Help! Annuity or Lump Sum Decision

alaska55 said:
What happen to all the predictions of low return for the next 10-20 years. I'm pretty sure some of the same people saying take the lump sum are the same posters talking about low returns. I never said take the annuity, I said depends on the OP overall situation. BCG if you think you can make 405000 last 30 years with 36700 WD rate, i got a gold mine for sale. 36700 WD for 30 years is 9%. I put in 405000 for 30 years, 3% cpi, 60/40 with 5 year treasuries. Guess what 2.6 success rate.
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Wheres the gold mine? So you think its a 2 % success. Interesting. Ill need to assay that mine. And now were going out to age 100, and its at 75 %. Ill stand by my 30 year numbers at 97 % with 2 million on average left over. Lets take it to age 110 I bet Its even a lower success rate. When you come back to reality, let me know.
 
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CRLLS said:
I'm with BCG. As a matter of fact, I did take a lump sum a few years back. A wise choice was to keep it at the co and take the annuity at age 65.

One thing I evaluated was that even though the annuity was larger to start after some years, taking a 4% from the lump sum (and increasing with COLA) the lump sum came out higher. 2nd) anything left should both DW And I cease living, the kids would benefit where the Annuity would not give that benefit. 3rd) I was not comfortable with someone else having my family future in their hands. 4th) now..... the way the pensions are currently running, in some cases, the PBGC(?) is allowing pensions to short pay everyone, even those already collecting before they default. This prevents the pensions from going bust and defaulting to the PBGC. So future payment at promised levels is no guarantee anymore. I'll take my lump sum at 75(ish)% now, thank you.

This is a group of varying thoughts and practices. Nobody knows for certain which is the best life decision until we are dead and gone. Only in hindsight is vision 20/20.
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In 2015 your pension guarantee was around 60K, anything below that was not reduced, you're well under that. Is your pension even covered by PBGC? This is for a single payer, if your in a multi employer plan all bets are off.
 
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CRLLS said:
....4th) now..... the way the pensions are currently running, in some cases, the PBGC(?) is allowing pensions to short pay everyone, even those already collecting before they default. This prevents the pensions from going bust and defaulting to the PBGC. So future payment at promised levels is no guarantee anymore. I'll take my lump sum at 75(ish)% now, thank you.....
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This is a great example of a little knowledge being dangerous.

What you are reffering to only applies to multi-employer plans and the OP's plan is not a multi-employer plan.
 
One other small factor you have to account for when you model using something like FIREcalq is the guarantee of the lump sum to the estate in the event of an early demise. You are getting an advantage by taking the lump sum that can be modelled by including the cost of a term life policy that declines in payout from the full lump value to zero over the life expectancy. It is a not insignificant advantage for the lump in the early years. Of course, if you outlive life expectancy you have to start an addition to the annuity side.

Another factor is that inflation in the future will skew the advantage towards the lump sum. There is a potential for a big difference in modelling results based on inflation assumptions. I think it is correct to anticipate lower real returns on market portfolios in the future, but that may very well mean something like 8% nominal returns, 5% inflation and 3% real returns. That type environment will decimate a non-cola'd pension value.

I personally elected to take a lump sum about a year ago with similar cost/benefit to the OP, although my pension was only about 1/3 the size. The offer I received was not "fair" compared to the cost of a SPIA, but that isn't nearly the whole picture. You have to input assumptions about market returns, future segment rates and especially future inflation.
 
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I face the same dilemma. Ran actuary numbers and researched pros and cons. Changed my previous decision and will choose the lump sum instead of lifetime pension payments. Key drivers are 100% control of my investment $, much more investment options, no COLA pension, able to inherit to kids unlike a pension, uncertainty any company will remain solvent, don't trust govt pension backup plan.
 
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OP here. If you take the lump sum and assume a 75/25 AA with an average annual return of 8% after taking annual distributions of $36.7k you are left with about $2M at age 93 . However, look at the WR for the first few years. And this assumes you get 8% between age 57, current age, and 63. IMO, A poor sequence of returns early on would put this plan in jeopardy. Like others, I think the threshold rate that must be overcome to show a benefit for the lump sum is about 5.75%. While probably achievable in the long term, it might not survive in the short term.

Lump Sum
$405,000
Return
Age 8.00%

58 $437,400
59 $472,392
60 $510,183
61 $550,998 Effective Distribution
62 $595,078 WR
63 $605,984 6.06% $36,700
64 $617,763 5.94% $36,700
65 $630,484 5.82% $36,700
66 $644,223 5.70% $36,700
67 $659,060 5.57% $36,700
68 $675,085 5.44% $36,700
69 $692,392 5.30% $36,700
70 $711,083 5.16% $36,700
71 $731,270 5.02% $36,700
72 $753,072 4.87% $36,700
 
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bada bing said:
I personally elected to take a lump sum about a year ago with similar cost/benefit to the OP, although my pension was only about 1/3 the size. The offer I received was not "fair" compared to the cost of a SPIA, but that isn't nearly the whole picture. You have to input assumptions about market returns, future segment rates and especially future inflation.
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Turboslacker said:
I face the same dilemma. Ran actuary numbers and researched pros and cons. Changed my previous decision and will choose the lump sum instead of lifetime pension payments. Key drivers are 100% control of my investment $, much more investment options, no COLA pension, able to inherit to kids unlike a pension, uncertainty any company will remain solvent, don't trust govt pension backup plan.
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Thank you both. It is a tough decision.

FN
 
Another way to look at the annuity/lump sum decision is if you had the lump sum and had the opportunity to purchase a SPIA at favorable rates compared to a commercially available SPIA market rates, would you take advantage of the opportunity (not unlike the decision to defer SS is essentially buying a COLAed SPIA by making monthly premium payments the time of deferral).

Also, there is an aspect of how much of your spending do you want from guaranteed income sources.

In theory, unless you have achieved your target percentage of guaranteed income those who prefer pension benefits over the lump sum should also be the same people who would lean towards deferring SS. I know that is true in my case.... we intend to defer SS to at least FRA and perhaps age 70 and we also took the pension rather than the lump sum... in both cases it is like buying something that is on sale and a good deal. The pension increased our guaranteed income sources as a percent of our spending from ~45% to 54% (but my pension was ~1/2 of the OPs).
 
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pb4uski said:
Also, there is an aspect of how much of your spending do you want from guaranteed income sources.
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This is probably the largest personal factor I am considering. We can achieve a SWR without this pension (currently at 3%). OTOH this pension, the DW's small future pension and our SS at about age 64/65 cover our inflation adjusted budget. Accordingly, this structure has allowed us to keep a fairly aggressive stock allocation at 70% (We will likely never need this money). With the annuity option, I can let the stock allocation drift even higher in the future. If I take the lump sum, I will be reducing portfolio diversification and will need to take additional risk to achieve a reasonable return on the payment.

FN
 
pb4uski said:
This is a great example of a little knowledge being dangerous.

What you are reffering to only applies to multi-employer plans and the OP's plan is not a multi-employer plan.
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I do agree that I have little knowledge in that area. But in my defense, I did qualify my statement with "in some cases". 10 years ago, this wasn't even a consideration. Today it is multi-employer plans, what About tomorrow?

I'm not saying it is guaranteed that the payout will be less. With all other things being equal, it is something that I considered and chose the lump sum.
 
Big_Hitter said:
8%? Is that the 50th percentile of 30 year returns based on that asset allocation?

:confused:
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No, it was just a random number to show that returns would need to be fairly high to achieve the $2M surplus that was mentioned by a poster earlier. It also let me look at sequence of return risk. If returns are lower, the initial WR and sequence of return risk are even higher. In other words, IMO the initial WR is fairly high even with an seemingly good return of 8% on a 75/25 allocation. :)

FN
 
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flintnational said:
No, it was just a random number to show that returns would need to be fairly high to achieve the $2M surplus that was mentioned by a poster earlier. It also let me look at sequence of return risk. If returns are lower, the initial WR and sequence of return risk are even higher. In other words, IMO the initial WR is fairly high even with an seemly good return of 8% on a 75/25 allocation. :)

FN
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ah understood
 
Blue Collar Guy said:
Hitter, I put 405000 in the portfolio line , I put 36700 in the spending line and I put 30 years. Thats was on the start here tab. Then I put 0 % for the CPI as it isnt cola'd. On the "not retired tab" i put 2024 . 75/25 portfolio. thats what I got. Can you re do it? Maybe I goofed ? hahah I did it again got the same results. Im hitting a lot of tabs, so Im sure Murphys Law and me might be messed up.
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You probably put "30" vs "36" yrs on the first tab; remember it's 6 yrs until getting the annuity, then 30 yrs living on it.

Also, the comparison should be risk adjusted, which means using the "probability of success" function in FIRECalc. If you select 100%, which it should be to equate to the annuity, then the OP can spend $26k/yr...funny how that seems similar to the earlier posts huh? ;) If you want to discount that 100% a couple points to account for pension uncertainty, you can also do that.

Having said all that, I think the choice comes down to the OP's situation: his & his DW's risk tolerance, their overall portfolio/income stream makeup, and how an annuity (or LS invested 75/25) fits into their plan.

EDIT: I see some of these points were already made since I began writing this response. I stand by the two major points: (1) any comparison must be risk adjusted, and (2) the OP's situation (risk tolerance, portfolio/income mix, etc.) must be factored into the decision.
 
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Huston55 said:
Having said all that, I think the choice comes down to the OP's situation: his & his DW's risk tolerance, their overall portfolio/income stream makeup, and how an annuity (or LS invested 75/25) fits into their plan.
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Thanks Huston55. This item will probably drive my decision.

FN
 
flintnational said:
I know we have covered this before, but it seems each situation is different. Yesterday in the mail I received a lump sum pension offer............. FN
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Decision update

Thank each of you for your input. We have decided to keep the annuity and decline the lump sum offer. The reason for the decision is based primarily on our specific situation. We have enough cash and short term bonds to fund our retirement until age 65 or 66. At that point, SS and the pension annuity will 100% fund our inflation adjusted budget. Accordingly, that has allowed us to maintain a relatively high (IMHO) stock allocation of 70%. If I took the lump sum, I believe I would be adding risk to our portfolio and would not be comfortable with a 70% stock allocation. The annuity also adds some diversification to our portfolio. We can fund our budget with either our savings or the SS/pension annuity combination. If one fails, we still have the other, hopefully.

Once again, thank you for your input and help. :)

FN
 
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