Lump sum, Immediate Annuities, and FireCalc

[FireAspire]

I know there's another active thread on this, but I didn't want to hi-jack the other member's request for help. Hope that's OK.

I received a "lump sum" letter yesterday. I've looked through the related threads here and learned a good bit. I'm still thinking through it and would appreciate some assistance. My particulars:

• I'm 56 years young, retiring this year, or at least taking a long sabbatical before finding something part time. DW is 59.
• I'm 100% in Firecalc for $90k/year using a 25% haircut for SS and assuming only 90% of our current retirement account balance. Probably overly conservative, but that's me.
• Lump sum offer $300k
• Pension starting 6/1/21 - $1470/mo single
• Pension starting 6/1/29 - $2073/mo single / $1743/mo joint - we would choose the joint survivor option

Immediate annuities says $300k would get us around $1800/mo on a single payout and $1550 joint (starting 6/1/29), so it looks like the pension is a better deal. However, when I model the lump sum vs a joint survivor pension in FireCalc, we would have about $5k/year more to spend with the lump sum invested at our 60/40 AA. Even if I assume the entire $300k goes into bonds and adjust our AA accordingly, I get $5k more per year. The calculators at Fidelity and Personal Capital also show a better outcome with the lump sum.

We have until March 19 to decide. Here is my current thinking: if we take the pension (non-COLA), we've got inflation risk which seems to be increasing as the government does what governments do. If we take the lump sum, we've got sequence of return risks that are probably also significant. I've Firecalced and Exceled it every way I can think of and it seems like the best course is to roll the lump sum into an IRA and invest conservatively (maybe Wellesley). By investing conservatively, we protect somewhat against SOR risk and by taking the lump sum we aren't locked in if inflation goes crazy.

Your insights are appreciated.

[VanWinkle]

I had the same choice in 2016 when I retired. I made my decision based on the sure thing vs the unknown. I took a joint pension with a reduced payout to protect my spouse. Although DW passed away 3 years to the day from when I retired, it still seems to be the right choice in my mind. The security of that check every month along with my just claimed SS benefit makes me sleep well at night. SS and Pension cover my expenses and allow me to be slightly more aggressive with my investments.

I sometimes wonder how much I would have if I took the lump sum, but that is not as important to me as the security of a pension.

Good luck on your decision,

VW

[street]

I'm far from an expert but I think logically and act the same way when it comes to money. I for one took the lump sum and my thinking was with that large amount I will will invest it into the market. I don't need the money, so for me I could invest it for the longer hauler.

My thinking is I would do better investing entire amount rather then a monthly amount. In my thinking I would do better doing it that way. I have no numbers etc. if that is a true way and most effective way.

I can say after 4 years with that initial lump sum it has grown to over 1.6 million in growth only, not including the lump sum money as of 02012021. So, that is my uneducated unorthodox way of handling money. Right or wrong, best or worst I can't help but for me I like simple common sense thinking.

Good luck in your tough decision.

[Midpack]

You’re evaluating the best way I know of, but I wonder how reliable an online annuity calculator quote for 8 years from now would be? Maybe contact some annuity providers for quotes to be sure? Most people ask here with an immediate annuity vs 8 years from now, not that there’s anything wrong with your plan to defer.

It depends mostly on whether you value secure income (a pension) vs a lump sum. And how comfortable you are investing the lump sum.

You probably realize this - the only thing I’d add, and what helped me choose a lump sum in 2011, if you take the pension you don’t have any flexibility left. If you take the lump sum you preserve your flexibility, you can invest it as aggressively/conservatively as you’re comfortable with and never buy a pension (annuity). Or you can “buy a pension” - change your mind in a year or 20 or anything in between. Yields are at historic lows now so annuity payouts are lower as well, it may not get better anytime soon but it’s less likely to get worse? If/when they improve, you can buy an annuity with higher payouts due to better yields and your reduced longevity. I can buy an annuity today with my lump sum with higher payouts even without any lump sum appreciation. With appreciation my annuity payout would be considerably higher - though paying out for fewer years obviously (the years I held the lump sum).

Best of luck with your choice, since your pension seems to be a little better than the annuity option, my situation was almost exactly a wash making the decision clearer.

[RunningBum]

So if you do a direct comparison of lump sum vs. pension it favors the pension, but if you put the numbers into the Firecalc black box where you probably aren't sure how it does the calculations, if favors the lump sum. Personally, I would trust the direct comparison unless you come up with a reasonable explanation for Firecalc's difference.

Perhaps Firecalc used a different end age than immediateannuities does?

Or it could be that Firecalc uses historical scenarios only, while insurance companies have a different, perhaps better mechanism to predict the future.

OTOH, your inflation concerns are quite valid. Presumably annuity payouts will go up if interest rates rise, so one strategy might be to take the lump sum now, and look into an SPIA later.

Or you just take the lump sum and invest it safely yourself, and keep it all under your own control.

I don't think there's an obviously wrong answer here.

[JRon]

Per month you will always be ahead investing a lump sum rather than a pension or annuity. The pension fund or annuity company takes the difference. You may come out ahead with the pension, financially speaking, if you live a long time.

The real question is security. Do you want the security from that monthly payment for the rest of your lives? If so, choose the pension. If you’re comfortable handling the risk, then choose the lump sum.

[FireAspire]

Quote:

Originally Posted by RunningBum Perhaps Firecalc used a different end age than immediateannuities does?

I'm using 100 years old in FireCalc, so I doubt the annuity is beyond that. I assumed their low numbers were based on today's very low interest rates. They are obviously going to protect themselves, so they use that to figure the benefit. As noted elsewhere, when (if) interest rates rise, they will benefit. I'm guessing they won't send me more money, though.

[FireAspire]

Quote:

Originally Posted by JRon The real question is security. Do you want the security from that monthly payment for the rest of your lives? If so, choose the pension. If you’re comfortable handling the risk, then choose the lump sum.

That's my big question ... security. If inflation stays low, it does offer security and that would make my decision fairly easy. But if inflation goes up, it erodes the pension and there's nothing I can do ... except adopt a bologna diet or go back to w*rk.

[Ready]

If I had a large amount of retirement savings and the $300K was not a significant percentage of my total savings, I might be inclined to take the pension. It’s nice to have a base amount of guaranteed income for the rest of your life that you can count on.

[finnski1]

Be thankful you even have a choice. My wife started her pension 2 months ago and there was no lump sum option so we took the 100% J&S.

[street]

Just one more thing that made a huge difference to me with my options of lump or annuity was. If I die the my pension was terminated, no more payments all that money is gone, nothing more.
Even thou I had options how the annuity could be distributed the kicker was if I die the money was gone!! So, if I die after receiving one pension check the money is gone done forever. That wasn't an option for me I wanted total control of those resources.

I can say, there are many here that will disagree with taking a lump sum and I sure they are right, I just like a common sense approach.

[doneat54]

I retired in 2017 and was offered pretty much what you listed. I took the lump sum and invested it mostly in Bond Funds (the rest of the port folio is stock heavy). No regrets, I like the flexibility and as pointed out above, if I croak, it doesn't vanish...

[Midpack]

Quote:

Originally Posted by doneat54 I retired in 2017 and was offered pretty much what you listed. I took the lump sum and invested it mostly in Bond Funds (the rest of the port folio is stock heavy). No regrets, I like the flexibility and as pointed out above, if I croak, it doesn't vanish...

+1, a good point I forgot to note. Your own health and family longevity are a consideration. If unfortunately you’re not blessed with good health and good genes, the lump sum might be the better choice. But don’t let the ‘hit by a bus’ thinkers cloud your judgement, those are exceptions we shouldn’t plan on.

[FireAspire]

Quote:

Originally Posted by Midpack +1, a good point I forgot to note. Your own health and family longevity are a consideration. If unfortunately you’re not blessed with good health and good genes, the lump sum might be the better choice. But don’t let the ‘hit by a bus’ thinkers cloud your judgement, those are exceptions we shouldn’t plan on.

What I lack in looks and brains, I make up by being extremely healthy, so that is a consideration. But by the time I get to 85, the $1743/month will be worth 1/2 as much at 2.5% inflation. It will be worth $1420 by the time I start taking it at 65.

[Ready2Go]

+1 on the lump sum now. You can always buy an annuity later. I'll be making this decision in a month or so. Inflation scares the heck out of with a non-COLA pension. I also worry about corporate financial issues with the pension. An insolvent pension and the PBGC can ruin your retirement. Happened to a neighbor. He had to go back to work in his 70's.

[pb4uski]

I guess the way that I would view it is that the pension benefit is an opportunity to get a joint life pension that would be worth $337k or a single life pension that would be worth $345k for $300k.

Or put another way, if you had an opportunity to buy a SPIA that was worth $337k or $345k for $300k would you take it?

[FireAspire]

Quote:

Originally Posted by pb4uski I guess the way that I would view it is that the pension benefit is an opportunity to get a joint life pension that would be worth $337k or a single life pension that would be worth $345k for $300k. Or put another way, if you had an opportunity to buy a SPIA that was worth $337k or $345k for $300k would you take it?

That sums it up. And I'm not sure if I would buy it or take the money and invest it, which would mean I think I can get a better deal elsewhere. Where's that crystal ball when I need it?