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scubamonkey 02-24-2006 12:48 PM

lump sum or annuity payout on rule of 85
 
Part of my compensation for 30 years employment is the rule of 85. This is where you add your age and years of employment together - when the sum is 85 and you are over 55 years old you can retire. I will reach my rule of 85 only two months after i reach 55.

I have two choices of payout on my pension.

The first choice is a life annuity for $65,000.
The second choice is a lump sum payout for $625,000.

How in the world can this decision be made (life expectancy, etc.)?

ALso, If the lump sume is the best option and I roll it into an IRA - do I have to wait until 59 1/2 to strat receiving annual distributions?

I should note that the annual income from this pension is necessary
to my retirment plan to retire at 55. ???

Can ya'll help me with some sage advice?

brewer12345 02-24-2006 12:53 PM

Re: lump sum or annuity payout on rule of 85
 
Is the payout fixed or inflation adjusted? Single life or joint?

The way I would look at this is to price an equivalent annuity payout from a commercial insurer. If you can do better in the private market, its probably better to take the lump sum.

setab 02-24-2006 12:59 PM

Re: lump sum or annuity payout on rule of 85
 
I also think that you will have to wait until 591/2 if you role it over, so that may be a significant factor.

setab

scubamonkey 02-24-2006 01:25 PM

Re: lump sum or annuity payout on rule of 85
 
There are many options such as 5 or 10 years guaranteed, life of my wife etc. (9 options alltogether). They all decrease in value as you add guarantee options - although not a great deal.

The payment is NOT adjusted for inflation!

I would like to know more about the commercial insure option.

brewer12345 02-24-2006 01:35 PM

Re: lump sum or annuity payout on rule of 85
 
Quote:

Originally Posted by scubamonkey
There are many options such as 5 or 10 years guaranteed, life of my wife etc. (9 options alltogether). They all decrease in value as you add guarantee options - although not a great deal.

The payment is NOT adjusted for inflation!

I would like to know more about the commercial insure option.

Just to get a ballpark, plug your particulars in here: http://www.immediateannuities.com/

You should be able to see what it costs on the open market to buy the income stream you are being offered (bear in mind that if you take the lump sum, you might not choose to actually buy an annuity).

twincity 02-24-2006 02:44 PM

Re: lump sum or annuity payout on rule of 85
 
"ALso, If the lump sume is the best option and I roll it into an IRA - do I have to wait until 59 1/2 to strat receiving annual distributions"

My situation was similar to yours. I took the lump sum. You allowed to roll your lump sum into an IRA or multiple IRA's if you wish. You can take a distribution from your IRA before your 59 1/2 - it's called a 72T distribution. The rule is you have to take the distribution for 5 years or until your 59 1/2, whichever is longer. The distribution is taxed as ordinary income. I have two IRA's and take a monthly distribution from the "big" IRA.* If you have to stop the 72T distribution, for some reason, after it starts, there are tax penaties that come into effect. Searh this board or the internet for more information. A financial adviser, can also help you with this process

Nords 02-24-2006 02:59 PM

Re: lump sum or annuity payout on rule of 85
 
Quote:

Originally Posted by scubamonkey
The first choice is a life annuity for $65,000.
The second choice is a lump sum payout for $625,000.

Is the life annuity coming from the company you worked for, or is it coming from an insurance company?

The reason I'm asking is because my FIL is very very happy and sleeps well at night because he took a lump sum from CBS.* I suspect there are a lot of employees in the steel, airline, & auto industries who also wish they'd taken a lump sum.

But a life annuity from an insurance company might have a better chance of survival than a company pension.

mickeyd 02-24-2006 03:44 PM

Re: lump sum or annuity payout on rule of 85
 
What are your living annual expanses? Will less than $65k annually allow you to live in comfort? If you rolled it over to an IRA you could spin off $25k@ a 4% rate per year. What other fiancial assets do you have? Will you be getting SS? Does your pension have a cola?


JPatrick 02-24-2006 04:07 PM

Re: lump sum or annuity payout on rule of 85
 
You said you needed the 65K to retire.* You will never (never say never) generate that amount of cash from your lump sum and still sleep at night, let alone leave any behind.*
Another real key is the options you have and how much they cost.
Given no cola, you need to figure what your 65K will be 10,15 20, or even 40 years from now.
Your other assets are important to consider also.


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