Take a lump sum or pension payout

[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

 

[dory36]

When I retired, the HR guy told me that fewer than 1 in a thousand in that company had chosen the annuity over the lump sum.

Remember that the 4% is worst case, not typical case. In this chart,

4% is at the very bottom.

Are you willing to take a chance that the next xxx years won't match the worst we've ever seen?

We (the US) have done a good job managing inflation in the past few years, but the lack of inflation protection is still scary.

The biggest threat to a lump sum payout, I think, is the temptation to spend it down, not investment returns.

 

[frayne]

Just my two cents YMMV.  Rollover your pension lump sum into an IRA and invest it yourself or with the help of an advisor.  If you need to draw the money before you are 59.5 you could go the 72T route to avoid paying the 10% penality to uncle sam.  There are some conditions around the 72T withdrawals you need to be aware of.  

I worked for a mega corp and retired last year (age 54) rolled everything, 401K and pension lump sum over with Fidelity.  Went smooth as silk, and I now have many more investment options than I did in my old 401K.  I haven't needed to tap any funds as of yet as the Mrs. is still working and we have some after tax saving and investments as well that we are living off of.

 

[AltaRed]

I don't necessarily see taking lump sum as the most attractive option here. Granted the trend is for most people to take lump sums over annuites, but that may well be tempered by the last 15 years in the marketplace (2000-2002 not withstanding). I chose the annuity option over lump sum when I retired end of April and it is not inflation indexed either.

While the lump sum would have given me more net worth under most every scenario, it did not give me the best present value of a cash flow stream. To me, cash flow is more important than residual value of my estate.

The primary driver, however, was the 'sleep at night' factor and the annuity gave me major diversification from the rest of my investment portfolio. Now I do not have to worry about the markets going into a 10 year ugly bear on a lump sum . Should inflation rears its ugly head, then those same investments (balanced equity/income split) will presumably outperform making up for at least a portion of the rapidly diminishing purchasing power of the annuity.

It really comes down to what each individual feels good about.

 

[jdw_fire]

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

Two thoughts - first when I put your 650k into vanguard's annuity quoter I find that your pension provides more income then their joint fixed immediate annuity.  I had to make assumptions (like your birth date, your wife's birthdate, how much of the pension goes away on the death of a spouse) so for you to get an accurate quote you should run your numbers yourself, but it looks like the pension is more valuable than the $650k.

The second is I suggest that you run FIRECalc with the two different scenerios ($650k lump sum added to your portfilio and the pension as an income stream with the rest of your portfolio) and see which one turns out best for you.  Remember when doing this to include any SS you are expecting.

 

[Brat]

If he takes the annuity he needs to save elsewhere for the impact of inflation. His need of $3,500/mo will grow over time but the annuity will not - and he is young. How long will it take $2,166 in today's purchasing power to equal $3,500 at 3.5-4% inflation? That is his tipping point.

 

[jdw_fire]

Hence

... I suggest that you run FIRECalc with the two different scenerios ($650k lump sum added to your portfilio and the pension as an income stream with the rest of your portfolio) and see which one turns out best for you.  Remember when doing this to include any SS you are expecting.

Having a fixed income stream as part of his total W/D picture may support his W/D number better than a $650k addition to his portfolio.  Without his particulars I can't tell, but as an example if the other investments he mentions =$650k also and he is planning for a 40 yr retirement w/o SS then the $1300k portfolio produces a $48,820/yr CPI adjusted W/D with a 96.9%success rate.  However the $3674/mo fixed pension with a $650k portfolio produces a $49,401/yr CPI adjusted total W/D with a 96.9%success rate.  Hence in this example the pension is a better choice. 

 

[Brat]

That is just the analysis I was looking for.

Rollie, the decision of the committe has been made, take the annuity.

 

[bosco]

If he takes the annuity he needs to save elsewhere for the impact of inflation. His need of $3,500/mo will grow over time but the annuity will not - and he is young. How long will it take $2,166 in today's purchasing power to equal $3,500 at 3.5-4% inflation? That is his tipping point.

14 years at 3.5% inflation
12 years at 4%

 

[jdw_fire]

Rollie, the decision of the committe has been made, take the annuity.

There are alot of variables and depending on what they are in your particular case the pension may not win out so my vote would be that you run FIRECalc with the two different scenerios with your particulars included

 

[macdaddy]

What if you kicked the bucket @ 58 or even in your 60s?  Does the pension have some kind of death benefit.  I don't think most do.  Keep in mind that a 4% SWR means you will most likely have more than you started with to leave to your kids.  I don't think it is an apples to apples comparison. I would take the lump sum and invest it.

 

[JohnP]

Just thinking there is a need for another variable to consider...

Lump Sum amount goes down when Treasury Rate goes up...

Who knows what the Treasury Rate will be in three years when you may retire; right now, I'm guessing that treasuries will be at higher rates than today. This means that any lump sum will likely be less in three years - probably much less - meaning that that joint annuity of $3674/mo wil be looking even MUCH sweeter then.

JohnP

 

[MasterBlaster]

It seems to me that some of the above posts are mixing apples and oranges. The 4 percent SWR is not a fair comparison to the fixed annuity payout because the annuity does not increase each year for inflation.

A more fair comparison is to take the 4 % SWR for a stock/bond portfolio and add in the inflation kicker of say 3.5 % giving a non inflation adjusted SWR of 7.5 %.

So the lump sum ($650k) will spin out around $48750 per year (or ~4k/month) without inflation adjustments. Therefore I believe that the lump sum is the better deal rather than the annuity since the annuity only paid $3674/month.

Keep in mind that inflation will eat away from the purchasing power of either the annuity or the payout discribed above. Some people recommend that you only spend a fraction of your payout and invest the remainder for inflation protection in years to come. Formulas for the amount to retain from your payout are usually something like reinvestment amount = (100-age)*payment. Change the 100 factor up or down by 10 percent to fit your risk style.

 

[bosco]

A more fair comparison is to take the 4 % SWR for a stock/bond portfolio and add in the inflation kicker of say 3.5 % giving a non inflation adjusted SWR of 7.5 %.

sorry, but I don't think the mathematics of this approach makes sense.

a more fair comparison would be to take the day you will die, add up all the present value of all annuity payments, and compare that sum to the present value of all SWR withdrawals added to the present value of of the residual amount upon death.

Unfortunately, this requires knowing when you will die, what inflation will be, and what the returns will be. So the best that can be done is to plug in everything into firecalc (or some equivalent tool) and see which works out better for you. It depends a lot on whether or not you want a high probability of having something for your heirs and how much, and what flavour, of risk you are willing to take.

 

[jdw_fire]

I don't think it is an apples to apples comparison. 

It seems to me that some of the above posts are mixing apples and oranges.

Comparing a pension/annuity to a lump sum can be done in several ways.  The two I mentioned (i.e. 1. determining what the income stream produced by the pension would cost if you were to buy it on the open market and 2. plugging all your numbers into FIRECalc , making two runs one with the larger portfolio size/no pension and one with the pension income stream/smaller portfolio) were an attempt to make the comparison an apples to apples one, at least from a financal point of view.  However, as I hinted to in my first post to this thread, the original post did not provide enough info to perfom either of these accurately.  

That being said there are other ways to compare them that are less apples to apples, however since you arrear to be interested in retiring I would strongly recommend the FIRECalc approach because then you can compare income streams and residual portfolio values on an equal footing.

 

[astromeria]

Since a joint annuity was mentioned, there must be a spouse. In addition to the factors already mentioned, consider the spouse's retirement savings. Perhaps a combination of your annuity and his/her/your rollover/Roth IRAs and taxable savings will provide a good compromise between handling inflation (by managing your own investments) and handling down markets (with a reliable pension). Don't forget the sleep-at-night factor. Also--is it possible to take some of your pension in the form of an annuity and some as a lump sum?

 

[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.

 

[dawgster]

I would take the lump sum and buy my own immediate annuity with half the cash. I don't trust mega corp's and their pension promises. But I work for a airline and my pension was altered for years, then frozen and now on the verge of being terminated. I might a bit more cynical then most, but after the automakers follow the airlines and steel mills in terminating their pensions, watch out . the Gov't is showing little interest in pension reform.
I'm waiting for my pension to start termination proceedings and ER'ing with my lump sum.

 

[Brat]

dawgster has a point.  Your retirement may be fully funded now but its management is in the hands of others.  A risk to consider.

I concurr with others, play with your options using FireCalc.

You have time to involve your spouse in the decision.  Embark in joint retirement planning.  Consider the whole picture - income and expenses.  Usually a woman lives longer, the impact of inflation on a joint fixed annuity will impact her more.

 

[cj]

I agree with dawgster as well. Whe we had to make the decision with DH's pension money, financially it seemed to come out the pretty much the same (lump sum vs. annuity). But I just didn't want to have to rely on his company to make it good for 30 years or more... they have done too many bone-headed things to stick it to employees over the years. It probably would have been fine, but it would have made me nervous in any case. We invested it conservatively, and I'm way more comfortable with it that way.

CJ

 

[JohnP]

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

 

[bosco]

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.

 

[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

 

[Brat]

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.)

 

[ats5g]

Rollie,

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

- Alec