I'm like a deer in the headlights on this decision

[WestUniversity]

The dollar amounts were different but the other factors of my decision were very similar. I chose the lump sum.

Ultimately for me, having my money tied up and managed by a pension administrator for the next 30’ish years was a bigger risk/gamble than me managing the funds on my own...

 

[street]

Just curious, did you make a decision on how you are going to take your pension?

 

[Canoesmith]

Not yet

Just curious, did you make a decision on how you are going to take your pension?

No, not yet as I have some time to waffle more. Responses here are running close to 50/50. But I’d say right now I’m leaning towards the annuity and I’ll tell you why.

1. I’m not a brave investor, so a safe ready return of 6% with 100% spouse survivorship (almost like an insurance policy) makes me less anxious.
2. I’d like to not worry about the stock market with all of my money when I’m retired. I’ll still have a bit north of 1M working for me even with the annuity, and I believe I like the set and forget part of the annuity.
3. With this annuity, and the one in 2025 and SS I’ll have more income than I will most likely need post 70 YOA and I can continue to save even in retirement - or use that money to pay for LTC if needed.
4. For heirs, we will gift along the way, and left over $ and paid off RE will be a nice inheritance
5. The annuity will be through New York Life. A++ rated and one of the very strongest companies in the business, so While there is always concern, it isn’t like my pension will be paid out by a small business for the next 35 years.

Also, and it’s just a mind game, my lump sum last year was projected at over $100k higher than it is right now. It has gone down due to rising interest rates. It doesn’t mean much, but it was irritating to see it drop. It won’t drop again before my decision, but that drop made the annuity look even better.

 

[CardsFan]

In reality, you have a no lose proposition.There is no BAD choice, and the OPTIMIUM choice can't be known until you are both gone.

Today, I would say take the lump sum. Five years ago, take the sure thing pension. Enjoy your retirement!

 

[street]

Outstanding great reasons and like most say, it comes down to what you feel comfortable with no right or wrong way.

Thanks and good luck.

 

[Original Wally]

Do keep in mind that with no cola on the pension that **if** we get into an inflationary spiral you could quickly lose purchasing power.
If the employer would go 50 / 50 that would be really ideal. Fixed income and more to add to the portfolio for growth. You are still young with (statistically) a lot of years ahead of you.

 

[street]

^ If you pass away in a few years after retirement and your wife passes away a few years later, then what happens? Does the rest of the money just stay with the pension company?

 

[pb4uski]

Does anyone know if a Corp. pension transferred to a life insurer, in this case New York Life, is backed stopped by the PBGC? If not, that would be an additional risk in taking the annuity option.

No, I don't think so.... but NYL is as solid a company as you can get... far ahead of the PBGC... and in this case the OP's pension exceeds the PBGC limit anyway.

 

[pb4uski]

No, not yet as I have some time to waffle more. Responses here are running close to 50/50. But I’d say right now I’m leaning towards the annuity and I’ll tell you why.

1. I’m not a brave investor, so a safe ready return of 6% with 100% spouse survivorship (almost like an insurance policy) makes me less anxious.
2. I’d like to not worry about the stock market with all of my money when I’m retired. I’ll still have a bit north of 1M working for me even with the annuity, and I believe I like the set and forget part of the annuity.
3. With this annuity, and the one in 2025 and SS I’ll have more income than I will most likely need post 70 YOA and I can continue to save even in retirement - or use that money to pay for LTC if needed.
4. For heirs, we will gift along the way, and left over $ and paid off RE will be a nice inheritance
5. The annuity will be through New York Life. A++ rated and one of the very strongest companies in the business, so While there is always concern, it isn’t like my pension will be paid out by a small business for the next 35 years.

Also, and it’s just a mind game, my lump sum last year was projected at over $100k higher than it is right now. It has gone down due to rising interest rates. It doesn’t mean much, but it was irritating to see it drop. It won’t drop again before my decision, but that drop made the annuity look even better.

To be clear though, you are not earning a "safe and steady return of 6%"... you are getting a 6% payout rate. That said, a 6% payout rate is attractive compared to immediate annuity pricing. If you and your DW perish within the first 17 years then your return is actually negative as you never get more than what you pay in.

I agree with you on NYL... rock solid.

While I would generally advocate taking the pension where one can get a better payout than the immediate annuity marketplace I would not in this case... because SS and your other COLAed pension will cover more than 117% of your spending once they are both online so I don't see having over 117% of your annual spending needs covered by pensions and SS.

The other reason that I don't think it is a good idea is that if you take the pension and head off having fund and you and DW die prematurely, that $1.4 million goes "POOF". It happens. A work colleague of mine had his parents retire and travel and they were both killed in a bus accident in South America. Or you could both perish in a car accident. And $1.4 million goes "POOF" never to be seen again by your heirs or charities.

There is no need to worry about the stock market... you could dump the $1.426 million in Wellesley, set up a $7,214/month automatic redemption and go have fun. Set it and forget it.

 

[pb4uski]

To illustrate what I was referring to in the last post, below is your "return" based on how long you live:

Lump Sum		1,426,000
Monthly benefit		7,214
Age	n	IRR
58	0
59	1	-98.3%
60	2	-80.4%
61	3	-59.9%
62	4	-44.3%
63	5	-33.3%
64	6	-25.3%
65	7	-19.4%
66	8	-14.9%
67	9	-11.5%
68	10	-8.8%
69	11	-6.6%
70	12	-4.9%
71	13	-3.4%
72	14	-2.2%
73	15	-1.2%
74	16	-0.4%
75	17	0.4%
76	18	1.0%
77	19	1.5%
78	20	2.0%
79	21	2.4%
80	22	2.8%
81	23	3.1%
82	24	3.4%
83	25	3.7%
84	26	3.9%
85	27	4.1%
86	28	4.3%
87	29	4.4%
88	30	4.6%
89	31	4.7%
90	32	4.8%
91	33	4.9%
92	34	5.0%
93	35	5.1%
94	36	5.2%
95	37	5.3%
96	38	5.4%
97	39	5.4%
98	40	5.5%
99	41	5.5%
100	42	5.6%
101	43	5.6%
102	44	5.7%
103	45	5.7%
104	46	5.8%
105	47	5.8%

As a reference point, Wellesley' returns are below:

 

[Perryinva]

I would take the lump sum. That is just too large an amount for too long a payback. In addition to as Pb4uski said, sometimes it’s not about the percentage numbers, but the absolute amounts. It’s one thing to take a needed $721/mo pension instead of a $140k lump sum (where the potential loss of the lump sum is not that damaging to your NW) and entirely different thing to take a $7214/mo instead of a 1.4M lump sum even though the percentage math is the same, so they should warrant the same decision. I absolutely wish my company would offer a lump sum buyout. Based on your numbers, I would have to decide on about a $1M lump sum. It would be an easy decision for me.

 

[flintnational]

ETA: It looks like pb4uski beat me to the break even point analysis.

OP, here is another way to look at the decision. Assuming you take the lump sum, the following shows the average annual return you need to achieve to match the pension payout at various ages. If you can beat this return or if both annuitants die early, you are better off with the lump sum. If you cannot beat this return you are better off with the pension. IOW, these are the return break even points at various ages. (Age refers to the death age of the last surviving spouse. Return refers to the average annual return required to match the pension. Probability refers to the chance at least one spouse will attain this age. This is based on the joint pension option.)

Age....Return.....Probability*

80......3.1%.........85%
85......4.0%.........68%
90......4.7%.........43%
95......5.2%.........18%

Age 90 Example

	4.70%
	$86,568
	$1,426,000
58	$1,416,227
59	$1,396,222
60	$1,375,276
61	$1,353,346
62	$1,330,385
63	$1,306,345
64	$1,281,176
65	$1,254,823
66	$1,227,232
67	$1,198,343
68	$1,168,098
69	$1,136,430
70	$1,103,274
71	$1,068,560
72	$1,032,215
73	$994,161
74	$954,318
75	$912,603
76	$868,928
77	$823,199
78	$775,322
79	$725,194
80	$672,710
81	$617,759
82	$560,226
83	$499,988
84	$436,920
85	$370,887
86	$301,751
87	$229,365
88	$153,577
89	$74,227
90	-$8,852
91	-$95,836
92	-$186,908
93	-$282,261
94	-$382,095
95	-$486,622

ETA: *Added Kitces joint mortality percentages.

 

[street]

Can someone answer the question, if you take a pension like in this case, what happens to the funds if both pass away lets say 2 years of receiving the pension?
This maybe something to think about also, before one makes a decision. Can anyone answer that question I have no idea what would happen to all that money left on the table??

 

[flintnational]

Can someone answer the question, if you take a pension like in this case, what happens to the funds if both pass away lets say 2 years of receiving the pension?
This maybe something to think about also, before one makes a decision. Can anyone answer that question I have no idea what would happen to all that money left on the table??

The payments stop and the estate receives nothing. The insurance company keeps all of the funds. But, the reserve is also true. If you live longer than expected, the insurance company is required to keep making payments. (Some annuities have options that require payments for a certain number of years, say 10 or 20.) In this case the payments would continue per the agreement to the heirs. I do not think the OP has the guaranteed payment option.

 

[bizlady]

DO you have the ability to roll the lump sum to an IRA - now or in the future? We had a plan that had to stay with the trustee plan for one year, but rolled it over as soon as we could.

 

[street]

The payments stop and the estate receives nothing. The insurance company keeps all of the funds. But, the reserve is also true. If you live longer than expected, the insurance company is required to keep making payments. (Some annuities have options that require payments for a certain number of years, say 10 or 20.) In this case the payments would continue per the agreement to the heirs. I do not think the OP has the guaranteed payment option.

Thank you for that information I appreciate it.

I do beleive that is one of the reasons these insurance company can give a better monthly pay out because of money left on the table due to early deaths from clients. IMO

Either way that is good info to know. Thanks

 

[Canoesmith]

So much good info.

Now....I’m leaning towards lump sum.

I believe I can open an account at Vanguard where I can roll my $1.426 into tax free (tell me if I’m wrong) and put it to work in low cost, relatively secure mutual funds (I heard you Pb4uski...VWINX) and the like....and do at least as well long term as the annuity. I was concerned about my DW handling this when I’m gone, as I expect her to live 15 years beyond me... but I hope we can have the time to set up distributions - where that won’t matter.

You guys are all so kind. I appreciate all, and I mean ALL, of your input.

Steve

 

[flintnational]

^^ A very good option for an elderly spouse would be Vanguard's private client services. I think they charge .30% (30 basis points). I have advised my DW that is an option if she does not wish to manage investments.

ETA: Yes, you can role the money tax free. But, double check the procedures to ensure you do not trigger a tax event. I am sure Vanguard and or your employer can advise.

 

[gamboolman]

Canoe,

I am really interested in this post as I am in a very similar situation now and our numbers are very close to yours. I'm 59 and Ms. gamboolgal is 57 - I'm looking to retire end of this year or in mid 2020.....afew one more months vs OMY.....haha...

As many of the other posters have said - you have a good problem.

I'm leaning towards taking the Lump Sum vs NCOL Pension because of Inflation.

Inflation scares me, thus we are going to take the Lump Sum and invest with our Asset Allocation of ~55% Equities and 45 % bonds/cash.

We are at Vanguard and will move the Lump Sum and Mega Oil Corp Savings to Vanguard to consolidate upon retirement. We prefer the ease of having one institution to deal with vs having our monies spread out because of potential risk. But that's just us......lots of folks like to spread it out just in case......

All the best and please keep us posted with your ultimate choice.

gamboolman.....

 

[Canoesmith]

Canoe,

I am really interested in this post as I am in a very similar situation now and our numbers are very close to yours. I'm 59 and Ms. gamboolgal is 57 - I'm looking to retire end of this year or in mid 2020.....afew one more months vs OMY.....haha...

All the best and please keep us posted with your ultimate choice.

gamboolman.....

Thanks gambool,

I haven’t even declared my retirement yet, as I’ve gone to school here about doing it too early so I’ll be declaring in March for a 90 day lead time. So I gave time to continue to ponder but all of the help I have gotten here is very beneficial.

Yes OMY has been my game for the past two years and there are days I say, why not go to years end (when bonuses are paid out), and then I may as well go to July and get another year of pension credit, and then year end for the bonus.... it never ends. So this July 5th is it for me.

 

[RetMD21]

That's a very attractive payout rate and not something that you can count on matching with investing on your own especially if you pay 0.3% for someone pick your index fund. Also if there are health or cognitive concerns in 30 years the regular monthly income would be easy although with inflation it would not be such a huge check.

 

[2177V]

Lump sum: $1,426,000 x 3.5% = $49,910 annually.

Annuity: $7,214 x 12 = $86,568 annually. $86,568/$1,426,000 = 6.07% annual yield.

$1,426,000/$86,568 = 16.47 years break even point.

I can see why it's a difficult decision. That said, how secure is the pension? Do you have any heirs who would benefit from the lump sum? Are you considering investment options that might earn something between 3.5% and 6.07%?

I agree. There are only some minor tax considerations. Tax considerations may depend how the pension was funded. For example, if 100% of the pension was funded with pre-tax dollars, then 100% will be taxed.

However, some pensions are partially funded by post tax dollars by the employee. In that case, only 95% of the $7214 is taxed so that the 6.07% yield would increase slightly because 5% should be tax free. Same goes the lump sum: If say $150,000 was funded by the employee with post tax dollars, then only $1,426,000 minus $150,000 will be taxed when you invest/withdraw this money.

The employee already paid taxes on the post tax contribution and the government does not get to tax you a second time on this portion of the contribution. On the other hand, if the contributions involve pre-tax dollars and 100% of the contributions and investment gains were never taxed, then 100% will be taxed.

Bottomline: I don't know how the pensions were funded so this is an important tax`question to ask before making a decision.

 

[SpinDoctorTX]

A bird in the hand is worth 2 in the bush.

My thoughts exactly. I rolled my rather small pension into an immediate annuity the minute I got away from my final job. Because I was 56 then, (58 now) I receive an additional stipend of $300./ mo for being under 65. I don't trust pensions since my dad's was reduced by 30% when the company who bought his original company filed (a predictable event based on my financial analysis) BK 5 years later. By then of course he had missed the opportunity to get it out of their clutches (which I'd urged him to do), and just had to get over it. He had many other sources of revenue, however, so it didn't affect his and wife # 2's standard of living in the least.

 

[Canoesmith]

OP Update -

New retirement date is 12/20 (see other post of mine on this if you want called "So, would you") - but on this specific question I am having the DB plan amended to allow 50-50. Half the annuity and half the lump sum. I like it as a best of both worlds solution.

I will end up a $45k/yr (100% spouse) w/no Cola - and a lump of $750K - which will add to my other funds. I think we have a winner - at least for me.

 

[RetMD21]

OP Update -

New retirement date is 12/20 (see other post of mine on this if you want called "So, would you") - but on this specific question I am having the DB plan amended to allow 50-50. Half the annuity and half the lump sum. I like it as a best of both worlds solution.

I will end up a $45k/yr (100% spouse) w/no Cola - and a lump of $750K - which will add to my other funds. I think we have a winner - at least for me.

Seems like a good compromise