities can be good and bad. *No one dislikes variable annuities more than I do; *I even am skeptical about immediate annuities. *By comparison, a pension annuity from a reputable HR organization in MegaCorp is a thing of beauty; it's been thought through to support retiring faithful employees in the days before 401k's existed. *One way or another the company planned to replace a portion of the employees income with a pension - don't call it an annuity for now, please. *

In fairly recent years, it became popular to offer a Lump Sum in part or full replacement of the pension - I believe that the Lump Sum concept was a way for the company to come out ahead compared to funding the company pension otherwise why offer it? *

So a lucky prospective DBP retiree now has a chance to take a non-cola'ed pension (where the pension was calculated based on 40-50 yr old concepts) or a lump-sum (where the company comes out ahead). *We now know the numbers, our employee can take the lump-sum and go to VG for an Immediate annuity and get less than half the pension amount. *Or he can take the lump-sum and go to invest it himself but we say that he can only take out 4% (a little more than half the pension amount) but it will grow with the cpi - maybe.

The question that some of us have is - how long will it be for Rollie to be able to take enough out of the lump-sum investment to be able to make as much as the pension amount. *I say it will take about 15 years or more to exceed the megacorp pension amount; *I believe Rollie has said that this option means that he would have to work a few more years compared to retiring in 3 yrs with the pension.* I happen to agree with Rollie's assessment.

This is a great thread - I hope we could come to some common understanding on pensions vs lump-sums based on the facts before us.

JohnP
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