Lump Sum Versus Annuity

Car-Guy said:
I went through this same decision some years ago. Even read about this topic on this forum at the time (and many times since then). Same question, and it seems the same concerns/answers each time. My first impression was to take the lump sum. I thought about it until my head hurt but in the end I went with my first impression and have never regretted it.

I think it gets down to personal situations and preferences for the most part but of course payout values and risk tolerance play into it.
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Just went through this a couple of years ago for a much smaller sum. I ran the numbers and found that the break-even point was age 82 - I'm 54 now. It was an early-retirement buy-out that gave me a lump sum or small pension. I took the small pension.

It was also a timing thing. I have several other 'streams' of income that will be turning on at different times throughout the rest of my life. I figured starting a small one a bit early would be a way to ease into the RE. So far, so good.

To the OP, there are more than just financial reasons and many here have made great points about their preferences. Not everyone is super savvy about how they would manage their withdrawals and/or funds when they retire. Having a way to automate it can be a relief.

I have another sum of after tax money and looked into a SPIA...then realized I could 'roll-my-own' by taking out a certain amount every year and 'simulate' an annuity and realize even more spending power.

In any case, it's good to make an informed decision, which you are attempting to do. As with most things, except LBYM, YMMV.
 
I tend to side with taking the guranteed annuity, especially since you said you also have other available funds. What you want to do is have guaranteed income for most of your normal retirement expenses and for most this takes having a pension or annuity.

What I would want you to find out from your work is if some of this pension was paid for with your own funds making then some of the pension tax-free.

Even if it is all taxable income I would still err on the safe side and take the pension.
 
FinancialDave said:
What I would want you to find out from your work is if some of this pension was paid for with your own funds making then some of the pension tax-free.

Even if it is all taxable income I would still err on the safe side and take the pension.
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None of this was paid for with my funds. All company money. Tax free would be nice. It would almost be a no brainer to do the annuity if I could pull that off.
 
I took a lump sum on a non-cola pension of a modest sum several years ago. I reasoned that I could earn a higher return in the market. My rate of return since 2003 has been 7.04%; I hold some cash and bonds which are a drag. However if I had made this post around 2011, my rate of return would have been significantly lower- and the annuity would have been the better deal.

I will evaluate annually, but my current plan is to defer SS to age 70; the 8% from Uncle Sam is better than I have achieved to date. I don't regret taking the lump sum or deferring SS past 62.
 
Jerry1 said:
Again, thanks for all the comments. I’ll definitely have more questions for the FA and, I’m going to loop back with the company(employer) to make sure I understand the annuity. Especially what company is managing it. I know the pension obligation is funded, but I’m not sure if they purchase an annuity or if the pay out the annuity. I’d be more comfortable if a major insurance company manages the annuity and to make sure it’s PBGC insured.

From the FA, I’ll make sure the model my plan both ways so I can have a better basis for decision. I was only thinking of the market comparison, but I also want to look at the tax consequences of the cash flow in both cases.
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Most commonly, the pension plan just makes the pension payments from the pension plan assets and there is no insurer involved. Sometimes, the plan might buy a SPIA from an insurer as a plan asset and then they relay the benefit payments to you but that is rare. In both these cases there would likely be PBGC insurance, but just know that the PBGC is very underfunded so I'm not sure how much comfort you should take from that.

There are some cases where they effectively offload their obligation to an insurer and some big plans have done that in recent years. If an insurer is directly on the hook to you then state guaranty funds woud come into play. After some reforms in the mid 1990s, insurers are very financially sound and it is very unlikely that an insurer will default.
 
One thing if a person doesn't need the pension to live on and wants to leave a legacy for a charity or heirs then a lump sum would be a better option I would think.
 
pb4uski said:
but just know that the PBGC is very underfunded so I'm not sure how much comfort you should take from that.
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isn't the PBGC financially sound from a single-employer perspective?
 
street said:
One thing if a person doesn't need the pension to live on and wants to leave a legacy for a charity or heirs then a lump sum would be a better option I would think.
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there is also the concept that having a fixed income source significantly improves the probability of avoiding actuarial ruin
 
I would say take the lump sum. You and only you will be in control of your money and you can invest and spend the way you want to. The annuity ties up your money forever. I'm sure you can handle this on your own, or use Vanguard, that's who I use. Cheers.:)
 
pb4uski said:
.... but just know that the PBGC is very underfunded so I'm not sure how much comfort you should take from that. ....
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Big_Hitter said:
isn't the PBGC financially sound from a single-employer perspective?
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pb4uski said:
Not the last time that I looked, but I'll have to check that.
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No, even the single employer perspective has more liabilties than assets. According to the 2017 annual report, the single employer plan has net liabilties of $10.9 billion, an improvement from a $20.6 billion of net liabilities at the end of 2016.

The multi-employer plans had a net liabilities of $65.1 billion at the end of 2017 vs $58.8 billion a year earlier.

See https://www.pbgc.gov/sites/default/files/pbgc-annual-report-2017.pdf , page 58.
 
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I had the exact same choice in 2016. After comparing to buying my own annuity, I decided to go with the pension as it was much better than I could buy. The pension and SS will take care of my living expenses so it takes the worry out of my investments. My genes are good with Dad and Grandfather both living into their 90s. I had a little more fun than them, but should make it to late 80s with any luck. Everything is a gamble, so I went with the best odds of covering my expenses.

VW
 
I had one more thought for the OP, so I'm posting this a little late.

Have you set out your plans for when you'll take SS ? The reason this is relevant to the pension/lump sum decision is that delaying SS is the same thing as buying additional SS annuity. The terms on SS are better than you'll get on a pension annuity. If you want additional annuity payments, the first place to get it is by delaying SS to 70. Then if you want additional annuity you could take the pension instead of the lump sum.

It wouldn't make much sense to start SS before age 70 and also take the pension annuity. The better deal in that case is to take the lump sum and use the money for living expenses while delaying SS.
 
When faced with the decision upon retirement I chose to take the cash. But everyone has their own reasons for deciding what would be best for them.


Since our combined SS and other small pensions take care of all our needs as well as a few wants and since I have always managed my retirement portfolio instead of handing it over to someone else to manage and since I didn't like money evaporating once I die (or what ever arrangement they allow) I took the lump sum and invested it in dividend paying stocks. The annual amount is about 60% of what I would get in an annuity. The dividends are either put in CDs or reinvested. This way the money is available for my wife or children and not lost to the annuity ending.


Now that my wife is taking RMD (mine starts next year) we have exceeded the money necessary for our needs/wants so I don't see an annuity to be of any benefit for us.


Cheers!
 
I had a similar decision a couple years ago. I determined the single premium that would replicate the monthly pension benefit to get what the lump sum should be (annual benefit divided by payout rate). The lump sum was about 75% of that amount, so I passed.

Or put another way, had I accepted the lump sum and bought a joint life annuity the monthly benefits would have been 25% lower than my pension payment... so monthly payments was the better course for me since we have plenty of money invested at risk.
 
I will be in this situation shortly. I have yet to see this mentioned. If I stay with the company pension (University of California in my case), I maintain access to the group medical plan. While it still costs me money, it is less than buying it on the open market. If I take the lump sum, my ties to the company are over, including access to health insurance. As I will be 56 or so, I have a long way til medicare, so this is a factor.
 
sdawson said:
I will be in this situation shortly. I have yet to see this mentioned. If I stay with the company pension (University of California in my case), I maintain access to the group medical plan. While it still costs me money, it is less than buying it on the open market. If I take the lump sum, my ties to the company are over, including access to health insurance. As I will be 56 or so, I have a long way til medicare, so this is a factor.
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That is a major factor. In my case, I am eligible for retiree healthcare benefits no matter which option I take. If I had to take the annuity in order to get the retiree healthcare benefit, it would be a no brainer to take the annuity. It would have to be a pretty bad annuity to make me think otherwise.
 
Just filed my paperwork. I’ve been living off my buy-out this year but I am officially retired starting 2/1/2019. I ended up choosing the pension. It ended up being $2,216 per month with 100% survivor benefit. The lump sum would have been $458K. I think because DW is 5 years older than me, the differences in other survivor benefits (50% or 66.6%) were so close that we just went ahead and chose the 100%.

The main reason for the decision was diversification and a big dose of security. With this pension, which stars paying on 2/1/19, and mine and DW’s SS, we’ll gross about $74K. In today’s dollars, we can live on that. So basically, we have left, $1.5M to cover the time from now to when we start SS (about 4 years), and to cover inflation. All tolled, I felt comfortable we could make that work. The FA said the he preferred the pension versus the lump sum but that either way, DW and I should be fine. I agree and I think the main reason he believes that and the reason I agree is that our budget is still LBYM and I intend to keep it that way. I especially intend on keeping the budget tight for the next 5 years so as to minimize sequence of returns risk. Once we’re both collecting SS, we can re-evaluate our budget.

So that’s that. Come February, I’m officially retired and on a pension. I will have just turned 58 and DW will be almost 63. And we’re off. :)
 
Jerry1 said:
Just filed my paperwork. I’ve been living off my buy-out this year but I am officially retired starting 2/1/2019. I ended up choosing the pension. It ended up being $2,216 per month with 100% survivor benefit. The lump sum would have been $458K. I think because DW is 5 years older than me, the differences in other survivor benefits (50% or 66.6%) were so close that we just went ahead and chose the 100%.

The main reason for the decision was diversification and a big dose of security. With this pension, which stars paying on 2/1/19, and mine and DW’s SS, we’ll gross about $74K. In today’s dollars, we can live on that. So basically, we have left, $1.5M to cover the time from now to when we start SS (about 4 years), and to cover inflation. All tolled, I felt comfortable we could make that work. The FA said the he preferred the pension versus the lump sum but that either way, DW and I should be fine. I agree and I think the main reason he believes that and the reason I agree is that our budget is still LBYM and I intend to keep it that way. I especially intend on keeping the budget tight for the next 5 years so as to minimize sequence of returns risk. Once we’re both collecting SS, we can re-evaluate our budget.

So that’s that. Come February, I’m officially retired and on a pension. I will have just turned 58 and DW will be almost 63. And we’re off. :)
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Congratulations! (Had I been in your shoes, I would have made the same choice.)
 
In my case, my pension annuity looks like this:
$2136/mo
$1837/mo for 100% survivor benefit
For lump sum it I is. $359600

A disadvantage of my annuity is that it is fixed payout, and not COLA. Thus, it's value will shrink over time.
 
I requested paperwork for a 3/1 start date

Specifically looking at the SSLIO, which is a restructured, decreasing, annuity based on lump sum interest rates
 
Jerry1 said:
Just filed my paperwork. I’ve been living off my buy-out this year but I am officially retired starting 2/1/2019. I ended up choosing the pension. It ended up being $2,216 per month with 100% survivor benefit. The lump sum would have been $458K. I think because DW is 5 years older than me, the differences in other survivor benefits (50% or 66.6%) were so close that we just went ahead and chose the 100%.

The main reason for the decision was diversification and a big dose of security. With this pension, which stars paying on 2/1/19, and mine and DW’s SS, we’ll gross about $74K. In today’s dollars, we can live on that. So basically, we have left, $1.5M to cover the time from now to when we start SS (about 4 years), and to cover inflation. All tolled, I felt comfortable we could make that work. The FA said the he preferred the pension versus the lump sum but that either way, DW and I should be fine. I agree and I think the main reason he believes that and the reason I agree is that our budget is still LBYM and I intend to keep it that way. I especially intend on keeping the budget tight for the next 5 years so as to minimize sequence of returns risk. Once we’re both collecting SS, we can re-evaluate our budget.

So that’s that. Come February, I’m officially retired and on a pension. I will have just turned 58 and DW will be almost 63. And we’re off. :)
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Congrats!

I think you made the right choice.

Dave
 
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