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Lump sum or annuity ?
Old 10-02-2019, 08:01 AM   #1
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Lump sum or annuity ?

My former employer inform me that I have the option to take a lump sum of $127k or immediate monthly annuity of $446. Or do nothing and apply for monthly payment when I retire $1025 @ 55 yr old and $1499 @ 65. These are single life and non cola.
I m currently 51 year old.
What would you do? I appreciate any input.
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Old 10-02-2019, 08:56 AM   #2
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how much would it cost to purchase an annuity that pays $1000 for life commencing at 55?
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Old 10-02-2019, 10:15 AM   #3
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I'd base it on living until 70 (can't have much fun after 70). Do the math.
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Old 10-02-2019, 10:18 AM   #4
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I'd base it on living until 70 (can't have much fun after 70).
You know not of what you speak.

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Old 10-02-2019, 10:23 AM   #5
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I'd base it on living until 70 (can't have much fun after 70). Do the math.
Huh? So, what is your age, just out of curiosity? My guess is a couple of decades away from 70 ...
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Old 10-02-2019, 10:26 AM   #6
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Mess with this calculator...
https://www.dinkytown.net/java/pensi...alculator.html
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Old 10-02-2019, 10:39 AM   #7
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I would take the lump sum. Using a 4% withdraw rate yields
0.04*127,000=5080
5080/12months=423.33 per month

If you have the money, you can take more earlier if you need it. If you live long, it is very likely that you can still get growth after your 4% withdrawals.

Of course I'm ignoring taxes, which complicate the simplistic analysis above. You'd have to compare how the lump sum is taxed, with how the monthly payments would be taxed.
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Old 10-02-2019, 10:59 AM   #8
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I would take the lump sum. Using a 4% withdraw rate yields
0.04*127,000=5080
5080/12months=423.33 per month

If you have the money, you can take more earlier if you need it. If you live long, it is very likely that you can still get growth after your 4% withdrawals.

Of course I'm ignoring taxes, which complicate the simplistic analysis above. You'd have to compare how the lump sum is taxed, with how the monthly payments would be taxed.
but he/she could wait 4 years and get a grand a month - I don't see how you factored that in
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Old 10-02-2019, 11:07 AM   #9
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but he/she could wait 4 years and get a grand a month - I don't see how you factored that in
Ahh yes. I missed that. So waiting the four years is a much better option. Good catch.
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Old 10-02-2019, 11:48 AM   #10
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Remember, if you make decisions based upon "average" life spans, you may be biasing your results.

I suspect that the majority of members of ER.org will have way different results when effects such as wealth, education, income, disability status etc are factored in.

Personally, I am planning for 102.

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Old 10-02-2019, 02:55 PM   #11
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Thanks everyone and Mago30 for the link. If I take lump sum, I will need annual return rate of 5.9% to match the monthly of $1k at age 55. Assuming until age 80. I m thinking NOT taking lump sum
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Old 10-02-2019, 03:50 PM   #12
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Huh? So, what is your age, just out of curiosity? My guess is a couple of decades away from 70 ...


Based on the username, I’d guess 51......so yes, a couple decades away.
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Old 10-02-2019, 04:08 PM   #13
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Originally Posted by Smilefun View Post
My former employer inform me that I have the option to take a lump sum of $127k or immediate monthly annuity of $446. Or do nothing and apply for monthly payment when I retire $1025 @ 55 yr old and $1499 @ 65. These are single life and non cola.
I m currently 51 year old.
What would you do? I appreciate any input.
When I run these through https://www.immediateannuities.com/ they don’t make any sense. The lump sum is high for a $446/mo payout (should be more like $521/mo), but way low for the @55 and @65 numbers. A deferred annuity won’t go from $446 to $1025 in 4 years. I must be missing something...
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Old 10-02-2019, 04:19 PM   #14
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Assuming that the numbers in the OP are right..... $1,025/month at age 55 (in 4 years) is very attractive compared to $127k lump sum today.

If you invested the $127k lump sum in a 4-year deferred annuity the monthly benefit would only be $588/month when benefits start in 4 years.

Similarly, $1,025/month annuity for a 55 yo would require a premium of $229,991... so assuming today's annuity rates the $127k would need to grow about 16% annually for the next 4 years in order to fund a $1,025/month annuity in 4 years.

Above from immediateannuities.com for a male in FL.

Stick with the pension.... forget the lump sum.... if the numbers are right.
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Old 10-02-2019, 04:46 PM   #15
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Stick with the pension.... forget the lump sum.... if the numbers are right.
lump sums like this one don't have to include the value of the early retirement subsidy which, in this case, looks substantial
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Old 10-02-2019, 07:51 PM   #16
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OP here. I just double check and the numbers are correct:
1. Lump Sum $127k
2. Immediate monthly payment $446 single, $415 50% joint & survivor, $388 100% J&S
3. Normal payout starting at
55 yo - $1025 single life
60 yo - $1326
62 yo - $1446
65 yo - $1449

So I think I will take option 3.

Thank you all.
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Old 10-02-2019, 08:11 PM   #17
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Which option 3? 55, 60, 62 or 65?
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Old 10-02-2019, 10:02 PM   #18
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I have not thinking that far yet, LOL. It will depend on when we will pull the trigger to retire and when we would need that money. Any advice as far as which age have the advantage of pay out?
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Old 10-03-2019, 05:07 AM   #19
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I like 60 yo - $1326/mo.
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Old 10-03-2019, 07:42 AM   #20
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Are you in poor health? Do you have family history where most don’t live long?

If either of the above are yes, go ahead and take the cash. If both are no:

Pensions are secure investments (provided they are under PBGC insurance limits which yours is). As such they are much better off compared to bonds rather than stocks. They are also a nice “third stool” of your investments in that they help provide a floor of income when retired.
Now to compare your choices:
The age 51 payout is mediocre at best. Skip it
The age 55 payout is awesome. Looks like about 12 percent of you wait 4 years.
I did not calculate the age 65 payout compared to 55 but unless you plan on working from 55 to 65 I would tend to skip this option as your risk of dieing before payback is higher.

Hope this helps !
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