Lump Sum Vs. Monthly Pension

[verizon1990]

If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?

A) Lump Sum of $680,000
B) Monthly Pension of $2200

 

[gauss]

How secure should we assume the monthly pension is?

 

[verizon1990]

A Verizon pension. Pretty secure (as of now) It is funded at 90%.

 

[Whisper66]

https://www.calculatorsoup.com/calculators/financial/present-value-annuity-calculator.php

Determine the present value of the annuity using online calculators such as above. Vary assumptions to meet your comfort zone. I’d probably take the lump sum and invest it ... that’s what I did when I retired. Our annuity was quite reasonable vs the lump sum (IMO) but it wasn’t adjusted for inflation and I couldn’t leave any of it for our kids when I died. Long term investor so that’s well within my comfort zone.

 

[njhowie]

$2200/month with $680,000 principal comes to an annual withdrawal rate of about 3.88%. If you could generate 3.88% annually, when you pass on, you'd still have the $680,000, whereas you'd have nothing from the pension. There's also the possibility that you pass early, possibly even before the breakeven point at about 76 years old.

Also, do they include annual COLA adjustment or is it just $2200/month until you expire?

 

[SenorDave]

I'd be inclined to say, it depends.

How comfortable are you with managing your investments?
What is your tolerance for risk?
Will the $2,200 per month be sufficient for your retirement plan?

Answers to those questions will probably guide you to your answer.

 

[statsman]

If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?

A) Lump Sum of $680,000
B) Monthly Pension of $2200

Nice lump sum. If the pension starts at 50 instead of the typical 55+, that makes it tougher to decide.

When I was offered a pension buyout, I was offered $249,000 for a pension (50% survivor) that paid out $2,300+/mo starting at age 55 (maxing at $2,600 by age 60). The buyout would have been paid at age 53.

As you might imagine, I took the pension. If I had been offered at least $400,000, I would have taken the lump sum, even if the pension was still more attractive, for reasons stated by @njhowie. Then again, we had cash on hand to balance out not having the monthly pension.

 

[gauss]

If we can assume you have no other savings or equity and can retire at 50, which option would you suggest?

A) Lump Sum of $680,000
B) Monthly Pension of $2200

Given those assumptions, I would say take the pension.

The folks I know who had good corporate jobs and are now near poverty in retirement all cashed in their pensions for lump sums.

I think they were not very financially sophisticated and let financial advisors do what they wanted with the money because they thought the advisors knew best.

-gauss

 

[badatmath]

I would advise a person with nothing else to take a pension. Not sure they have the ability to invest on their own if that is the ONLY thing they have. But will you (eventually) get Social Secuirty? Married? Kids? Lot of considerations.

 

[CRLLS]

Immediateannuities.com says $2,340 per mo for joint life at age 50.

In Illinois, pensions are not taxed. I am not sure about annuities. Something to consider. I would check how your state taxes the two.

 

[rk911]

what happens to the pension when you cast off the mortal shell? if it disappears then it's a no brainer...take the lump sum. i myself might take the lump sum anyway as you can likely get a better ROI.

 

[jollystomper]

If you have no other savings, are willing to put the bulk of it into equities, and are disciplined enough to not panic when the market acts as it has during the pandemic, the lump sum would be a better choice.


edited to add: The pension ending when you die would also be a reason to consider the ump sum.

 

[lauradrops]

My husband (retired Verizon guy) and I had to make that choice in 2010. We took the lump sum, rolled it over into the market and pretty much haven't touched it since. (excluding a small 72t we were forced to take to show income for a small mortgage) We will probably start tapping into it when he is 61 or 62.
He was 48 and the pension was just around 30k. It was a no brainer for us and has grown very well. We can easily generate the pension amount at around 2% and still not get into the principal.
We also know other guys who blew through the money and would have been better off with the pension.
I think the answer financially is take the lump sum, but only if you're a person who is disciplined and can tolerate some volatility. If you can't be both of those things, then take the pension.
Also look into your retiree medical insurance and see what it will cost you. The guys who retired in 2010 were some of the last ones to retire with fully paid for medical, dental and vision coverage. Not sure how much they have to contribute now.
Best of luck!!

 

[SevenUp]

I think the answer financially is take the lump sum, but only if you're a person who is disciplined and can tolerate some volatility. If you can't be both of those things, then take the pension.

+1

Unless the OP expects to fall in the top left section of the chart below, the lump sum - if properly invested and managed - is highly likely to be the better choice.

See row 101, etc., in the case study spreadsheet to verify.

 

[racy]

Like others have said, I think it depends on whether or not you can manage the lump sum. If you enjoy personal finance, can invest wisely, keeping cost low (e.g. Vanguard, Schwab or Fidelity) and control spending then take the lump.
If don't enjoy personal finance and plan on hooking up with Edward Jones then take the monthly payments.

 

[CyPlainsDrifter]

For me this would be an easy pick -- lump sump without a doubt. Roll it to an IRA, select something in the stable value investments area that traditionally gets in the 4-6% range and take the same withdrawals as the pension would have given you.

 

[Big_Hitter]

The folks I know who had good corporate jobs and are now near poverty in retirement all cashed in their pensions for lump sums.


-gauss

corporate pension plans that allow for unlimited lump sums have very high take rates; that's one reason why there is a positive correlation between lump sum distributions and poverty, as I've posted before

the OP needs to make a personal decision, and we must assume that the $2200 a month is an annuity equivalent of $660,000, whether a deferred or immediate - OP what is the "relative value" of the lump sum to the immediate annuity - is that annuity for your life only or a joint and survivor pension with your spouse? Is the $2200 a month, immediate or deferred? I assume immediate.

 

[Chuckanut]

corporate pension plans that allow for unlimited lump sums have very high take rates; that's one reason why there is a positive correlation between lump sum distributions and poverty, as I've posted before

Is that because the lump sum was not reflective of the actual value of the pension? Or did the lump sum folk give into the temptation to spend the money on things like a new boat, motor home, fancier liquor cabinet with fancier liquor, etc?

Or, perhaps, both?

 

[Big_Hitter]

Is that because the lump sum was not reflective of the actual value of the pension? Or did the lump sum folk give into the temptation to spend the money on things like a new boat, motor home, fancier liquor cabinet with fancier liquor, etc?

Or, perhaps, both?

I believe it is due to mortality salience

no one wants to think about his or her own death although we all die - taking the lump sum avoids it

https://www.plansponsor.com/thought...ing amount stays with the financial company.”

 

[Big_Hitter]

Is that because the lump sum was not reflective of the actual value of the pension? Or did the lump sum folk give into the temptation to spend the money on things like a new boat, motor home, fancier liquor cabinet with fancier liquor, etc?

Or, perhaps, both?

https://www.early-retirement.org/fo...-retirees-tend-to-choose-lump-sums-82584.html

 

[rodi]

Repeating the question asked earlier - IS THIS PENSION INFLATION ADJUSTED?

That makes a big difference.

When I had to make the decision on my micro pensions - my NON cola'd pensions would have taken about 130% of the lump sum offer to buy a replacement SPIA.

Also - are you single. That makes a difference because you can choose a percentage of the pension to go to a surviving spouse.

Assuming single, no COLA, you could take the 680k and roll it into a SPIA and get $2434/month... (I used immediateannuity.com)

I'm a fan of the 3 legged stool approach to retirement: 1) SS, 2) savings, 3) pension...

With 3 legs you have more security if something impacts one of the legs... (SS reductions, market crash, pension goes belly up)... Your eggs are in 3 baskets. I have 2 solid legs, and a small third leg - so my 3 legged stool is a bit tilted. LOL.

I used immediateannuities.com to look it up.

If the pension is inflation adjusted

 

[Teacher Terry]

Pension

 

[brett]

We took the view that this decision was part of a larger retirement finance question that revolved around asset allocation.

I do not think that there is any one right answer. Far too many variables-financial, health, personality, etc.

 

[MarkiePippo]

I am about to start my pension. I did not get the offer of a lump sum. Since I am a widow I would have taken the lump sum. The pension goes away when I die. If you are married it is more of a ponder.

 

[Big_Hitter]

Repeating the question asked earlier - IS THIS PENSION INFLATION ADJUSTED?

magic 8 ball says "HIGHLY UNLIKELY"