Pension v. lump sum: non-financial reasons?

[ChicagoGal]

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.

Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).

 

[NoiseBoy]

Since you don't have any direct heirs, that takes one of the more compelling reasons to opt for the lump sum off of the table. You mention that the pension is non-COLA'd, which is pretty common in the private sector, but you might want to read some of the threads here that discuss long-term spending trends as they relate to inflation. There's a fair amount of opinion that our spending will elevate initially in retirement, and then reach a plateau (healthcare being a wildcard), so assuming that your spending is going to increase by 3% or something indefinitely may not be accurate.

We are very similar in age and circumstances. I'm firmly in the 3-legged stool camp. I will have a non-COLA'd pension from megacorp that I can live on. I do have a second, smaller civil service pension that I can start at 62 which has a fixed 3% COLA, and I will have Soc Sec from my private sector working life. Since I can live on my annuity income streams, I view my portfolio as my hedge against inflation and insurance against other risks. Note that I will draw about $25k per year from my portfolio until I reach 62 and can start the civil service pension. I see no reason to try to achieve maximum wealth. Heck, I'm already struggling to decide which charities will get my money!

My plan fits my conservative financial behavior. In other words, it will let me sleep comfortably (once I replace my current mattress.) Only you can decide which route will lead to the most restful nights for you.

 

[pacergal]

I like the three legged stool plan--SS, pension, investments.
Our pension and SS cover our budget+.
However, our pensions are small COLA with 2% max.

 

[finnski1]

Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).

I don't know but a 20% increase for the annuity(from $3757 to $4556 /month) or a 11% increase in lump sum (from 852k to 946k) seems like it would be worth waiting a little over 3 years for.
@ a 2%/year inflation rate you would preserve your spending power for 9 1/2 years (6 1/2 years beyond the 3 year wait)by delaying the annuity.
By delaying the lump sum the benefit of delaying seems less and in fact you could take the 852k and if you can get 3.5% a year for the next 3 years you'd get the same 946k.
Though those lump sums always look impressive, if I were single I think I'd wait 3 more years and defer the annuity for the 20% increase in monthly benefit and take the annuity.
Also consider yourself lucky for even having the option.
When we went thru this a few months ago for DW's pension she had no lump sum option at all.

 

[capjak]

I think of the pension as a bond replacement of sorts, and therefore it allows a person to be a little more aggressive if they want to with the rest of their assets. In addition it keeps some people from panicking when the market goes south as they still have a pension to pay part of the bills.

In addition interest rates are low so you're alternative for a low risk investment is bonds right now and that is not very attractive.

A pension also easy the worries about spending money early in retirement as you know the check will be in the mail.

Either way it will work out nicely.

 

[CardsFan]

With no immediate heirs to consider, and another +/-$2million in assets, either decision will work out fine.

You are faced with a choice between "the right" decision, and a fairly reasonable sub-optimal one.

Unless you know your date of death, you don't know which one is which.

No bad options (unless you take the lump sum and go to Vegas, that would be a bad decision)

 

[bada bing]

Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).

I would either spend the time to investigate on your own, or hire a fee only financial planner to thoroughly evaluate the terms for deferring. It could be very significant. I know for my own case, deferring is a no-brainer, not just a rounding error. Depending on how your pension is structured, the following advantages might exist:
1 Guaranteed interest rate credits well above current market interest. My pension is 5%/yr minimum with no principal fluctuations
2 Calculation of annuity using future interest rates at the time the annuity starts - interest rates could significantly rise in the next decade resulting in a much larger annuity.
3 While deferred, Pension value remains as part of your estate until/unless annuitized
4 Lowering income while deferred , increasing space for low tax rate Roth conversions.
5. Having better clarity on your potential longevity when eventually making the lump sum / pension choice

It could be a big error to not defer, depending on your pensions terms and your financial plans.

 

[RetireeRobert]

....... 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%

+1 With, I assume, about $2 million other retirement assets which you mentioned, your level of sleeping comfort with income from the lump of $852,000 does not need to be as great as otherwise.

As the other poster quoted above suggested, take the lump, roll it to an IRA, then set up an automatic payment to yourself of $3797 a month. Other poster kindly provided a projection for doing that to age 100. Which looks entirely achievable to me. In the meantime, the money is yours, it is under your control. Consider this your "third leg" of a three legged stool.

But in the event you "do not need" income off of that lump, then "you can turn it off" at your discretion. By so doing you can somewhat control your tax situation, maybe save some tax bucks on Social Security after you start SS. Also allows flexibility to grow the lump, to adjust your risk in investing it, when you do not need the income from it.

In short, the lump gives you so much more flexibility to adapt to changing circumstances, all while allowing you to sleep at night. In fact that flexibility may "improve" your level of sleep comfort!

I'd suggest, take the lump. Congratulations on being in such an enviable position. Best wishes to you.

 

[Big_Hitter]

I don't know but a 20% increase for the annuity(from $3757 to $4556 /month) or a 11% increase in lump sum (from 852k to 946k) seems like it would be worth waiting a little over 3 years for.
@ a 2%/year inflation rate you would preserve your spending power for 9 1/2 years (6 1/2 years beyond the 3 year wait)by delaying the annuity.
By delaying the lump sum the benefit of delaying seems less and in fact you could take the 852k and if you can get 3.5% a year for the next 3 years you'd get the same 946k.
Though those lump sums always look impressive, if I were single I think I'd wait 3 more years and defer the annuity for the 20% increase in monthly benefit and take the annuity.
Also consider yourself lucky for even having the option.
When we went thru this a few months ago for DW's pension she had no lump sum option at all.

minimum corporate lump sums are based on mortality tables and interest rate provisions that can change at any time. Please refer to the changes in 417e made by GATT in 1995

 

[Big_Hitter]

Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).

I don't have my software to determine if a 6% reduction per year is actuarially equivalent to a "current" interest rate and mortality table - I've been so retired I haven't even bothered to download any free actuarial excel addins to my desktop. I may get bored and look at that early retirement reduction factor reduction later. It sounds like you have enough age/service to get your full pension at 62, rather than 65 or your plan's NRD is 62 (which I doubt).

anyway - at least you looked at it - a few more tips:

1) there should be a "relative value disclosure" in your packet - please read it and post any questions; I'll be happy to answer them if I'm online

2) I would run multiple scenarios using various rates of return and different ends to your retirement as people don't pass at a finite, particular "life expectancy" - we are constantly hit with a force of mortality that increases as we age, sometimes it hits us hard enough to end retirement.

3) I would read this if you have time, Steve does a really good job of explaining this stuff to non-actuaries https://www.amazon.com/Money-Life-Lifetime-Retirement-Paycheck/dp/0985384603

good luck!

 

[Big_Hitter]

I think of the pension as a bond replacement of sorts, and therefore it allows a person to be a little more aggressive if they want to with the rest of their assets. In addition it keeps some people from panicking when the market goes south as they still have a pension to pay part of the bills.

In addition interest rates are low so you're alternative for a low risk investment is bonds right now and that is not very attractive.

A pension also easy the worries about spending money early in retirement as you know the check will be in the mail.

Either way it will work out nicely.

all great points

for me, it's all about balancing out my expected cash flows - I like to have most of my fixed expenses covered by a combination of a pension, qualified dividends and tax-exempt interest income

 

[Big_Hitter]

Unless you know your date of death, you don't know which one is which.

agreed, but one should be told if one is clearly getting fleeced - that's what the "relative value" disclosure is supposed to do

 

[RobbieB]

I'd take the dough "rollover IRA" and invest it.

 

[rodi]

Add me to the fan-club for the 3 legged stool.

My situation was quite different. Two very small non-cola pensions. Lump sum value was not a great deal. I kept the pensions and they cover some of the monthly bills (utilities, cell phones, cable.) So my 3 legged stool is tilted... but it *does* have the third leg of pension to add to the other legs of SS and Savings.

If it were me (which it's not) I would keep the annuity. It eliminates the sequence of return risks (SORR) and provides a nice high floor of income.

 

[Big_Hitter]

Since you don't have any direct heirs, that takes one of the more compelling reasons to opt for the lump sum off of the table. You mention that the pension is non-COLA'd, which is pretty common in the private sector, but you might want to read some of the threads here that discuss long-term spending trends as they relate to inflation. There's a fair amount of opinion that our spending will elevate initially in retirement, and then reach a plateau (healthcare being a wildcard), so assuming that your spending is going to increase by 3% or something indefinitely may not be accurate.

We are very similar in age and circumstances. I'm firmly in the 3-legged stool camp. I will have a non-COLA'd pension from megacorp that I can live on. I do have a second, smaller civil service pension that I can start at 62 which has a fixed 3% COLA, and I will have Soc Sec from my private sector working life. Since I can live on my annuity income streams, I view my portfolio as my hedge against inflation and insurance against other risks. Note that I will draw about $25k per year from my portfolio until I reach 62 and can start the civil service pension. I see no reason to try to achieve maximum wealth. Heck, I'm already struggling to decide which charities will get my money!

My plan fits my conservative financial behavior. In other words, it will let me sleep comfortably (once I replace my current mattress.) Only you can decide which route will lead to the most restful nights for you.

solid thoughts - the observed decrease in spending is called the "retirement smile" https://retirementresearcher.com/retirement-spending-smile/

 

[Big_Hitter]

It eliminates the sequence of return risks (SORR) and provides a nice high floor of income.

that's a big risk in retirement, as are shocks (big medical bills, casualty losses, etc.)

to me, the key is to minimize as many of these risks as possible, which is why one needs a stash to handle the shocks

 

[ChicagoGal]

1) there should be a "relative value disclosure" in your packet - please read it and post any questions; I'll be happy to answer them if I'm online

So I sort of ignored this, since it didn't seem to help with the decision. But the relative value information provided was (in summary):

• The interest rate assumption is 0.50% for the first 5 years, 2.38% for years 5 through 19 and 3.17% for years 20 and later.
• Relative value percentages for lump sum and single life annuity were both 100% (relative to the single life annuity).

What am I missing here?

And thanks for the book recommendation. I'll take a look.

 

[Big_Hitter]

So I sort of ignored this, since it didn't seem to help with the decision. But the relative value information provided was (in summary):

• The interest rate assumption is 0.50% for the first 5 years, 2.38% for years 5 through 19 and 3.17% for years 20 and later.
• Relative value percentages for lump sum and single life annuity were both 100% (relative to the single life annuity).

What am I missing here?

And thanks for the book recommendation. I'll take a look.

What that means is that if we discount your expected payments based on those interest assumptions over your expected lifetime, according to the statutory mortality table, you get the lump sum amount. Basically what that says is that the lump sum and immediate life annuity are "actuarially equivalent" using those assumptions. Those are the most current rates https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates so I'm somewhat shocked (hey, i'm retired) that immediateannuities.com isn't coming up with a closer answer to your annuity - it may be because you are female and annuity providers are allowed to rate on gender, pension plans can't so your lump sum is calculated using a 50% blend of male and female mortality.

You should be able to approximate it by using a 2.5% interest assumption over your finite life expectancy assuming you are half male and half female. I'll have to see if I can find a current table that does two dimensional projection which is what the statutory table is for 2021. This could make my head hurt.

 

[ChicagoGal]

This could make my head hurt.

Please don't make your head hurt! I would feel awfully guilty

 

[Big_Hitter]

Please don't make your head hurt! I would feel awfully guilty

I got the table manager to work but the soa only has really old mortality tables in the database. By the looks of it, my working answer is that the discrepancy with immediateannuities is a combination of whatever interest rates are being used right now (by them) versus December (what your plan uses), and the male mortality used in your lump sum calculation. You are expected to live about 3 years longer than a male your age and the mortality rates right around 58 are almost twice as high for men as for women, at least according to the old table I was using.

Ironically, the case that led to the unisex requirement for lump sum distributions (Norris) had to do with a female retiree arguing that her money purchase plan annuity, which is calculated inversely from a lump sum, was less than that of an equivalent male counterpart. She was told that since she was expected to live longer, the annuity purchased by the same money purchase amount was less. So now women get the short end of the stick converting annuities to lump sums.

 

[jollystomper]

Another reason I chose the annuity that does not apply to the OP is my spouse. In the likely event that I die first, she will continue to receive it, and along my SS survivors benefits her regular expenses will be covered. That gives her less to worry about with our investments.

If I were in the OP's situation with no spouse and no kids, I might lean towards taking the lump sum, since I would take on more risk for myself that I would not expose to my family.

 

[Big_Hitter]

If I were in the OP's situation with no spouse and no kids, I might lean towards taking the lump sum, since I would take on more risk for myself that I would not expose to my family.

life annuities generally don't stop before you die - lump sums can, and do

 

[RetireeRobert]

that's a big risk in retirement, as are shocks (big medical bills, casualty losses, etc.)

to me, the key is to minimize as many of these risks as possible, which is why one needs a stash to handle the shocks

The SORR, Sequence of Returns Risk, should NOT be looked at solely in relation to the $852,000 lump or the pension annuity decision. OP stated the lump was only 30% of her "other" retirement assets, which would be approximately $2 million.

That 70% "other" works to trivialize any SORR for the $852,000 lump.

I still recommend the lump for the flexibility and control it offers to OP. Not to mention the potentially much greater long term returns over the years.

 

[Big_Hitter]

That 70% "other" works to trivialize any SORR for the $852,000 lump.

eliminating sequence of return risk on 30% of a portfolio isn't immaterial, plus, it appears the annuity is more valuable when modeled

 

[RetireeRobert]

eliminating sequence of return risk on 30% of a portfolio isn't immaterial

We do not know what level of income OP is wanting. Maybe she wants something like $60,000 a year. Which could be supplied entirely with a very conservative model from her "other" 70% or $2 million assets, and that $60,000 effectively cola'd to boot. Meaning the $852,000 lump does not need to supply ANY income---which makes SORR on it not only trivial but meaningless.