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Old 03-11-2021, 08:21 AM   #21
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Well, so far you guys are articulating the exact debate I've been having with myself for the past many weeks! I will add the following:
  • Per I-ORP, the break even point for me would be age 90. At that point, both options come up with the same spending level. Prior to that, the lump sum is favorable, after that, the pension is favorable.
  • I'm planning to age 100 as a "just in case". There is longevity in my family (3 out of 4 grandparents lived well into their 90s). In my case, though, I really don't think I'll live that long given my health situation (although it's improving). And with whatever medical advances happen over the next few decades, I suppose it's anyone's guess.
  • I have zero concerns about the viability of the company to continue payments for my lifetime. It is a large, well-established, risk-averse financial institution. And I have read the annual pension summary; it looks to be very well funded.
  • SS will cover about half of my expenses, but that's still about 12 years away. It's that 12 years that would make taking the pension annuity more attractive (for steady income/peace of mind), but I'm not sure that's enough to offset my feeling that I could do better financially with the lump sum.

A great dilemma to have, for sure! I think I'm leaning toward rolling the lump sum into an IRA along with my 401(k) and doing conversions from there. Definitely more work than having the payment just come to me, but I'll have plenty of time to figure that all out now! But I'll also probably change my mind a few dozen times between now and tomorrow, when the retirement consultant will call to get my decision
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Old 03-11-2021, 08:26 AM   #22
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Quote:
Originally Posted by ChicagoGal View Post
I have to make a decision on Friday for my pension benefit. I have two choices:

Lump sum: $852K
Single life annuity: $3,797/month ($45.6K/annual)

Immediateannuities.com estimates a $3,385/month payout for that lump sum, which indicates that the annuity is a better choice, financially.

I'm 58 now, and for the sake of modeling, planning to age 100. No spouse, no kids. It does concern me that the non-COLA annuity will be worth significantly less in 40 years. On the other hand, having some level of guaranteed income now is a hedge against SORR. The pension is about 30% of my total retirement savings. I'm not planning to take social security until at least 67 and probably 70.

The financial planner I used recommended the lump sum in order to do more Roth conversions pre-SS. But then again, she was using 5.95% estimated portfolio returns, which seems high to me in this environment.

What other considerations would you look at in making this decision?
The FP recommended the lump sum because she or her firm earn their fees based on AUM and the lump sump provides more AUM and therefore more fees.

Your health is a key consideration... if you are healthy then it favors the pension, if not then the lump sum.

We faced this decision a few years ago, smaller numbers, but took the pension to have better diversification of income sources and it was a better value than the lump sum based on SPIA pricing at the time. The pension currently provides for ~18% of our spending but that will diminish over time due to inflation.

The breakeven point for your situation is 18-19 years. If you live long you would need to get a nominal return of 4.4% or more to "beat" the pension. You could opt to take the lump sum, transfer it to an IRA and invest it in Wellesley and then set up an automatic transfer of $3,797/month to your checking account and take your chances.
AgeNCash flowIRR
580-852,000 
59145,564 
60245,564 
61345,564 
62445,564 
63545,564 
64645,564 
65745,564 
66845,564 
67945,564 
681045,564 
691145,564 
701245,564 
711345,564 
721445,564 
731545,564 
741645,564 
751745,564 
761845,564 
771945,5640.2%
782045,5640.6%
792145,5641.1%
802245,5641.5%
812345,5641.8%
822445,5642.1%
832545,5642.4%
842645,5642.6%
852745,5642.8%
862845,5643.0%
872945,5643.2%
883045,5643.4%
893145,5643.5%
903245,5643.6%
913345,5643.8%
923445,5643.9%
933545,5644.0%
943645,5644.1%
953745,5644.2%
963845,5644.2%
973945,5644.3%
984045,5644.4%
994145,5644.5%
1004245,5644.5%
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Old 03-11-2021, 10:21 AM   #23
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Originally Posted by pb4uski View Post
Sounds to me like the plan is giving you an annuity benefit that is worth $956k in terms of today's annuity pricing in exchange for $852k.... I'd take the pension benefit.
agreed - ceteris paribus
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Old 03-11-2021, 10:24 AM   #24
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Your health is a key consideration... if you are healthy then it favors the pension, if not then the lump sum.
yes, important point

nice breakeven worksheets too
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Old 03-11-2021, 10:25 AM   #25
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I have to make a decision on Friday for my pension benefit. I have two choices:

Lump sum: $852K
Single life annuity: $3,797/month ($45.6K/annual)
Don't you have a third choice? Can't you defer the annuity? If so, will deferring increase the annuity or is it fully subsidized?

If this is a tax-qualified corporate plan, they have to give you the right to defer if you are under NRA and it should be stated in your election packet.
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Old 03-11-2021, 12:23 PM   #26
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Originally Posted by Big_Hitter View Post
Don't you have a third choice? Can't you defer the annuity? If so, will deferring increase the annuity or is it fully subsidized?

If this is a tax-qualified corporate plan, they have to give you the right to defer if you are under NRA and it should be stated in your election packet.
Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).
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Old 03-11-2021, 02:25 PM   #27
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Since you don't have any direct heirs, that takes one of the more compelling reasons to opt for the lump sum off of the table. You mention that the pension is non-COLA'd, which is pretty common in the private sector, but you might want to read some of the threads here that discuss long-term spending trends as they relate to inflation. There's a fair amount of opinion that our spending will elevate initially in retirement, and then reach a plateau (healthcare being a wildcard), so assuming that your spending is going to increase by 3% or something indefinitely may not be accurate.

We are very similar in age and circumstances. I'm firmly in the 3-legged stool camp. I will have a non-COLA'd pension from megacorp that I can live on. I do have a second, smaller civil service pension that I can start at 62 which has a fixed 3% COLA, and I will have Soc Sec from my private sector working life. Since I can live on my annuity income streams, I view my portfolio as my hedge against inflation and insurance against other risks. Note that I will draw about $25k per year from my portfolio until I reach 62 and can start the civil service pension. I see no reason to try to achieve maximum wealth. Heck, I'm already struggling to decide which charities will get my money!

My plan fits my conservative financial behavior. In other words, it will let me sleep comfortably (once I replace my current mattress.) Only you can decide which route will lead to the most restful nights for you.
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Old 03-11-2021, 02:39 PM   #28
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I like the three legged stool plan--SS, pension, investments.
Our pension and SS cover our budget+.
However, our pensions are small COLA with 2% max.
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Old 03-11-2021, 04:14 PM   #29
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Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).

I don't know but a 20% increase for the annuity(from $3757 to $4556 /month) or a 11% increase in lump sum (from 852k to 946k) seems like it would be worth waiting a little over 3 years for.
@ a 2%/year inflation rate you would preserve your spending power for 9 1/2 years (6 1/2 years beyond the 3 year wait)by delaying the annuity.
By delaying the lump sum the benefit of delaying seems less and in fact you could take the 852k and if you can get 3.5% a year for the next 3 years you'd get the same 946k.
Though those lump sums always look impressive, if I were single I think I'd wait 3 more years and defer the annuity for the 20% increase in monthly benefit and take the annuity.
Also consider yourself lucky for even having the option.
When we went thru this a few months ago for DW's pension she had no lump sum option at all.
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Old 03-11-2021, 04:43 PM   #30
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I think of the pension as a bond replacement of sorts, and therefore it allows a person to be a little more aggressive if they want to with the rest of their assets. In addition it keeps some people from panicking when the market goes south as they still have a pension to pay part of the bills.

In addition interest rates are low so you're alternative for a low risk investment is bonds right now and that is not very attractive.

A pension also easy the worries about spending money early in retirement as you know the check will be in the mail.

Either way it will work out nicely.
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Old 03-11-2021, 05:00 PM   #31
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With no immediate heirs to consider, and another +/-$2million in assets, either decision will work out fine.

You are faced with a choice between "the right" decision, and a fairly reasonable sub-optimal one.

Unless you know your date of death, you don't know which one is which.

No bad options (unless you take the lump sum and go to Vegas, that would be a bad decision)
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Old 03-11-2021, 05:16 PM   #32
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Originally Posted by ChicagoGal View Post
Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).
I would either spend the time to investigate on your own, or hire a fee only financial planner to thoroughly evaluate the terms for deferring. It could be very significant. I know for my own case, deferring is a no-brainer, not just a rounding error. Depending on how your pension is structured, the following advantages might exist:
1 Guaranteed interest rate credits well above current market interest. My pension is 5%/yr minimum with no principal fluctuations
2 Calculation of annuity using future interest rates at the time the annuity starts - interest rates could significantly rise in the next decade resulting in a much larger annuity.
3 While deferred, Pension value remains as part of your estate until/unless annuitized
4 Lowering income while deferred , increasing space for low tax rate Roth conversions.
5. Having better clarity on your potential longevity when eventually making the lump sum / pension choice

It could be a big error to not defer, depending on your pensions terms and your financial plans.
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Old 03-11-2021, 05:17 PM   #33
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....... You could opt to take the lump sum, transfer it to an IRA and invest it in Wellesley and then set up an automatic transfer of $3,797/month to your checking account and take your chances.
AgeNCash flowIRR
580-852,000 
59145,564 
60245,564 
61345,564 
62445,564 
63545,564 
64645,564 
65745,564 
66845,564 
67945,564 
681045,564 
691145,564 
701245,564 
711345,564 
721445,564 
731545,564 
741645,564 
751745,564 
761845,564 
771945,5640.2%
782045,5640.6%
792145,5641.1%
802245,5641.5%
812345,5641.8%
822445,5642.1%
832545,5642.4%
842645,5642.6%
852745,5642.8%
862845,5643.0%
872945,5643.2%
883045,5643.4%
893145,5643.5%
903245,5643.6%
913345,5643.8%
923445,5643.9%
933545,5644.0%
943645,5644.1%
953745,5644.2%
963845,5644.2%
973945,5644.3%
984045,5644.4%
994145,5644.5%
1004245,5644.5%


+1 With, I assume, about $2 million other retirement assets which you mentioned, your level of sleeping comfort with income from the lump of $852,000 does not need to be as great as otherwise.

As the other poster quoted above suggested, take the lump, roll it to an IRA, then set up an automatic payment to yourself of $3797 a month. Other poster kindly provided a projection for doing that to age 100. Which looks entirely achievable to me. In the meantime, the money is yours, it is under your control. Consider this your "third leg" of a three legged stool.

But in the event you "do not need" income off of that lump, then "you can turn it off" at your discretion. By so doing you can somewhat control your tax situation, maybe save some tax bucks on Social Security after you start SS. Also allows flexibility to grow the lump, to adjust your risk in investing it, when you do not need the income from it.

In short, the lump gives you so much more flexibility to adapt to changing circumstances, all while allowing you to sleep at night. In fact that flexibility may "improve" your level of sleep comfort!

I'd suggest, take the lump. Congratulations on being in such an enviable position. Best wishes to you.
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Old 03-11-2021, 06:30 PM   #34
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I don't know but a 20% increase for the annuity(from $3757 to $4556 /month) or a 11% increase in lump sum (from 852k to 946k) seems like it would be worth waiting a little over 3 years for.
@ a 2%/year inflation rate you would preserve your spending power for 9 1/2 years (6 1/2 years beyond the 3 year wait)by delaying the annuity.
By delaying the lump sum the benefit of delaying seems less and in fact you could take the 852k and if you can get 3.5% a year for the next 3 years you'd get the same 946k.
Though those lump sums always look impressive, if I were single I think I'd wait 3 more years and defer the annuity for the 20% increase in monthly benefit and take the annuity.
Also consider yourself lucky for even having the option.
When we went thru this a few months ago for DW's pension she had no lump sum option at all.
minimum corporate lump sums are based on mortality tables and interest rate provisions that can change at any time. Please refer to the changes in 417e made by GATT in 1995
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Old 03-11-2021, 06:41 PM   #35
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Good question. Yes, there is the option of deferring until "at least Normal Retirement Date" (per the pension package). I can't use the internal tool to calculate amounts any more because my retirement is being processed. However, when I did a number of calculations prior to announcing, it did increase up until my birthday in 2024 (age 62). Pension annuity was 20% higher (increasing at about 0.5% per month delayed), lump sum was 11% higher (increasing at about 0.3% per month delayed). Note these are estimates and not guarantees, of course.

Makes very little difference in I-ORP for the delay (up $1K/year for the annuity, down $1K/year for the lump sum).
I don't have my software to determine if a 6% reduction per year is actuarially equivalent to a "current" interest rate and mortality table - I've been so retired I haven't even bothered to download any free actuarial excel addins to my desktop. I may get bored and look at that early retirement reduction factor reduction later. It sounds like you have enough age/service to get your full pension at 62, rather than 65 or your plan's NRD is 62 (which I doubt).

anyway - at least you looked at it - a few more tips:

1) there should be a "relative value disclosure" in your packet - please read it and post any questions; I'll be happy to answer them if I'm online

2) I would run multiple scenarios using various rates of return and different ends to your retirement as people don't pass at a finite, particular "life expectancy" - we are constantly hit with a force of mortality that increases as we age, sometimes it hits us hard enough to end retirement.

3) I would read this if you have time, Steve does a really good job of explaining this stuff to non-actuaries https://www.amazon.com/Money-Life-Li.../dp/0985384603

good luck!
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Old 03-11-2021, 06:45 PM   #36
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I think of the pension as a bond replacement of sorts, and therefore it allows a person to be a little more aggressive if they want to with the rest of their assets. In addition it keeps some people from panicking when the market goes south as they still have a pension to pay part of the bills.

In addition interest rates are low so you're alternative for a low risk investment is bonds right now and that is not very attractive.

A pension also easy the worries about spending money early in retirement as you know the check will be in the mail.

Either way it will work out nicely.
all great points

for me, it's all about balancing out my expected cash flows - I like to have most of my fixed expenses covered by a combination of a pension, qualified dividends and tax-exempt interest income
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Old 03-11-2021, 06:48 PM   #37
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Unless you know your date of death, you don't know which one is which.
agreed, but one should be told if one is clearly getting fleeced - that's what the "relative value" disclosure is supposed to do
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Old 03-11-2021, 06:52 PM   #38
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I'd take the dough "rollover IRA" and invest it.
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Old 03-11-2021, 06:54 PM   #39
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Add me to the fan-club for the 3 legged stool.

My situation was quite different. Two very small non-cola pensions. Lump sum value was not a great deal. I kept the pensions and they cover some of the monthly bills (utilities, cell phones, cable.) So my 3 legged stool is tilted... but it *does* have the third leg of pension to add to the other legs of SS and Savings.

If it were me (which it's not) I would keep the annuity. It eliminates the sequence of return risks (SORR) and provides a nice high floor of income.
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Old 03-11-2021, 06:54 PM   #40
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Since you don't have any direct heirs, that takes one of the more compelling reasons to opt for the lump sum off of the table. You mention that the pension is non-COLA'd, which is pretty common in the private sector, but you might want to read some of the threads here that discuss long-term spending trends as they relate to inflation. There's a fair amount of opinion that our spending will elevate initially in retirement, and then reach a plateau (healthcare being a wildcard), so assuming that your spending is going to increase by 3% or something indefinitely may not be accurate.

We are very similar in age and circumstances. I'm firmly in the 3-legged stool camp. I will have a non-COLA'd pension from megacorp that I can live on. I do have a second, smaller civil service pension that I can start at 62 which has a fixed 3% COLA, and I will have Soc Sec from my private sector working life. Since I can live on my annuity income streams, I view my portfolio as my hedge against inflation and insurance against other risks. Note that I will draw about $25k per year from my portfolio until I reach 62 and can start the civil service pension. I see no reason to try to achieve maximum wealth. Heck, I'm already struggling to decide which charities will get my money!

My plan fits my conservative financial behavior. In other words, it will let me sleep comfortably (once I replace my current mattress.) Only you can decide which route will lead to the most restful nights for you.
solid thoughts - the observed decrease in spending is called the "retirement smile" https://retirementresearcher.com/ret...pending-smile/
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