Another Lump Sum vs Monthly Pension Question

[ParFour]

ER'd 2 years ago with megacorp "exit plan" at 56. Have not started taking pension or lump sum yet as did not immediately need and monthly was growing at decent rate (approx 10% in first year). At about the 18 month mark, I learned megacorp adjusted the mortality tables used for the calc, which erased that 10% growth.

Pension at MC was always reflected as a lump sum every year, with interest and growth based on years of service and salary. Then at time of retirement, forecast into annuity, so not the lump sum "offer" often described.

So now wrestling with the decision of taking the $31K/yr non-cola pension or the $618K lump sum. As suggested in other threads, I did look on immediateannuities.com and to get the same 31K/yr would require just over $700K investment.

Will also point out this is the 100% survivor rate in both cases. DW is 60.

Pension fund is well funded with very solid company.

Lump sum represents approx 23% of total portfolio.

Thoughts welcomed....

 

[CRLLS]

Nothing changes due to the current financial crisis. If I were to assume that the $31K per year pension was based on a single life and is not "needed" to meet today's expenses I would, (and did) take the lump sum. I would not hesitate giving up 20% annual difference for the benefit of having the ~$24K grow every year (vs the fixed pension), have it continue for my spouse in the event of my demise, and have it part of our estate to benefit our heirs.

In the end, it is a personal decision and is based on an individual's financial picture and desires.

 

[ParFour]

CRLLS. The $31K is the 100% survivor rate. $35K would be single life. I'v been leaning in the same direction as you noted, but have been hesitant to pull the trigger for reasons I cannot explain....

 

[Just_Steve]

I do the monthly, there is something comforting about waking up on the first of every month to many thousands of dollars in my checking account and upon my demise my DW will have that warm fuzzy feeling also.

 

[Z3Dreamer]

I vote with Just_Steve. You are 58 and I am going to assume that you and DW are in reasonable health. If so, I would take SS at 62 - both of you. And you have that non-cola'd pension of $31k. I am going to assume that combined SS will be $50k, annually. That would be a rounded $80k per year without getting out of bed or touching your portfolio. That would make me sleep well.

Yes, you will wrestle with planning for RMD's and backfilling those lower tax brackets. What a fun problem to have.

 

[pacergal]

We also choose the monthly pension with 100% survivor, it covers our expenses.
If the pension is well funded, less worry.
It's an individual decision, good luck!

 

[youbet]

Give a lot of thought to the prospects of higher inflation in the coming years for all the obvious reasons.

 

[Midpack]

The math obviously says take the pension, but how secure is the pension funding source? There are pensions that are woefully underfunded these days, and some of those beneficiaries will take a big haircut on their "secure pension," some already have. The answers above all seem to just assume the pension is bulletproof...

I took a lump sum when I retired, as pension* vs lump sum was a wash in my case, and I knew I could grow the lump sum and buy an annuity anytime in the future if I wanted to. And that lump sum is worth way more now, even with the recent downturn I have a 7% annual return on that money. So I could now buy a much larger annuity with the lump sum than I would have had in 2011. Odds are I won't ever buy an annuity, but I have that option if ever needed.

I wouldn't make any decision without studying how secure the pension or annuity was. They are not guaranteed, some major providers would have gone under in 2008-2009 if left to their own devices. And how insurers and pension funds will fare in this downturn is TBD.

* actually just an annuity they would have purchased on my behalf

 

[davebarnes]

Take the lump sum.
You never know about "very solid company".
You will sleep better at night.

 

[statsman]

I'm receiving close to your $31k/yr non-cola pension (life policy). In my case, I was offered a lump sum of $249k or about 40% of what an annuity would have required at the time. For me, it was a no-brainer to take the pension. An 88% offer, as in your case, I would have seriously considered it.

That said, my pension and DW's SS (she's 67) covers pretty much all of our living expenses. WR is something ridiculously small, less than 0.25%. If necessary, I can start SS in a year. While I would have preferred a lump sum close to the annuity value, I can't complain given our current financial situation.

 

[pb4uski]

Essentially, with the pension, they are offering you a contract with a fair market value of $700k for $618k.... I'd take the free money (the pension) and adjust your AA accordingly.

 

[capjak]

Do you know how tax impacts the lump sum? The annuity may or may not have state tax depending on your state, it will be taxed at federal level.

I have a pension but did not have an option for a lump sum. I like having a "paycheck" but also realize that if you figure you will place the lump sum in a fixed income safe investment (2% return) you could likely pay out $31,000 for 24 years from the lump sum if zero tax is owed at the lump sum, than the pension starts returning more potentially.

Nice to have options.

 

[pb4uski]

capjak, usually the lump sum sum is rolled over into a traditional IRA and there are no federal or state tax implications.

 

[jollystomper]

I also had a choice of lump sum vs annuity for non-cola pension. I chose the annuity to have another retirement income stream beyond my investments. It also covers the majority of our normal living expenses. Yes there is the inflation danger but I will risk it, since SS is inflation adjusted.


Edited to add: it will also make things easier for my DW should I die first, as she is not financially savvy. A pension and SS will more than cover her expenses and simplify what she has to deal with financially.

 

[The Cosmic Avenger]

If you don't need the money for a while, I'd be inclined to take the lump sum and invest it into the market during this downturn. It wouldn't take long until you could safely take $31K/year, plus then you'd still have the principal.

 

[pb4uski]

If you don't need the money for a while, I'd be inclined to take the lump sum and invest it into the market during this downturn. It wouldn't take long until you could safely take $31K/year, plus then you'd still have the principal.

And how do you know this?

 

[breger1]

I just made a similar decision based upon receiving a similar sized pension and took the lump sum. Here was my logic YMMV. Company pension like 80% funded (some risk there) but what really concerned me is that if I died before taking the pension my spouse would only get 50% survivor rate (the default). But if I started the pension I had many choices.
Single Life
10 Yrs Garanteed
50%
75%
100% Survivor

Waiting until max age of 70 would have more than doubled the monthly payout. But If something happened suddenly my DW would be stuck with 50%. I took the lump sum as now I do not need to touch it for years but I am confident I can invest it wisely.

Just my thoughts.

 

[savory]

I took the pension. I worry from time to time about the funding. But, when I get the money I never worry about my expenses. It does keep my worrying down in times like this. Research also suggests that people receiving pensions have less stress.

With this 10 year run, I expect I would have had more money had I taken the lump sum. But, for me, I have more money than I expected and still have the comfort of money magically appearing in my checking account that allows me to live the lifestyle I want.

Having said all this, it was not an easy call.

 

[ncbill]

Take the $31k annual with 100% survivor...as another poster noted, that plus SS at age 62 probably covers your regular expenses.

 

[tdv2]

I was faced with the same decision last May. I decided on the lump sum because the 50% survivor option wasn't a good deal based on all my calculations. I am in the process of executing a plan to put the funds into stocks and bonds over a 1 year period. My last deployment is May 1, 2020. Right now I stand at -1% on the whole bucket... I'm using a 25/75 allocation for these funds. Fortunately I did a buy last month when both stocks and bonds were getting creamed...value averaging in worked for that purchase. I don't need these funds for a long time, if ever, so I'm aggressively doing Roth conversions now to take advantage of lower share prices in the equity market. Not the greatest outcome so far but not a disaster either. I will report back in 10 years to let everyone know how things are going

One thing I will say, the comments I see on this topic recently are a quite a bit different from what I was reading a year ago. I'm still in the camp of safety first....meaning if that stream of income is a significant portion of your retirement spend, it may be a better option to take the pension payout. Otherwise it's most likely a better time than last year to take the payout....then again, maybe not.

 

[CRLLS]

Considering that your numbers are for 100% survivor, it would be a tougher decision for me. I am leaning toward the pension considering that you have another 77% in other retirement funds. I usually tend to being a control freak when it comes to my money. What can I say? I'm conflicted on this one.

 

[ncbill]

Yep, it's the 100% survivor (with only a modest reduction) that makes taking the annual pension here more attractive than taking the lump sum.

 

[racy]

A writer at Kiplinger explored the options, here: https://tinyurl.com/t8kkovq
Michael Kitces wrote about 'safety first' and 'probability based' de-cumulate, here:
https://tinyurl.com/okcdqkj

(Personally, I opted to take the lump and control the money myself. What you do is up to you. Good luck.)

 

[Big_Hitter]

And how do you know this?

lots of armchair actuaries in this thread - the OP answered his own question with the immediateannuities research

" As suggested in other threads, I did look on immediateannuities.com and to get the same 31K/yr would require just over $700K investment."

 

[Cobra9777]

DW and I both took the annuity option on our pensions, and we both elected the single life option. Mine is non-COLA and had a payout ratio of 6.4%. Hers is the larger of the two, with a partial COLA (70% of CPI) and an inital payout ratio of 7.6%, but it only had a partial lump sum option.

Combined, the two lump sum options represented about 25% of our total retirement nest egg at the time. The two annuities now cover half our total expenses and about 70% of non-discretionary.

I retired at 52 and did not want to be solely dependent on dividends and selling shares to generate cash with SS still 10-15+ years away. At the time (2013), I was still fairly skittish about stocks following 2008-9 and very concerned about SoRR in the short term. With today's events, it is comforting to have the cash coming in.

I also like the concept of the three-legged stool. With such a long period of early retirement before SS and Medicare, we wanted some balance so we weren't solely dependent on portfolio withdrawals. I just saw it as an easy way to diversify our income streams.

The trade-off was foregoing some long-term growth if markets in the future perform as well as they have in the past. I think it was a reasonable trade-off to annuitize 25% of the nest egg at a time that I was skittish about stocks and SoRR.