Lump sum versus monthly pension?

[Andy Sr]

Hi everyone, I name is Andy. I'm new to this forum. My wife has a choice to make in regards to her pension. She can take a lump sum disbursement of $770,000 or a monthly pension distribution of $3,650 per month. She'll be 59 at the time of all of this. Not really sure which way is better. Any comments would be appreciated.


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[REWahoo]

Check online for single premium immediate annuity quotes for a point of comparison. Plug in the lump sum amount and see what $770k would buy in monthly income.

 

[rodi]

A few questions.

- Will she be doing joint survivor? If so, your age is a factor.
- Is the pension COLA'd?

If the pension is not COLA'd - then you can see if the lump sum would buy an equivalent pension in the form of a SPIA. (Single Premium Immediate Annuity - fancy name for a fixed income annuity). One site that offers quotes is https://www.immediateannuities.com/

Plugging in your numbers for a 59yo with a 59yo spouse - 770k buys you an annuity of 3284/month. So the pension is a bit better.

That said - the inflation factor and other income sources should be considered. If the income has a COLA adjustment - it's a no brainer (IMO) to take the pension rather than the lump sum. If you have other pension income, it's less of a no brainer. If you have oodles of other cash/investments you might like the diversity of the pension.

I'm a big fan of the 3 legged stool approach for a stable retirement. 1 leg is SS, 1 leg is investments, and the third leg is pension. It's super safe/effective if the 3 legs are all adequate and balanced. Mine has a super short pension leg... but I've got rental income to compensate.

 

[martyp]

I ER'd at 55 (5 yrs ago) with the same choice. I chose the monthly pension because I was young and healthy and because I know that I am not a knowledgable investor. I'm pretty conservative about my money and didn't have confidence that I could do better with the money than my pension fund. I'm also betting that I'll live long enough that I will get more out of the pension system than I could get by drawing down from my own account over time. Also, my pension has cost of living increases. That may make a difference.

 

[travelover]

Do you have confidence that the pension payer will remain solvent?

 

[nun]

If the pension is joint life or has a COLA you should consider taking it. If it is single life with no COLA the 5.6% payout rate is no better than you could get on the open market.

So is there a COLA?
Is it joint or single life?
What does the rest of your portfolio look like? What is your income requirement?

 

[Andy Sr]

Thanks for all the help. $3,650 a month takes survivorship into consideration. Need to find out if she gets COLA.
I,m 56 and will have a pension of $2,500 per month that's also taking the lower amount for survivorship.
We do own our home and have a bit in 401k.


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[nun]

Thanks for all the help. $3,650 a month takes survivorship into consideration. Need to find out if she gets COLA.
I,m 56 and will have a pension of $2,500 per month that's also taking the lower amount for survivorship.
We do own our home and have a bit in 401k.


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If it's joint survivor then it's an ok deal. But you should be thinking about how another pension fits into your financial life. Would having a lump sum give you more flexibility and remember you'll be getting SS in a few years as well. How much do you spend each year and how much do you want as a guaranteed income floor?

 

[Teacher Terry]

I would take the pension.

 

[DrRoy]

I will take my pension as monthly payments. I agree with Rodi that it serves as diversification of retirement income.

 

[nun]

I will take my pension as monthly payments. I agree with Rodi that it serves as diversification of retirement income.

Without knowing the OPs overall asset allocation it's impossible to know if the pension will diversify their overall portfolio. The OP and spouse are looking at $2500/month and $3650/month in defined benefit pensions and also SS. So that might be a total of over $100k in guaranteed income at age 66...but if only the SS part is inflation linked will that be a problem in later years? How much does the OP have in more liquid assets....like in a 401k or taxable that they can use for one time expenditures and to keep pace with inflation? How much i the OP's annual budget. It would not be wise to have pensions that covered a lot more than the income requirement as they could afford to take a risk in equities and have a very good chance of ending up with a higher net worth which might be relevant if they want to leave money to beneficiaries.

 

[nun]

I'm a big fan of the 3 legged stool approach for a stable retirement. 1 leg is SS, 1 leg is investments, and the third leg is pension. It's super safe/effective if the 3 legs are all adequate and balanced. Mine has a super short pension leg... but I've got rental income to compensate.

Luckily I have a 4 legged stool, or maybe 5 as I'll get SS from two countries. Pension, rental income, SS checks from both the US and the UK, and equity investments.

 

[thepalmersinking]

I wish I could get one of my pensions to offer the cash out option.


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[Fedup]

I took the pension vs lump sum offer with 100% survivor 's benefit. My retirement philosophy is 4 vs 3 legged stool, as my company often preaches. SS, pension, 401k, and rental. Everything has COLA except the pension.


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[mmgoebe]

Looks like the $770 Lump Sum is Pre-T
ax. Need to determine what you will have after tax, then see what kind of annuity you can buy on the street.

 

[robertf57]

Not really....

Looks like the $770 Lump Sum is Pre-T
ax. Need to determine what you will have after tax, then see what kind of annuity you can buy on the street.

In making comparisons between annuitization and a lump sum, it's not an apples to apples comparison to look at the AFTER tax lump sum and the PRE-tax annuity payments. That distorts the comparison. You will be paying taxes on the offered pension payments just as you will on the lump sum. Income tax on the after-tax annuity is only paid on the interest, not the original premium. Mixing after tax and pre-tax makes meaningful comparisons very difficult

 

[mmgoebe]

ROBERT, Great point, you are correct, there is a taxable portion of an After Tax funded annuity, ie the interest. Question - does it make more sense to purchase an annuity inside of a 401K, or, pay the tax on the 401k monies, and purchase the annuity with the now After Tax dollars ? (assume a $1M pre-tax lump sum). Mike

 

[robertf57]

This becomes mostly a tax rate issue in my mind. Assuming you are intent on purchasing an annuity at all, taking the money out of the 401 as a distribution would be taxable at the highest rates leaving less capital to purchase the annuity. While annual annuity payments taken as distributions from the IRA or 401k would be likely at a lower tax rate if there wasn't much income. This assumes that there are equivalent annuity products available in both the 401k and post tax sphere.

 

[pb4uski]

It is NOT a tax rate issue. Both the $770k and the $3,650/month are pre-tax and if one takes the lump sum it is transferred into an IRA and is not a taxable event.

If you take the lump sum and roll it into an IRA and then take distributions from the IRA (or buy an annuity in the IRA and receive annuity benefits) then any distributions are taxable income. If you take the pension then the pension benefits are taxable income.

I am assuming that in both cases the pension plan was non-contributory but even if it was contributory it would be a wash even if the lump sum was rolled into an IRA.

 

[robertf57]

It is NOT a tax rate issue. Both the $770k and the $3,650/month are pre-tax and if one takes the lump sum it is transferred into an IRA and is not a taxable event.

If you take the lump sum and roll it into an IRA and then take distributions from the IRA (or buy an annuity in the IRA and receive annuity benefits) then any distributions are taxable income. If you take the pension then the pension benefits are taxable income.

I am assuming that in both cases the pension plan was non-contributory but even if it was contributory it would be a wash even if the lump sum was rolled into an IRA.

Thanks, but that wasn't the question that mmgoebe raised (at least as I read it). He asked about taking a distribution of the lump sum and purchasing an after-tax annuity.

 

[pb4uski]

Perhaps that is what mmgoebe raised but I suspect that he misinterpreted the OP's OP. It would be rare that someone would take a $770k lump sum from a defined benefit pension plan as a taxable distribution, pay the tax all at once and then buy an annuity with the after-tax proceeds because the progressivity of the tax rates would slaughter you.

I responded so the OP would not get confused by the tangent that you two created and think that he had to pay taxes if he took the lump sum.