Help! Annuity or Lump Sum Decision

[flintnational]

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.

Historically, my company did not offer a lump sum pension choice. I had planned to take the annuity at age 63. I am currently 57. Here are the rough numbers (they sent some of the numbers, but I have estimated other numbers - so this may change).

One time lump sum offer $405k (may not be available in the future)

Annuity option - Non Cola

At current age 57 the annual annuity is $23,500 with joint 100% to survivor

DW is also 57

Considerations - If I don't start it now, the annuity grows at about 8% per year until age 63, full retirement age, and does not increase after that date.

If I die before I elect the annuity, planned age 63 election, the DW only receives a 50% survivor benefit. But, I feel pretty healthy today!

What would you do? Take the lump sum or the annuity. If you prefer the annuity, would you start it now to lock in the 100% survivor benefit option, or let the annuity grow at 8% till age 63. If I wait, I run the risk of the DW only receiving 50% if I die before I elect the annuity. I had not noticed the 50% automatic survivor benefit until I read the plan docs with the lump sum offer.

Thanks all,

FN

 

[Big_Hitter]

how old is your spouse?

 

[flintnational]

The DW is also 57.

Edited the original to include DW's age.

 

[pb4uski]

I suggest that you price out what a $405k single premium today would by for a joint-life annuity with benefits deferred for 6 years on immediateannuities.com.

I think that you'll find that declining the lump sum and taking the pension benefit at age 63 is more attractive.

 

[flintnational]

I suggest that you price out what a $405k single premium today would by for a joint-life annuity with benefits deferred for 6 years on immediateannuities.com.

I think that you'll find that declining the lump sum and taking the pension benefit at age 63 is more attractive.

Thanks, Pb4uski. I ran the current value but did not think to run the value in 6 years. That would give me a better answer.

FN

 

[flintnational]

I suggest that you price out what a $405k single premium today would by for a joint-life annuity with benefits deferred for 6 years on immediateannuities.com.

I think that you'll find that declining the lump sum and taking the pension benefit at age 63 is more attractive.

Plugging the lump sum offer into Immediate annuities.com and delaying 6 years, till age 63, yields a joint survivor 100% annual payment of about $26,000. The pension annuity joint 100% at age 63 is $36,700.

Thanks,

FN

 

[pb4uski]

That's in line with what I was figuring that you would get. BTW, my former employer also did a lump sum offer last year that was as much of a rip-off as yours was. I was talking with the pension fund's former actuary, also a former colleague of mine, and we were unhappy that the company that we knew and admired had stooped so low. I'm sure that there were plan participants that were not financially astute who looked at the big number and jumped on it without knowing they were being fleeced. OTOH, there may have been some plan participatants that were in poor health who made out much better with the lump sum than they would if the lump sum offer had not been made.

 

[Blue Collar Guy]

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.

Historically, my company did not offer a lump sum pension choice. I had planned to take the annuity at age 63. I am currently 57. Here are the rough numbers (they sent some of the numbers, but I have estimated other numbers - so this may change).

One time lump sum offer $405k (may not be available in the future)

Annuity option - Non Cola

At current age 57 the annual annuity is $23,500 with joint 100% to survivor

DW is also 57

Considerations - If I don't start it now, the annuity grows at about 8% per year until age 63, full retirement age, and does not increase after that date.

If I die before I elect the annuity, planned age 63 election, the DW only receives a 50% survivor benefit. But, I feel pretty healthy today!

What would you do? Take the lump sum or the annuity. If you prefer the annuity, would you start it now to lock in the 100% survivor benefit option, or let the annuity grow at 8% till age 63. If I wait, I run the risk of the DW only receiving 50% if I die before I elect the annuity. I had not noticed the 50% automatic survivor benefit until I read the plan docs with the lump sum offer.

Thanks all,

FN

Is your company solid? Will they go bust in the future? I would take the 405k. Invest it. I took my lump sum, it was for my age at a cost of 6.3 %. I got the checks early 2009 ( the city wont write a check for over $99,990 so they sent several ) , every 2 weeks. Guess it was dumb luck cause I killed the 6.3 % reduction over that time period.

 

[flintnational]

Is your company solid? Will they go bust in the future? I would take the 405k. Invest it. I took my lump sum, it was for my age at a cost of 6.3 %. I got the checks early 2009 ( the city wont write a check for over $99,990 so they sent several ) , every 2 weeks. Guess it was dumb luck cause I killed the 6.3 % reduction over that time period.

Thanks BCG. They are pretty solid and the plan is adequately funded. I don't think there is to much credit risk (but always a concern on some level). And I should be under the PBGC limits if they do get in trouble. IIRC, your pension was a big one. I was hoping you would offer to swap.

FN

 

[Blue Collar Guy]

Thanks BCG. They are pretty solid and the plan is adequately funded. I don't think there is to much credit risk (but always a concern on some level). And I should be under the PBGC limits if they do get in trouble. IIRC, your pension was a big one. I was hoping you would offer to swap.

FN

, I still think I would take the lump sum, invest it now, in a 75/25 portfolio. 405,000 is a lot to leave on the table. you will get that amount on your own every year non col'd and still have the 405K, and much more 95 % of the time.

 

[pb4uski]

A 63-yo couple would need to pay ~$678,400 today to get a $36,700 annual joint-life benefit. Let's assume that annuity pricing is constant so in 6 years your $405,000 lump sum would need to grow to $678,400. You would need to get an average annual return of ~9% over the next 6 years for your $405,000 lump sum to grow to $678,400.

While the historical return of a 75/25 portfolio is slightly higher at ~9.3%, I'm skeptical that portfolio returns will be better than average over the next 6 years.

In a way by offering you a $405,000 lump sum today or a $36,700 annual benefit in 6 years your plan is offering you an all-but-guaranteed 9% return on your pension money for the next 6 years.... IMO a screaming deal given the risks involved.

 

[CRLLS]

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.

 

[street]

Lump sum and put it to work.

 

[bada bing]

One additional future market prediction and calculation
that needs to be evaluated is what will the annuity segment
rates be in 6 years ? I would guess that rates will be somewhat
higher in 6 years, but it is only a guess. Rates are pretty poor
now for purchasers of SPIA's. By electing to keep the pension
annuity, you are doing the equivalent of purchasing a future
annuity with money today. Be aware that current rates are
below historical norms and can possibly be better in the future.

I am not making a recommendation to lump sum, just bringing up
an additional factor that makes an apples to apples estimate of
future scenario values even more of a crap shoot.

 

[alaska55]

I suggest that you price out what a $405k single premium today would by for a joint-life annuity with benefits deferred for 6 years on immediateannuities.com.

I think that you'll find that declining the lump sum and taking the pension benefit at age 63 is more attractive.

+1 everybody that says take the lump sum is either bad at math or letting the lump sum blind them, or both.

 

[alaska55]

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.

Historically, my company did not offer a lump sum pension choice. I had planned to take the annuity at age 63. I am currently 57. Here are the rough numbers (they sent some of the numbers, but I have estimated other numbers - so this may change).

One time lump sum offer $405k (may not be available in the future)

Annuity option - Non Cola

At current age 57 the annual annuity is $23,500 with joint 100% to survivor

DW is also 57




Considerations - If I don't start it now, the annuity grows at about 8% per year until age 63, full retirement age, and does not increase after that date.

If I die before I elect the annuity, planned age 63 election, the DW only receives a 50% survivor benefit. But, I feel pretty healthy today!

What would you do? Take the lump sum or the annuity. If you prefer the annuity, would you start it now to lock in the 100% survivor benefit option, or let the annuity grow at 8% till age 63. If I wait, I run the risk of the DW only receiving 50% if I die before I elect the annuity. I had not noticed the 50% automatic survivor benefit until I read the plan docs with the lump sum offer.

Thanks all,

FN

It really depend on your whole asset picture. Do you get SS? Any other pensions, have a large 401/IRA? Maybe the annuity or maybe lump sum, you need to look at the big picture.

 

[GalaxyBoy]

Bogleheads wiki has this on the subject:

https://www.bogleheads.org/wiki/Lump_sum_vs_pension

 

[flintnational]

It really depend on your whole asset picture. Do you get SS? Any other pensions, have a large 401/IRA? Maybe the annuity or maybe lump sum, you need to look at the big picture.

Agreed. We have significant assets other than the pension and we will receive two SS benefits. Accordingly, I have kept a relatively high percentage, 70%, of our investments in stocks. I considered the pension annuity and SS as safer assets lowering the overall portfolio risk. Taking the lump sum and investing the proceeds in stocks would change this.

FN

 

[flintnational]

+1 everybody that says take the lump sum is either bad at math or letting the lump sum blind them, or both.

Thanks. I reached out to a friend with significant HR experience. He reminded me, "the company does this because it benefits them not you".

But I understand the other side. The cash looks good in an uncertain future.

FN

 

[flintnational]

One additional future market prediction and calculation
that needs to be evaluated is what will the annuity segment
rates be in 6 years ? I would guess that rates will be somewhat
higher in 6 years, but it is only a guess. Rates are pretty poor
now for purchasers of SPIA's. By electing to keep the pension
annuity, you are doing the equivalent of purchasing a future
annuity with money today. Be aware that current rates are
below historical norms and can possibly be better in the future.

I am not making a recommendation to lump sum, just bringing up
an additional factor that makes an apples to apples estimate of
future scenario values even more of a crap shoot.

Thanks. Good point. And yes, there are a lot of unknowns. It would make planning a lot easier if someone would give the date I will pass and the future returns of stocks and bonds.

 

[flintnational]

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.

Thanks. I was not aware of this.

FN

 

[flintnational]

Bogleheads wiki has this on the subject:

https://www.bogleheads.org/wiki/Lump_sum_vs_pension

The bogleheads wiki was helpful. The article's decision tree and my responses follow.

"Is your offer a fair deal? In other words, can your offered lump sum buy the pension? No
Have you considered delaying your claim on Social Security, and how might this lump sum enable you to do so? Not needed
What is your opinion on your own mortality? Do you want to plan beyond a life expectancy of 83 years? Yes, one or both of us will likely make it.
What do you think of the viability of the provider, be it your company for your pension, your insurer for your annuity, or the Federal Government for Social Security? Average risk
Have you considered and planned for the income streams you will need in retirement? Yes, the annuity offsets riskier stock investments
Do you think you can do better with a lump sum by investing it yourself? Better than a guaranteed income stream for the rest of your life?" No because of the current high stock allocation of other assets

FN

 

[racy]

Personally, I'd take the lump. I'd be nervous about the company's ability to honor the pension (any company's ability). The fact that companies are offering buyouts, and some are off-loading their pension plans to insurance companies, makes me think they're concerned, too. I'd take control of the money myself. Just my 2 cents...

 

[Running_Man]

The calculation for this is straightforward. The hurdle rate is 5.75%, which is the amount the 405K would have to earn each year in order to begin taking 36K per year at age 63 until you turn 98 - 35 years. If you earn over the 5.75% you will do better taking the lump sum, if you and your wife die before 35 years it would have been the better financial decision. If you earn under 5.75% it will be unfavorable.

If you earn 7% by year 35 you are 1.6 million dollars to the better

 

[Running_Man]

Personally, I'd take the lump. I'd be nervous about the company's ability to honor the pension (any company's ability). The fact that companies are offering buyouts, and some are off-loading their pension plans to insurance companies, makes me think they're concerned, too. I'd take control of the money myself. Just my 2 cents...

The actual reasons companies look to offload pensions are employees overwhelmingly will choose a lump sum over the annuity resulting in 30 - 40 percent of the accrued liability being reversed for the company's favor. Financially it is a no-brainer for the company. The long term feasibility of the pension plan is no factor in offloading them. In fact most companies that have pension plans that are going to fail are not offered buyouts because the companies have to have the funds in the pension plan to make them whole to the insurance companies or pay the employees. So that most of the buyouts result in income going to the companies with the best funded pensions.

However, those corporate decisions should have no influence to an individual deciding whether or not to take the lump sum or not, what affects the individual is much different than the myriad of reporting rules and regulations a company utilize and file to value their obligations. The simple regulation costs of holding a pension is typically over 1% of the asset value of the pension plan for most small- mid size companies and you free up much corporate time and reporting just by getting rid of the pensions