Lump sum or annuity?

D

Dvonzip

Confused about dryer sheets
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Jul 9, 2015
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I am 60 and just left my company. I was going to do the defined pension monthly annuity, but our CFO called me and said they are in process of getting ready to offer lump sum option to all former employees who have not yet started the annuity and are eligible. He said they won't have the amount till September, and if I start the annuity, I won't be eligible for the lump sum. Does this sound fishy? I did not plan for no income and can't make an informed decision without the lump sum number. I worked there 30 years. Advice?
 
There are other discussions about this topic on the forum.

Personallly I prefer the monthly payment.
It is all too easy to fritter away the lump sum or put in into unwise investments.

I read somewhere about how to figure out whether to take a lump sum or the monthly payment.

Multiply the monthly payment by 12 to get the annual payment.
Divide by the lump sum.
If the calculation (as a percentage) is 6 or 7 then get the monthly payment.
If the calculation (as a percentage) is less than 6 then get the lump sum.

Example:
monthly payment $436 lump sum $89,000

436*12*100/89000 = @ 5.9%

This is less than 6 so I "should" get the lump sum.
 
I took the lump sum when I retired from my Megacorp but of course I had the numbers before I made the decision. There are a lot of threads on this site discussing the pros and cons. Do a site search and you should find them without too much trouble
 
"The regulations, as amended, will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. "
 
DEC-1982 said:
There are other discussions about this topic on the forum.

Personallly I prefer the monthly payment.
It is all too easy to fritter away the lump sum or put in into unwise investments.

I read somewhere about how to figure out whether to take a lump sum or the monthly payment.

Multiply the monthly payment by 12 to get the annual payment.
Divide by the lump sum.
If the calculation (as a percentage) is 6 or 7 then get the monthly payment.
If the calculation (as a percentage) is less than 6 then get the lump sum.

Example:
monthly payment $436 lump sum $89,000

436*12*100/89000 = @ 5.9%

This is less than 6 so I "should" get the lump sum.
Click to expand...


The 6 or 7 percent is purely a preference. 6 or 7 should only be chosen if you feel you can earn 6 or 7 investing on your own. If not, take the annuity.

This decision is called "next best alternative" in finance. Doesn't account for tax situation.


Sent from my iPhone using Early Retirement Forum
 
ETFs_Rule said:
Annuities are one of the worst places you can ever put your money.
Click to expand...

Purchasing an annuity on the open market at today's interest rates probably is a "bad" deal in many cases. The dealer and it's sales staff have to be paid and that comes out of your initial stash. However, "annuities" set up within a pension plan are not so easy to dismiss without the numbers. First of all, they are likely handled by a company who does several to several hundred or several thousand for your Megacorp or even small company. Their "cut" is built in, known to your company and is spread over all the pensions - thus, it does not HAVE to be outrageous - not saying it won't be. Many plans were set up 30 to 40 years ago and MAY (I repeat may) have a very good pay out vs a lump sum. Again, only the numbers will tell. In most cases, even a shaky company's pension will be honored or at least covered, so I would personally not worry too much as long as Megacorp's pension is CURRENTLY doing okay. No guarantees in life or pensions, but it is far down on my worry list.

Having an annuity coming in every month can be quite comforting - especially if it frees you up to be a bit more aggressive on the remainder of your portfolio. While a pension does remove some of your flexibility vs a lump sum, that's not always a bad thing. YOU (or I) could screw up a single lump sum. Megacorp's pension plan has built in safe-guards and backups.

Not pushing one over the other. Just suggesting that pensions vs most "annuities" are at least Valencia vs Navel in the orange department. (Apples vs oranges might be a stretch.) As always, YMMV.
 
Please don't accept the "annuities are bad" rhetoric. You need to have the numbers to make an informed decision. I have not seen one of these lump sum deals be in the favor of the retiree in my estimation. In the interest of full disclosure. As part of my retirement nest egg I have a well funded defined benefit plan with an 8% guaranteed return and a 1983 mortality table that I will without a question take as monthly payments.

P.S> maybe the sub forum ought to be fire and money:confused:?
 
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Koolau said:
Having an annuity coming in every month can be quite comforting - especially if it frees you up to be a bit more aggressive on the remainder of your portfolio. While a pension does remove some of your flexibility vs a lump sum, that's not always a bad thing. YOU (or I) could screw up a single lump sum. Megacorp's pension plan has built in safe-guards and backups.

Not pushing one over the other. Just suggesting that pensions vs most "annuities" are at least Valencia vs Navel in the orange department. (Apples vs oranges might be a stretch.) As always, YMMV.
Click to expand...
What type of annuity are you talking about? Variable and index are terrible. Immediate or income annuities are regarded by some as the least offensive but these annuities are still a bad deal. You get your fix early on (in the form of a higher payment rate than 4% as one would take out under the "safe withdrawal rate") but as time goes on, those fixed payments seem less and less because of inflation. Eventually, while taking out 4%, the separate account of bonds/stocks will surpass the immediate annuity payment rate substantially. And that's just when someone is going to need the money most. And heirs inherit all of your money with the separate account. With an immediate annuity your heirs either get nothing or a zero return on investment. Not good.
 
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Dvonzip said it was a "defined pension monthly annuity". I took this to mean you are not buying an annuity in the open market but it is a monthly payment arranged by your company through an insurer.

There is a nice article in the latest (Aug 2015) issue of Money magazine that discusses this topic "lump sum vs annuity". I couldn't find the article on the Internet so I couldn't attach a link to it.

Some excerpts:

"Tempted to trade your pension for a lump sum? Here's why you should think twice."

"Pension industry experts and consumer advocates, however, say that for most workers the traditional pension is a better deal."

"Why is the lump sum income so low". "Because in a group plan, a lot of people will live shorter lives, so less money has to be reserved by them. The result is more generous monthly payments for everyone."

"If you are in poor health and don't have to provide for a spouse, the math favors the lump sum".
 
DH was offered a lump sum after he'd been receiving his pension for several years. His MegaCorp was derisking, and unloading their liabilities to Prudential. SO, his pension would have been coming from Prudential, and we were losing the ERISA protection (for what it's worth). Lots of research, meetings, and advice, but we went with the lump sum, rolled right into his 401(k). It's done well.


No universally right or wrong answer to this question - each situation is unique, and it depends on what you are comfortable with as well.
 
ETFs_Rule said:
What type of annuity are you talking about?
Click to expand...

The kind you get when you take a pension vs a lump sum. That is to say an "annuity" structured by a pension plan - not something you go out and buy from an insurance company on your own. If we still disagree, I'm okay with that.:)

I agree(d) with you that "bought-on-the-street" annuities are fraught with issues. But annuitized PENSIONS are often structured in such a way that they are a good deal for the recipient (vs a lump sum). You DO have to do your homework if you are offered a lump sum. I would start with the assumption that if MEGACorp suddenly gives you an option to take a lump sum instead of the pension, they just might think it is a good deal for THEM. Not to be paranoid - just careful. YMMV
 
SO, his pension would have been coming from Prudential, and we were losing the ERISA protection (for what it's worth).
Click to expand...

Derp, too much cold medication - I meant to say PBGC coverage, not ERISA.
 
I would take the credit risk of Prudential over the PBGC any day of the week.

The PBGC's liabilities exceed its assets by $61 billion as of September 30, 2014.

Prudential has $46 billion of equity as of March 31, 2015.
 
51IMUK3zP3L._SY355_.jpg
 
For many people (apart from the solvency issue) the question comes down to genetics (family history of longevity, the more longevity in the genes, the better the annuitized payout looks), and the degree to which one values a regular income stream you can't outlive. Some people value eliminating uncertainty more highly than others, and for those people, an annuity is more attractive than a lump sum and a DB pension is more attractive than retiring on 401Ks and IRAs.
 
ETFs_Rule said:
What type of annuity are you talking about? Variable and index are terrible. Immediate or income annuities are regarded by some as the least offensive but these annuities are still a bad deal. You get your fix early on (in the form of a higher payment rate than 4% as one would take out under the "safe withdrawal rate") but as time goes on, those fixed payments seem less and less because of inflation. Eventually, while taking out 4%, the separate account of bonds/stocks will surpass the immediate annuity payment rate substantially. And that's just when someone is going to need the money most. And heirs inherit all of your money with the separate account. With an immediate annuity your heirs either get nothing or a zero return on investment. Not good.
Click to expand...


I don't know why you compare this to taking money from a stocks/bonds portfolio. At best the comparison should be to the bond part only, as if spending down a bond ladder. If you're worried about inflation then buy an inflation indexed annuity. We all know that the heirs will get nothing, and I'm sure we all know that that's the price of insurance. You obviously don't want to buy that insurance, but it seems that many others might.


Sent from my iPad using Early Retirement Forum
 
Bumping this thread: I just read an article in Money Magazine (yeah, I know - financial porn). I gleaned one thing on the choice between pension vs lump sum: Most companies will give you the lump sum based on their average cost for the equivalent "annuity" (aka pension). Since they have multiple participants, they know the actuarial issues (how many will die young, how many will hang on to 98, etc.) Thus their average cost turns out to be much LOWER per person than if you tried to structure your own "pension" of equivalent monthly payout. So, right off the bat, they will most likely offer you a much lower lump sum than what would be required to cover yourself out to 98 (or whatever you figure is your date of demise.) For all their faults, Money does a better job of 'splaining this than I can so YMMV.
 
Immediate annuities don't make sense. They are pushed under the guise of guaranteeing that you won't outlive your money. They'll say to a 65 year old "Wouldn't you rather get 6.5% per year rather than 4%"? The problem is that by the time you get to be about 87 or so a bond/stock balanced portfolio will start to outpace the annual fixed payments of that annuity. And by that time you can INCREASE your withdrawals from the bond/stock portfolio. Soon that annuity is paying the equivalent of 3% when you're 90 years old, then 2.5% when you're 95. That's just when you're gonna need that extra money most to pay for caretakers, higher insurance, etc. So you won't outlive your money BUT you'll be living in poverty. Guaranteed!
 
Koolau, I actually think Money is quite good and would attribute being a longtime subscriber with now being ER. I concede that you need to read between the lines and ignore their hottest stocks lists and such nonsense that they need to to sell magazines.

ETF, the problem with your statements is that you are assuming that the future is like the past. While that may well be, I'm sure that there are a whole bunch of folks that were retirement age in Japan 15 years ago that would take issue with your statement that "a bond/stock balanced portfolio will start to outpace the annual fixed payments of that annuity" and would have been better off with an annuity than a balanced bond/stock portfolio. You may well be right, but who knows what the future will hold. All that said, I agree with you that I would prefer a balanced bond/stock portfolio to an immediate annuity, but I recognize that there are some risks associated with that choice and I'm willing to take them.
 
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