Pension v. lump sum: non-financial reasons?

[ChicagoGal]

I have to make a decision on Friday for my pension benefit. I have two choices:

Lump sum: $852K
Single life annuity: $3,797/month ($45.6K/annual)

Immediateannuities.com estimates a $3,385/month payout for that lump sum, which indicates that the annuity is a better choice, financially.

I'm 58 now, and for the sake of modeling, planning to age 100. No spouse, no kids. It does concern me that the non-COLA annuity will be worth significantly less in 40 years. On the other hand, having some level of guaranteed income now is a hedge against SORR. The pension is about 30% of my total retirement savings. I'm not planning to take social security until at least 67 and probably 70.

The financial planner I used recommended the lump sum in order to do more Roth conversions pre-SS. But then again, she was using 5.95% estimated portfolio returns, which seems high to me in this environment.

What other considerations would you look at in making this decision?

 

[Ready]

Annuities are paying out at historically low levels now because interest rates are near zero. So even though your monthly amount is more than the current annuity rate, that doesn’t mean it’s a good deal. With the lump sump you can invest it however you choose. It does not seem likely that interest rates will be this low for the rest of your life but you are essentially locking in today’s low rates by taking the monthly payout. If it were me I would go lump sump and invest it conservatively, waiting patiently for interest rates to rise.

A monthly annuity with no COLA is not a great deal. Every year you will be taking a pay cut.

 

[jollystomper]

On the other hand, having some level of guaranteed income now is a hedge against SORR.

This is one of the reasons I chose to take my pension as a non-COLA annuity instead of a lump sum. I wanted to have three sources of retirement income: pension annuity, investment income, and (eventually) social security. The pension is large enough to cover our regular monthly spending and over half of our total spending.

Some additional reasons that may only apply to me:
- I am willing to trade off potential gains to keep things simple. I do not have to do anything for the monthly pension other than to observe it being deposited.

- When downturn hits, it adds to the "sleep well at night" factor. I refer you to threads started in January of 2020, when many were rejoicing over their 2019 gains and expecting more of the same in 2020... no one then foresaw what would happen just 2 months later in the market. Then the threads were "Oh no I need to get out of the market I am totally dependent on it for my spending". If you can have everything in the market and not panic at a 50-60% downturn, you are a better person than me .

- It is not COLA but (a) I am fine with SS being the COLA component of my finances, since I paid the max in for 35 years so will get the maximum benefit, (b) I already have a large amount of savings and investments, and (c) f I live another 30 years, I doubt I'll be spending as much as I am now.

YMMV, but it works for me. Just as having between 35-40% of my assets in the market works - I will not do as historically well as those with 70, 80, 90, or 100% in the market, but I will do well enough for my needs .

 

[RetireeRobert]

The pension is about 30% of my total retirement savings. I'm not planning to take social security until at least 67 and probably 70.

What other considerations would you look at in making this decision?

So by saying the lump amount of $852,000 is about 30% of your retirement savings, I take it you mean you have about $2 million "other" retirement savings?

If so, you can easily give yourself a pension of about $60,000 at a very conservative withdrawal rate of 3% of the $2 million every year, and adjust every year for inflation (or $80,000 at WD rate of 4% and adjust every year for inflation).

That leaves the $852,000 lump untouched for you to invest. Possibly do Roth conversions with some of it---or not.

If $60,000 (or $80,000) effectively cola'd is adequate for you to retire on, I would say take the lump sum of $852,000. As others mentioned, interest rates can't go any lower from present levels. Having that lump to redeploy at higher interest rates later on would be very nice.

Take the lump of $852,000.

 

[grayv]

taxes if you take the lump sum?

can you roll it into an IRA?

 

[pb4uski]

Sounds to me like the plan is giving you an annuity benefit that is worth $956k in terms of today's annuity pricing in exchange for $852k.... I'd take the pension benefit.

 

[Finance Dave]

Annuities are paying out at historically low levels now because interest rates are near zero. So even though your monthly amount is more than the current annuity rate, that doesn’t mean it’s a good deal. With the lump sump you can invest it however you choose. It does not seem likely that interest rates will be this low for the rest of your life but you are essentially locking in today’s low rates by taking the monthly payout. If it were me I would go lump sump and invest it conservatively, waiting patiently for interest rates to rise.

A monthly annuity with no COLA is not a great deal. Every year you will be taking a pay cut.

This is a good point.

Another thing to consider...is how much of your "necessary" expenses will be covered by SS. If all of them, then you can play "loose and easy" with this annuity money. For me, I like the idea that even if the worst things happen, I want to have enough income that's COLA'd to pay for our basic living needs.

 

[njhowie]

If your assumption is that you will live to be 100, then take the annuity - very little to decide in my mind. The breakeven point of most pension-related annuities is around age 80. Having the additional 20 years of guaranteed income puts you way ahead.

If you take the lump sum, today, you may plan to invest and get higher returns. However, we don't know what will happen with interest rates over the next 40 years, the stock market, or the economy. Over the 40 year time frame, you might decide to do something frivolous with the money and upend your original plans. Taking the annuity guarantees you'll stick to the plan, live within your means, and have that guaranteed monthly check until you pass away. It makes planning a whole lot easier. And again, if your assumption is living to 100, the annuity puts you way ahead. If your assumption were you'd live to 80 or 85, that's a completely different story.

 

[flintnational]

With similar payout ratios, we took the monthly non-cola pensions. We also liked the idea of a floor of guaranteed income. (Pensions plus SS can cover our budget.) This decision has allowed us to comfortably keep a higher stock allocation. We are currently at about 78/22. If we had taken the lump sums, we would have a lower stock allocation.

*Edit to add: To counter the concept of potentially higher returns of the lump sum option, investing the lump sum in a mixed portfolio of stocks and bonds is a riskier investment than a near risk free monthly pension. Anytime we take more risk, the expected return should go up. I think it is more applicable to compare the monthly pension to your bond returns. Because, if you take the pension, you can also decrease bond holdings and increase stock allocations and hold your overall risk even.

*This assumes the actuarial value of each option has been worked out as the OP has done.

 

[Dtail]

So by saying the lump amount of $852,000 is about 30% of your retirement savings, I take it you mean you have about $2 million "other" retirement savings?

If so, you can easily give yourself a pension of about $60,000 at a very conservative withdrawal rate of 3% of the $2 million every year, and adjust every year for inflation (or $80,000 at WD rate of 4% and adjust every year for inflation).

That leaves the $852,000 lump untouched for you to invest. Possibly do Roth conversions with some of it---or not.

If $60,000 (or $80,000) effectively cola'd is adequate for you to retire on, I would say take the lump sum of $852,000. As others mentioned, interest rates can't go any lower from present levels. Having that lump to redeploy at higher interest rates later on would be very nice.

Take the lump of $852,000.

+1

 

[target2019]

What other considerations would you look at in making this decision?

I would include a reduction factor in the monthly annuity if there are doubts about the plan's financial stability.
I would definitely make a summary plan for next ten years to have estimates of all income and expenses. How much baseline expenses does the monthly provide?
In your ten year plan you can evaluate the rate and amount of Roth conversion.

I would be very tempted by that lump sum in an IRA. Convert $50K a year for 10 years before SS.

If you have an AUM financial advisor, you don't need to use them for this.

 

[DrRoy]

My pension was more like 15% of my NW at RE. I preferred the monthly payout for some guaranteed income, and for some diversity.

 

[bobbyr]

This is one of the reasons I chose to take my pension as a non-COLA annuity instead of a lump sum. I wanted to have three sources of retirement income: pension annuity, investment income, and (eventually) social security. The pension is large enough to cover our regular monthly spending and over half of our total spending.

I look at this the same way. ++

 

[jazz4cash]

Although it is probably trivial in your situation, another consideration is the health of the annuity payer. Do they qualify for PBGC coverage if they can’t meet their liability? I would review some annual statements for the pension plan.

 

[racy]

When I was faced with this decision, I chose the lump. I was leery of trusting an annuity payor for my income. I was concerned about being locked-in to the decision. I was concerned about inflation eroding the income. I preferred the flexibility of investment opportunities provided by the lump. I sleep better at night knowing I'm in control.
Others have different concerns.
Do whatever mitigates your concerns.

 

[street]

When I was faced with this decision, I chose the lump. I was leery of trusting an annuity payor for my income. I was concerned about being locked-in to the decision. I was concerned about inflation eroding the income. I preferred the flexibility of investment opportunities provided by the lump. I sleep better at night knowing I'm in control.
Others have different concerns.
Do whatever mitigates your concerns.

X2
I had a bit more then you have but I took the lump and was rolled into an IRA. After short of 5 years that lump has grown to 170%. That was my thinking when taking the lump that I wanted to get that money to work, instead of receiving a check each month. Now that lump is worth more then if I would of took an annuity by a long shot.

Secondly, if I was to die the money/annuity is gone. The money that was mine is back in their system and that money is theirs. In a lump sum I have every penny and can do what I want with it.

Good luck and I'm not trying to convince you to do a lump sum payout, just stated what I did and the reasons why.

 

[Jerry1]

I took the monthly benefit. With it and SS my needs will be met and then some. Therefore, all my portfolio needs to do is cover inflation. My lump sum would have been about 20% of my portfolio had I taken it, so it was not going to make or break my retirement plans no matter which way I took it.

Make sure that your monthly payout is considered a pension and covered (insured) by the Pension Benefit Guaranty Corporation (www.pbgc.gov).

 

[Whisper66]

Longevity basis of your calcs - make sure you are happy with planning basis of a 100 yr life. According to https://www.longevityillustrator.org/ your chances of living to 100 if average health is ~9%. Don't know how strongly this impacts your calculation of value of annuity vs lump sum but something to consider. If this money is critical to your life spending or your mental comfort, maybe good to plan to 100. In our case, the annuity our company offered was not critical to us so we planned for average life expectancy ... maybe ~87 in your case.

I retired 6 yrs ago and took the lump sum my company offered. I figured I needed to make about 5.1% on that money to "beat" the annuity financially. With many years of investing behind us, that seemed quite doable. Our conservative portfolio as done that so far. Besides feeling comfortable we would do better with the lump sum financially, we noted the annuity was not adjusted for cost of living. With our country's spending totally out of control, we were concerned with future inflation and a non-cola annuity. Government spending since our retirement has only raised that concern more. Probably the most important thing to us was the pension funds were not critical to our lives so we had flexibility to go either way. With that in mind, we have children or causes we support that will inherit any remains of the lump sum. An annuity would not provide any benefit once wife and I passed. Good luck in your decision ... hope all these good responses from folks with various opinions help.

 

[Car-Guy]

When I was faced with this decision, I chose the lump. I was leery of trusting an annuity payor for my income. I was concerned about being locked-in to the decision. I was concerned about inflation eroding the income. I preferred the flexibility of investment opportunities provided by the lump. I sleep better at night knowing I'm in control.
Others have different concerns.
Do whatever mitigates your concerns.

X2
I had a bit more then you have but I took the lump and was rolled into an IRA. After short of 5 years that lump has grown to 170%. That was my thinking when taking the lump that I wanted to get that money to work, instead of receiving a check each month. Now that lump is worth more then if I would of took an annuity by a long shot.

Secondly, if I was to die the money/annuity is gone. The money that was mine is back in their system and that money is theirs. In a lump sum I have every penny and can do what I want with it.

Good luck and I'm not trying to convince you to do a lump sum payout, just stated what I did and the reasons why.

+1 I was faced with a similar decision ~10 years ago... Well over a million and I never gave it much thought... Took the lump sum, rolled it into an IRA and invest/manage like I want.... If I die tomorrow (possible) my heirs get it all. When it gets down to it, the biggest concern for me is I just don't trust anyone to manage a retirement annuity (or anything) for me. So I try to minimize that to the extent possible.

 

[marko]

marko's third law: Take the money and run.

Had a similar situation/amount and took the payout, invested it and never looked back. It becomes your money and you control it for now and your heirs.

 

[ChicagoGal]

Well, so far you guys are articulating the exact debate I've been having with myself for the past many weeks! I will add the following:

• Per I-ORP, the break even point for me would be age 90. At that point, both options come up with the same spending level. Prior to that, the lump sum is favorable, after that, the pension is favorable.
  
• I'm planning to age 100 as a "just in case". There is longevity in my family (3 out of 4 grandparents lived well into their 90s). In my case, though, I really don't think I'll live that long given my health situation (although it's improving). And with whatever medical advances happen over the next few decades, I suppose it's anyone's guess.
  
• I have zero concerns about the viability of the company to continue payments for my lifetime. It is a large, well-established, risk-averse financial institution. And I have read the annual pension summary; it looks to be very well funded.
  
• SS will cover about half of my expenses, but that's still about 12 years away. It's that 12 years that would make taking the pension annuity more attractive (for steady income/peace of mind), but I'm not sure that's enough to offset my feeling that I could do better financially with the lump sum.

A great dilemma to have, for sure! I think I'm leaning toward rolling the lump sum into an IRA along with my 401(k) and doing conversions from there. Definitely more work than having the payment just come to me, but I'll have plenty of time to figure that all out now! But I'll also probably change my mind a few dozen times between now and tomorrow, when the retirement consultant will call to get my decision

 

[pb4uski]

I have to make a decision on Friday for my pension benefit. I have two choices:

Lump sum: $852K
Single life annuity: $3,797/month ($45.6K/annual)

Immediateannuities.com estimates a $3,385/month payout for that lump sum, which indicates that the annuity is a better choice, financially.

I'm 58 now, and for the sake of modeling, planning to age 100. No spouse, no kids. It does concern me that the non-COLA annuity will be worth significantly less in 40 years. On the other hand, having some level of guaranteed income now is a hedge against SORR. The pension is about 30% of my total retirement savings. I'm not planning to take social security until at least 67 and probably 70.

The financial planner I used recommended the lump sum in order to do more Roth conversions pre-SS. But then again, she was using 5.95% estimated portfolio returns, which seems high to me in this environment.

What other considerations would you look at in making this decision?

The FP recommended the lump sum because she or her firm earn their fees based on AUM and the lump sump provides more AUM and therefore more fees.

Your health is a key consideration... if you are healthy then it favors the pension, if not then the lump sum.

We faced this decision a few years ago, smaller numbers, but took the pension to have better diversification of income sources and it was a better value than the lump sum based on SPIA pricing at the time. The pension currently provides for ~18% of our spending but that will diminish over time due to inflation.

The breakeven point for your situation is 18-19 years. If you live long you would need to get a nominal return of 4.4% or more to "beat" the pension. You could opt to take the lump sum, transfer it to an IRA and invest it in Wellesley and then set up an automatic transfer of $3,797/month to your checking account and take your chances.

Age	N	Cash flow	IRR
58	0	-852,000
59	1	45,564
60	2	45,564
61	3	45,564
62	4	45,564
63	5	45,564
64	6	45,564
65	7	45,564
66	8	45,564
67	9	45,564
68	10	45,564
69	11	45,564
70	12	45,564
71	13	45,564
72	14	45,564
73	15	45,564
74	16	45,564
75	17	45,564
76	18	45,564
77	19	45,564	0.2%
78	20	45,564	0.6%
79	21	45,564	1.1%
80	22	45,564	1.5%
81	23	45,564	1.8%
82	24	45,564	2.1%
83	25	45,564	2.4%
84	26	45,564	2.6%
85	27	45,564	2.8%
86	28	45,564	3.0%
87	29	45,564	3.2%
88	30	45,564	3.4%
89	31	45,564	3.5%
90	32	45,564	3.6%
91	33	45,564	3.8%
92	34	45,564	3.9%
93	35	45,564	4.0%
94	36	45,564	4.1%
95	37	45,564	4.2%
96	38	45,564	4.2%
97	39	45,564	4.3%
98	40	45,564	4.4%
99	41	45,564	4.5%
100	42	45,564	4.5%

 

[Big_Hitter]

Sounds to me like the plan is giving you an annuity benefit that is worth $956k in terms of today's annuity pricing in exchange for $852k.... I'd take the pension benefit.

agreed - ceteris paribus

 

[Big_Hitter]

Your health is a key consideration... if you are healthy then it favors the pension, if not then the lump sum.

yes, important point

nice breakeven worksheets too

 

[Big_Hitter]

I have to make a decision on Friday for my pension benefit. I have two choices:

Lump sum: $852K
Single life annuity: $3,797/month ($45.6K/annual)

Don't you have a third choice? Can't you defer the annuity? If so, will deferring increase the annuity or is it fully subsidized?

If this is a tax-qualified corporate plan, they have to give you the right to defer if you are under NRA and it should be stated in your election packet.