Annuity vs Lump Sum Pension

[moguls]

I might have an opportunity to retire earlier (age 53)than planned and may need to make a quick decision on how to take my pension payout.

My option is a lump sum or an annuity (with no cola).

I have three questions that someone may be able to help with.

1. I've run the numbers and know that that if I live for 35 years (roughly my life expectancy based on family history) the lump sum is favorable if I can earn at least 5.5%. I believe I can earn more than 5.5%, and my assumptions for the rest of my portfolio is higher than that. However, I'm thinking of taking the annuity anyway as a way to lessen the risk of my total portfolio.
Since this will be my only "guaranteed" income stream (other than social security), I can at least be assured of this fixed income stream annually. Even though it's going to suffer from inflation. Good logic/bad logic? Any comments?

2. This pension is supposed to be "guaranteed". How can I determine the safety of the pension. What protection does the Pension Guarantee Corp (or whatever they call it) provide? Where can I research this further?

3. My pension payments would start immediately upon retirement at age 53. Are there any tax issues with starting the pension payments early?

Thanks in advance for any feedback.


Moguls
(keeping his fingers crossed that FIRE comes even earlier than planned)

 

[dory36]

There's a whole lot of comfort in a guaranteed income stream. That comfort can't be quantified.

But to see some numeric results, run http://capn-bill.com/fire and reduce your expenses by the amount of the pension in the lower section, starting in year 1 -- uncheck the inflation box.

You'll get two figures -- the percent survival and the mean ending portfolio.

Then run it again, but set the withdrawal reduction in the lower part to zero, and increase the portfolio by the amount of the lump sum.

The differences in survival and average ending portfolio balance might help you.

Good luck!

Dory36

 

[Michael]

The PBGC covers most private employer plans that go under, and you can research them at their website http://www.pbgc.gov They have very strict limits on what they will pay early retirees. There are caps on payments that depend upon your age when they take over the plan, and payments are never adjusted for inflation once PBGC starts payments. You should find out if your plan is insured by the PBGC, or just by a private insurance companty that your employer buys an annuity from. Your plan administrator can answer this question. The PBGC itself strikes me as a very secure income provider, but the age cap and lack of inflation adjustments must be taken into consideration.

 

[northwestbob]

I just took early retirement from my former employer and had the same choice. At the time I left, AA rated long maturity bonds were paying 6.5%. The annuity was not much more than the bonds would pay and, in the end, with bonds I would still have the cash at the end of the maturity. (Of course, by the time I actually received the lump sum settlement 3 months later, the bond rates had plummetted. )

My personnel adviser said he only knew one person who took the annuity. He was afraid his wife would spend up all the cash if he died. At least this way she would have an income.

If you have an annuity with a cost of living adjustment, that is a differeent matter.

 

[JeanneP]

I took early retirement but at age 62. What I did was take the money from company and put it into a Annuity as a IRA account. It was paying 6% at the time. over the years it dropped by 1%. I started thinking I had made a big mistake but was in for 6 years. After two years I was pulling out of it what they would allow aprox 10.000 and putting that into Mutual Funds also still IRA. Well in the first year that money did well but along came the last three years and boom. Lost everything that the Mutual Market funds had made. On figuring it out I would have been money ahead by leaving it in the Annuity it went down to paying 4% but at least did not lose. I still have it in there even though now there would be no penelty for taking it out. At this time I am leaving it alone and seeing what happens. what is not IRA money I have managed to ladder CD paying 4% and 5%. Won't get where I wanted to be. Back when it started I figured make 8% over 8 years and can double your money. People in Financial business try to sell you on that. Did not work for me.

JeanneP

 

[Mr._johngalt]

I spend part of each day thinking of how to maximize
my return. However, I could maintain my ER lifestyle
even if my ROI fell to zero (worst case scenario).
What would really mess things up is losing my base
(equity loss). Thus, it is really impossible for me to be
too conservative when you consider the potential
downside.