Annuity or lump sum poll

[harley]

I've seen a number of annuity vs. lump sum threads recently and I almost always choose the lump sum. I've noticed others who pretty much always choose the annuity. So I decided to run a poll to see what the breakdown of this forum looks like.

Here's the question. Assume there's an annuity offer where you get a decent payout without COLA, maybe running about 6.5% of the lump sum's current value. It's lifelong, no survivor benefit, no bells and whistles. The lump sum is just that. You don't need the money to live on anytime soon, so you have the option of investing either option for the future if you prefer.

I'm assuming that the annuity is based on reasonable actuarial decisions, not overly optimistic or cynical. If everything breaks exactly like they assume it would be a wash. And that it's pretty safe, not likely to default. But the lump sum gives you the possibility of making significantly more money over time if things turn out well. Of course you could also lose it all if you [-]gamble[/-] invest poorly. The annuity gives you security, with decreasing value over time depending on inflation.

So, based on your personality and preferences, which do you choose?

 

[REWahoo]

It depends. I'm not a big fan of annuities, but...

DW will be eligible for a small pension when she reaches 65. When we look at the SPIA she could purchase with the lump sum option, the monthly pension amount is 15% higher. We think this is a significant difference, so she's going to pass on the lump sum and take the monthly payout.

 

[Purron]

Would tend toward the lump sum. Would depend on a number of factors, such as:
- the risk the annuity issuer would default. Even if the issuer is on solid ground now, would they continue to be so over a potentially long period of time?
- if the annuity has a COLA
- my financial position at the time. If I had another annuity, it might be better to have more investable cash. If I had no other annuities, having a reliable source of income would be more attractive.

 

[bbbamI]

I'm a 'bird in the hand' kind of woman mahself....YMMV...

 

[ziggy29]

Right now, the lump sum all the way. Annuities are a terrible deal if purchased today because of pathetic interest rates. In the future if interest rates made an annuity a better deal, I might take a lump sum and annuitize *some* of it. I don't think I'd ever annuitize the entire shebang.

 

[Independent]

I figure we can get enough annuity to cover our basic expenses by deferring SS to age 70. Once we've done that, I like the "control and flexibility" that goes with the lump sum. So I voted for the lump sum.

 

[offthefront]

I have an option now of 5762/month with a 350K payout (which can be defered to my 457) or 6624/month with no payout .....I am choosing the 5762 with the Payout ........m

 

[GregLee]

Right now, the lump sum all the way. Annuities are a terrible deal if purchased today because of pathetic interest rates.

Likewise. Also, with a lump sum, you can diversify your investment, and arrange a beneficiary.

 

[Alan]

It's lifelong, no survivor benefit...

That would probably have me choosing the lump sum. I would have to buy a life insurance policy on myself in case I die before DW which would reduce the value of the annuity.

 

[harley]

I have to admit, I'm a little surprised at this point to have such a big lead on the lump sum side. It may have to do with my wording if the question. I was trying to to make it basically a financial wash, just to see who goes for the security vs. the flexibility. Interesting...

 

[REWahoo]

I have to admit, I'm a little surprised at this point to have such a big lead on the lump sum side. It may have to do with my wording if the question. I was trying to to make it basically a financial wash, just to see who goes for the security vs. the flexibility. Interesting...

I'm surprised you're surprised. What else would you expect from this DIY investment bunch?

 

[easysurfer]

I voted the last option. One could take a lump sum and roll that into an IRA, then annuitize a portion of the IRA. Then you have the best (depending on how you look at it ) of both worlds. Some of it in a lump sum and some in an annuity.

 

[ziggy29]

I have to admit, I'm a little surprised at this point to have such a big lead on the lump sum side. It may have to do with my wording if the question. I was trying to to make it basically a financial wash, just to see who goes for the security vs. the flexibility. Interesting...

You can always convert a lump sum to an annuity later if interest rates rise and annuitized income increases per unit amount purchased.

Once you commit to an annuity at such high prices due to terrible rates, you have no "do over" when rates rise in a couple years and you could have received a 25% higher payout if you waited. To some degree that's always true but it's really true with annuity "prices" (cost per $X in monthly income) higher than ever in history.

 

[Moemg]

I have done both . When I retired I took a lump sum because the hospital was in a shaky position . When my husband died I took the annuity because it offered health care and no health care with a lump sum.

 

[obgyn65]

I would tend toward an annuity over a lump sum. However, I would need more details (i.e. age, overall health, other financial products yields, etc) before making a big decision like this. A solution might be to annuitize 50% of the lump sum.

 

[chinaco]

I have to admit, I'm a little surprised at this point to have such a big lead on the lump sum side. It may have to do with my wording if the question. I was trying to to make it basically a financial wash, just to see who goes for the security vs. the flexibility. Interesting...

When I first saw this poll... I thought this is such a complex decision, how in the world can you capture it in: To Lump or Not To Lump!


There are so many things to consider.... While there are many individual life event factors that might lead to a decision to take a lump sum (bad health... know you will die early or have to have a large sum of money now, etc)... I did not see many post those considerations.


I suspect many think they would take that money and invest it and make more. If this is the case the only way to do it is to either get lucky or take on more risk and get lucky... But "more risk" means a real chance of losing money!

If one takes a lump sum and conservatively invests in similar securities or securities with a similar risk profile... they are unlikely to beat the pension fund manager. Furthermore... assuming the individual did not make a mistake and lose money...

Pension payout is typically calculated using average pay, a factor and years of service. The lump is calculated using current corp bond yields for varying time periods to discount the stream of payment into a PV. I have not looked, but I doubt you could take the lump and buy and equivalent annuity the same day... because the insurance company would want a profit (and take a few percent).


The trade-off ends up being the life expectancy component. "I will take the lump (for the flexibility to do whatever with it) at the expense of longevity mitigation"

The most illuminating thing about this poll. Based on the comments... I figure the decision point was: "I can beat the pros". The fact is the Pros often cannot beat the pros and they have every advantage. What makes you think you will beat them and have a better outcome?

What are you hoping to accomplish ? Build a secure income or hit it lucky in the market?

I wonder if the "arm chair decision" lump sum crowd are the same people that think SS should be dissolved and replaced with self-directed accounts?

 

[chinaco]

I did a complex financial analysis with many considerations and scenarios for my situation.


I will give the simple answer (no math or analysis) in 3 points:

1. I will not likely have a better outcome than the pension manager using like investments or investments with a similar risk profile.
2. I am healthy with no reason to expect an early death. I already have a nest egg... do I really want to try to manage more (and assume the risk)? My answer to that is no! My pension is more safe than any single AAA corporate bond, or corp bond mutual fund and as close to the risk of treasury note as can be!! But a better return unless I die young!
3. My goal is a stable lifestyle and secure income stream for DW and me. If something happens to me... I know DW is covered.

 

[GregLee]

I have not looked, but I doubt you could take the lump and buy and equivalent annuity the same day... because the insurance company would want a profit (and take a few percent).

When my mother retired, she had a choice between a Ohio state pension and a lump sum payment. Of course, the pension was by far the better deal, but I wanted to compare for her what monthly income she could get by taking the lump sum and investing it or buying an annuity. The annuity payments, quoted by an insurance company, were shockingly low --- they were substantially less than the interest on low risk bonds would have been. That was 1972, and maybe there was something special about the situation, ...

I also had a choice between a lump sum payment or a pension from my state when I retired. But it wasn't even close -- not like this hypothetical situation we voted on in this thread (I voted lump sum). For me, the pension was much, much better -- it would have been insane to take the lump sum.

 

[rescueme]

When I retired in early 2007, the only options I was given was to take a lump sum, or an annuity (through a company selected 3rd party). There was no traditional defined benefit (pension) option.

After I did an analysis of the annuity payout and conditions (e.g. payments were reduced at age 62 for the SS "offset", and you could not get a guaranteed term), along with looking at other annuity (e.g. SPIA's) options, I took the lump sum and put a portion into an SPIA (joint DW/me, payments guaranteed for 28 years - payments continue at 100% if either passed. If both passed before 28 years, payments continued to our estate). BTW, if one/both live beyond the 28 year term (for our joint age, that would be 87), payments continue at 100%.

The remainer of the lump sum was invested in low-risk options, since I did not need the entire amount to be dedicated to an SPIA. Additionally, since I plan to take SS at age 70, the monthly amount would fall drastically after three years.

 

[Texas Proud]

When I first saw this poll... I thought this is such a complex decision, how in the world can you capture it in: To Lump or Not To Lump!


There are so many things to consider.... While there are many individual life event factors that might lead to a decision to take a lump sum (bad health... know you will die early or have to have a large sum of money now, etc)... I did not see many post those considerations.


I suspect many think they would take that money and invest it and make more. If this is the case the only way to do it is to either get lucky or take on more risk and get lucky... But "more risk" means a real chance of losing money!

If one takes a lump sum and conservatively invests in similar securities or securities with a similar risk profile... they are unlikely to beat the pension fund manager. Furthermore... assuming the individual did not make a mistake and lose money...

Pension payout is typically calculated using average pay, a factor and years of service. The lump is calculated using current corp bond yields for varying time periods to discount the stream of payment into a PV. I have not looked, but I doubt you could take the lump and buy and equivalent annuity the same day... because the insurance company would want a profit (and take a few percent).


The trade-off ends up being the life expectancy component. "I will take the lump (for the flexibility to do whatever with it) at the expense of longevity mitigation"

The most illuminating thing about this poll. Based on the comments... I figure the decision point was: "I can beat the pros". The fact is the Pros often cannot beat the pros and they have every advantage. What makes you think you will beat them and have a better outcome?

What are you hoping to accomplish ? Build a secure income or hit it lucky in the market?

I wonder if the "arm chair decision" lump sum crowd are the same people that think SS should be dissolved and replaced with self-directed accounts?

A couple of points.... you assume that the annuity payments does not include a profit... I think it does... IOW, you could get the lump sum OR an annuity that was bought from the lump sum ammount... so I think you could buy an equivalent annuity the same day...

You also do not factor in the costs of the pros in your example... If I bought similar securities etc. etc... I should be able to beat the pros because I am not paying THEM to buy these securites... and their cost is over 100 BP.. maybe even 200BPs....

Now, it is true that having a smaller amount of money means it is harder to diversify... but that can be taken care of by buying ETFs...

So, unless the annuity was based on something else besides the market rates at the time of the annuity, you should be able to beat the annuity...

 

[clifp]

Harley, I just wanted to say that in all the lump sum vs annuities questions I've answered, I think yours is only the 2nd or 3rd time I've suggested taking the annuity.

Most of the time I can do 5 minute check on Vanguard or the TSP calculator and see that a 3rd party offers a better annuity or the interest from a Pen Fed CD is within shouting distance of the annuity distribution. In your case, the payout from your annuity was significantly higher than anything else I saw, hence my recommendation to take it.

 

[chinaco]

A couple of points.... you assume that the annuity payments does not include a profit... I think it does... IOW, you could get the lump sum OR an annuity that was bought from the lump sum ammount... so I think you could buy an equivalent annuity the same day...

You also do not factor in the costs of the pros in your example... If I bought similar securities etc. etc... I should be able to beat the pros because I am not paying THEM to buy these securites... and their cost is over 100 BP.. maybe even 200BPs....

Now, it is true that having a smaller amount of money means it is harder to diversify... but that can be taken care of by buying ETFs...

So, unless the annuity was based on something else besides the market rates at the time of the annuity, you should be able to beat the annuity...

I am not assuming too much of anything! I was trying to illustrate a practical point... not an academic discussion of possibilities. I suppose anything is possible in the broadest sense. But there is unlikely to be an arbitrage opportunity (at least of any significance) unless the annuity is inappropriately priced or some aspect of the pension lump calculation is not typical. Insurance companies stay on top of rates (and changes)... and they like their fees!



My point was about not assuming and what is the goal anyway...

• Do the analysis! Don't assume anything. It is complicated, but it needs to be done to make the best decision.
• Is the goal to invest (take more risk for a potential gain) or have an stable income. Yes some think they will have their cake and eat it too... Most will just wind up with less cake unless they die early!!! then someone else gets the cake!

Sounds like you took a Lump.... If you did, I hope you did your analysis.

 

[harley]

This is a hypothetical question, but in my personal retirement decision I took the lump sum. I did all the math, which showed the lump sum to be the better choice, based on 2006 assumptions. I wouldn't be making the same assumptions these days, being older and sadly wiser. Luckily when I rolled the lump sum into an IRA I left it in cash (procrastination, not planning), so it's still got it's full value despite the crash. Probably breaking about even now after the recent rise in the market.

But still, the overriding deciding factor was that I was 50, and hopefully had a 40 year life expectancy (I guess I still tend to optimism ). I just didn't think that my megacorp would still be around to make the payments. I might be overly cynical on that part, but management was making so many dumb decisions that it tipped my decision toward the lump sum. My megacorp would be considered one of the biggest and safest out there, but 40 years is beyond my acceptable risk level. I have trust issues, and would rather blame myself for any mistakes than curse the darkness.

 

[clifp]

Harley just realized that I got you confused with Golfnut who asked the Lump Sum vs Annuity recently.

 

[golfnut]

Harley just realized that I got you confused with Golfnut who asked the Lump Sum vs Annuity recently.

Very similar threads indeed ! Also, very timely as I need to make this decision real soon. Lump sum of $135,000 or non-cola yearly payout of $8,400 (joint survive) ? Decisions, decisions!