Pension Decision: Lump Sum or Annuity Payments??

[Cessna5354]

Hello,

I am new to the board, @ 58 YO, looking to bail from my company in 3 years.
I am wrestling with taking the lum or monthly payments. I am in vgood health and other streams of income.

The lum is $ 700K and the annuity is $ 64K/ year, both approx.

I would prefer to take the lum, invest, only take the interest. I would plan a combo of dividend stocks and bonds.

$700 K @ 5% return is $35K, obviously $39K/yr short of the annuity.
We have about $2.3M, savings & 401K, invested 50% bonds & 50%stocks.
We can live with the interest off the lum sum, and of course if I get hit by the bus, my wife has the money. (the annuity would pay 50% after my passing). We have real estate we will sell after retirement for additional investment funds.

I am very concerned with my two children, although both very independant (30 & 28 YO) I firmly believe they would benefit from our inheritance with the state of the world today.

I have been lurking here for a while and do enjoy and appreciate the knowledge provided.

Thanks in advance !!

 

[clifp]

Your best bet is to plug in the specific of your pension vs a lump sum at various places, I like the Berkshire Hathaway annuity quotes just cause I figure Buffett's company is going to outlast me. But there are several other places to get quotes.

Given that you have significant other assets, my advice would be take the annuity since 700K will only purchase a bit more than $36K per year from an insurance company and the 9% return is significantly higher than most places.

P.S is 5334 your N number?

 

[Cessna5354]

Thanks for the suggestion. I am not keen on annuities as a investment product, but I will certainly take a look. I am thinking of buy hold, take dividends, in stocks.
If the annunty has an end cash value, that would interest me, but I think I am asking for my cake, while eating same.

When you say the 9% return is higher than most places, you are suggesting the BH annuity ? The company I toil for has a return of 7-8 %, IIRC.

Roger on the N number,

 

[REWahoo]

Cessna, checking the annuity sites for quotes is a means of determining the value of the pension, not a suggested purchase recommendation.

 

[clifp]

When you say the 9% return is higher than most places, you are suggesting the BH annuity ? The company I toil for has a return of 7-8 %, IIRC.

Roger on the N number,

I always struggle with right terminology when comparing the cash flow yield of an annuity with a normal investment to avoid confusion.

But very simplistic 64,000/700,000 is a bit over 9%, that is significantly higher than "income" you could generate on any other investment.

I also not a fan of annuities, (at least twice a year I have a rant about what if all the insurance companies go broke) . However, for a variety of reasons, often the annuities offered by companies are substantially more generous than those that average person can buy from an insurance company. At first blush yours looks that way.

Let's put it this way I am a few years younger than you have a similar assets and I'd jump at the deal, but then I don't have kids.

 

[Cessna5354]

Understand using BH as a comparsion.

You are correct, my company's 9% is difficult to beat. Several advisors agree. This annuity amount would insure my Wife receives 75% of my amount till her passing.

It comes down to how long do I feel I will live ?? I hear Clint Eastwood askin' If I feel Lucky ??

Thanks Guys

 

[audreyh1]

Understand using BH as a comparsion.

You are correct, my company's 9% is difficult to beat. Several advisors agree. This annuity amount would insure my Wife receives 75% of my amount till her passing.

It comes down to how long do I feel I will live ?? I hear Clint Eastwood askin' If I feel Lucky ??

Thanks Guys

With a 75% benefit to your wife, it also comes down to how long might she live!

You already have substantial savings outside the lump sum/annuity. Congratulations to you!

 

[Cessna5354]

AH, I agree and often say I hope that is the case. My wife has a disability, but does wonderfully despite her setback with Rheumatoid Arthitis (sp).

Maybe I can rationalize this by banking/investing the difference between the monthly annuity payment and lum sum proposed interest. Check out if I donot need to spend the annuity during the years what will be the balance at age 85 ??

Thanks for the kind words AH, we have spent alot of years working outside normal jobs with a separate business, real estate development during the crazy years.

 

[jclarksnakes]

The annuity number (64K and 75% survivor benefit) is too good to pass up.

 

[Midpack]

Ordinarily I recommend lump sum vs pension in today's interest rate environment assuming the lump sum and pension options are roughly equal to a current annuity (as they should be IMO, but aren't always). However, at age 61 with a spouse and similar survivor benefits (I can't find a calculator to match 50%), it appears it would cost you far more than $700K to get an annuity providing $64K/yr. So I'd have a hard time passing up the pension you've been offered. And you're portfolio leaves you plenty of flexibility for investing and supplementing income. Best of luck and good for you!

 

[Animorph]

Yeah, that sounds like a much better than otherwise available annuity at your age and with 75% spouse. Probably just getting screwed with a smaller lump sum than you deserve. Unless you have too much annuity-style income (including SS) or think inflation will be really bad, I'd take the annuity. Then tilt your AA a little towards more equities by say $700k or so. That will give you a little better shot at keeping inflation at bay.

 

[Cessna5354]

Without spending anything, the lump & the annuity at 6% annual return

After 14 years it is nearly even, after 26 years I am ahead by a Mil, investing the annuity. I am not sure of the tax implications or benifits either way.

Not sure this is feasible, but I can live off the income of my current investments. I truly live a frugal lifestyle. I am leaning towards the annuity, today.

 

[Lsbcal]

I'd read all the fine print on the annuity and then do due diligence on the annuity provider. How can they provide such a good deal with bonds at these rates?

30 year TIPS are at 0.5% now.

You don't have to do this as I really don't care myself. I personally distrust annuities and like to keep total control on my money.

BTW, why not invest the money like a 30 year old would. That would probably be 100% equities. I'm assuming you are just thinking of estate issues from the past posts.

And yes, I'm being purposefully provocative today. Must be the caffeine.

 

[Sirka]

64K annuity - too good to pass up

The annuity number (64K and 75% survivor benefit) is too good to pass up.

+1
with annuity steady income, you will not spent much of your other assets and leave plenty of inheritance IMHO

 

[Cessna5354]

To be clear, of which I many times I am not, This is a company retiree pension "annuity"

It is fully backed with investments, or close to 100%. I have been with the company for 25 years, and believe you me, this plan was closed in 1992, IIRC.
This company provides a increased 401K contribution.

I agree with those whom have a distaste for independant annuities. They are frought with fees, etc. They do provide a guaranteed monthly income for those who donot have the funds to diversify.

 

[obgyn65]

Based only upon the information you provide, I would take the annuity.

The lum is $ 700K and the annuity is $ 64K/ year, both approx.

 

[Bestwifeever]

I'd go with the pension--you have plenty of other assets you can use to buy an annuity if that becomes attractive to you.

 

[pb4uski]

+1

I would go with the periodic pension payments since they are so attractive compared to the lump sum.

One thing to consider is the financial strength of the pension plan. How well funded is the plan? Does the plan purchase an annuity from an insurance company that funds the payments to you or are the annuity payments simply made from the pension plan assets? If the pension plan purchases an annuity is the pension plan the owner or are you the owner? (payout approaches vary from plan to plan).

But if the pension plan is strong, the periodic pension payments seem like the best deal.

 

[Dave J]

My SO was early retired 10 years ago with a similar offer(but much lower dollar amounts but similar percentages, somewhat lower). We chose the lump sum. I regret that decision to this day.
I'd take the annunity.

 

[Midpack]

To be clear, of which I many times I am not, This is a company retiree pension "annuity"

If I understand you correctly, your company would buy an annuity on your behalf (and be done with their obligation) vs actually making (monthly) pension payments to you from their pension funds. My former Megacorp offered me the former as well, it's not unheard of. And depending on the relative long term outlook of the company vs the annuity (insurance) provider, either may be preferable. In my case, I'd have had more confidence in an insurance provider than the Megacorp, who knows if they'll be around as long as I will. But I took the lump sum anyway...

 

[Cessna5354]

The annuity payments are made directly from plan assets. They are close to 100% funded, but not always all the time. I am not concerned with the company going under without enough assets to cover the unfunded liability at that time. Even Enron employees recieved all retirement that was due to them.

I now need to look at the tax implications regarding the lum sum vs payments. I could take the lum sum into an IRA, then annually contribute to a Roth IRA. The monthly payments will be income, which I will not be able to control

 

[pb4uski]

The annuity payments are made directly from plan assets. They are close to 100% funded, but not always all the time. I am not concerned with the company going under without enough assets to cover the unfunded liability at that time.
Even Enron employees recieved all retirement that was due to them.

I now need to look at the tax implications regarding the lum sum vs payments. I could take the lum sum into an IRA, then annually contribute to a Roth IRA.
The monthly payments will be income, which I will not be able to control.

So it sounds like the annuity payments are financially secure. I agree that you need to look at the tax implications, but the annuity seems so good ($64k vs $36k "market" mentioned in another post) that it will be the winner.

 

[Cessna5354]

Thanks to all,

I have been wrestling with this for some time. You all have provided structure to my thinking.

I am nearly 100% on the monthly payments due to the nearly 9% return. As mentioned in an earlier post, I could become a little more agressive with the AA. Kinda counter intuitive, but makes big picture sense.

Justa simple kid from W.Va. trying to get along in the fast lane of NJ.