Pension v. lump sum: non-financial reasons?

[Big_Hitter]

Quote:

Originally Posted by rodi It eliminates the sequence of return risks (SORR) and provides a nice high floor of income.

that's a big risk in retirement, as are shocks (big medical bills, casualty losses, etc.)

to me, the key is to minimize as many of these risks as possible, which is why one needs a stash to handle the shocks

[ChicagoGal]

Quote:

Originally Posted by Big_Hitter 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

So I sort of ignored this, since it didn't seem to help with the decision. But the relative value information provided was (in summary):

• The interest rate assumption is 0.50% for the first 5 years, 2.38% for years 5 through 19 and 3.17% for years 20 and later.
• Relative value percentages for lump sum and single life annuity were both 100% (relative to the single life annuity).

What am I missing here?

And thanks for the book recommendation. I'll take a look.

[Big_Hitter]

Quote:

Originally Posted by ChicagoGal So I sort of ignored this, since it didn't seem to help with the decision. But the relative value information provided was (in summary): The interest rate assumption is 0.50% for the first 5 years, 2.38% for years 5 through 19 and 3.17% for years 20 and later. Relative value percentages for lump sum and single life annuity were both 100% (relative to the single life annuity). What am I missing here? And thanks for the book recommendation. I'll take a look.

What that means is that if we discount your expected payments based on those interest assumptions over your expected lifetime, according to the statutory mortality table, you get the lump sum amount. Basically what that says is that the lump sum and immediate life annuity are "actuarially equivalent" using those assumptions. Those are the most current rates https://www.irs.gov/retirement-plans...-segment-rates so I'm somewhat shocked (hey, i'm retired) that immediateannuities.com isn't coming up with a closer answer to your annuity - it may be because you are female and annuity providers are allowed to rate on gender, pension plans can't so your lump sum is calculated using a 50% blend of male and female mortality.

You should be able to approximate it by using a 2.5% interest assumption over your finite life expectancy assuming you are half male and half female. I'll have to see if I can find a current table that does two dimensional projection which is what the statutory table is for 2021. This could make my head hurt.

[ChicagoGal]

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Originally Posted by Big_Hitter This could make my head hurt.

Please don't make your head hurt! I would feel awfully guilty

[Big_Hitter]

Quote:

Originally Posted by ChicagoGal Please don't make your head hurt! I would feel awfully guilty

I got the table manager to work but the soa only has really old mortality tables in the database. By the looks of it, my working answer is that the discrepancy with immediateannuities is a combination of whatever interest rates are being used right now (by them) versus December (what your plan uses), and the male mortality used in your lump sum calculation. You are expected to live about 3 years longer than a male your age and the mortality rates right around 58 are almost twice as high for men as for women, at least according to the old table I was using.

Ironically, the case that led to the unisex requirement for lump sum distributions (Norris) had to do with a female retiree arguing that her money purchase plan annuity, which is calculated inversely from a lump sum, was less than that of an equivalent male counterpart. She was told that since she was expected to live longer, the annuity purchased by the same money purchase amount was less. So now women get the short end of the stick converting annuities to lump sums.

[jollystomper]

Another reason I chose the annuity that does not apply to the OP is my spouse. In the likely event that I die first, she will continue to receive it, and along my SS survivors benefits her regular expenses will be covered. That gives her less to worry about with our investments.

If I were in the OP's situation with no spouse and no kids, I might lean towards taking the lump sum, since I would take on more risk for myself that I would not expose to my family.

[Big_Hitter]

Quote:

Originally Posted by jollystomper If I were in the OP's situation with no spouse and no kids, I might lean towards taking the lump sum, since I would take on more risk for myself that I would not expose to my family.

life annuities generally don't stop before you die - lump sums can, and do

[RetireeRobert]

Quote:

Originally Posted by Big_Hitter that's a big risk in retirement, as are shocks (big medical bills, casualty losses, etc.) to me, the key is to minimize as many of these risks as possible, which is why one needs a stash to handle the shocks

The SORR, Sequence of Returns Risk, should NOT be looked at solely in relation to the $852,000 lump or the pension annuity decision. OP stated the lump was only 30% of her "other" retirement assets, which would be approximately $2 million.

That 70% "other" works to trivialize any SORR for the $852,000 lump.

I still recommend the lump for the flexibility and control it offers to OP. Not to mention the potentially much greater long term returns over the years.

[Big_Hitter]

Quote:

Originally Posted by RetireeRobert That 70% "other" works to trivialize any SORR for the $852,000 lump.

eliminating sequence of return risk on 30% of a portfolio isn't immaterial, plus, it appears the annuity is more valuable when modeled

[RetireeRobert]

Quote:

Originally Posted by Big_Hitter eliminating sequence of return risk on 30% of a portfolio isn't immaterial

We do not know what level of income OP is wanting. Maybe she wants something like $60,000 a year. Which could be supplied entirely with a very conservative model from her "other" 70% or $2 million assets, and that $60,000 effectively cola'd to boot. Meaning the $852,000 lump does not need to supply ANY income---which makes SORR on it not only trivial but meaningless.

[Big_Hitter]

Quote:

Originally Posted by RetireeRobert We do not know what level of income OP is wanting. Maybe she wants something like $60,000 a year. Which could be supplied entirely with a very conservative model from her "other" 70% or $2 million assets, and that $60,000 effectively cola'd to boot. Meaning the $852,000 lump does not need to supply ANY income---which makes SORR on it not only trivial but meaningless.

so you would rather roll the dice on a million when it could otherwise be used in that situation to live in comfort with 2 million in the bank? I don't get it

your risk tolerance is inverted

[RetireeRobert]

Quote:

Originally Posted by Big_Hitter so you would rather roll the dice on a million when it could otherwise be used in that situation to live in comfort? I don't get it your risk tolerance is inverted

Well, call my risk tolerance what you will. I retired at age 54 with three kids than ages 7, 11, and 17, and then after FIRE built our dream house and paid cash for it. Still living in it debt free and "quite comfortable", if I say so myself.

[Big_Hitter]

Quote:

Originally Posted by RetireeRobert Well, call my risk tolerance what you will. I retired at age 54 with three kids than ages 7, 11, and 17, and then after FIRE built our dream house and paid cash for it. Still living in it debt free and "quite comfortable", if I say so myself.

congrats - unfortunately, we don't hear those stories from everyone who actively seeks risk

[RetireeRobert]

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Originally Posted by Big_Hitter congrats - unfortunately, we don't hear those stories from everyone who actively seeks risk

There is risk everywhere one looks.

For instance, ChicagoGal may take the pension and "risk" seeing it's non-Cola'd purchasing power shrivel to untenable amounts in 30 years. Whereas with the lump she could stay even with, or most likely, ahead of inflation. With a modicum of investment attention she could grow the lump significantly faster than inflation.

Or she may take the "risk" of that pension amount putting her into an otherwise avoidable extra tax hit year after year. Whereas with the lump, she could turn on and turn off the income from the lump at her will.

Or she may take the "risk" of having that non-growing pension year after year, instead of the lump sum and regretting her decision for the rest of her natural life!

Yes, my friend, perhaps you are the one with an inverted risk tolerance.

[Big_Hitter]

Quote:

Originally Posted by RetireeRobert Yes, my friend, perhaps you are the one with an inverted risk tolerance.

those are all good points, I just try to eliminate as many financial risks as possible in retirement, not create them - that's called being risk averse, which is prevalent

matching fixed income streams with fixed expense flows in retirement is one way to make it work, but everyone has his or her own coefficient of risk

[RetireeRobert]

Quote:

Originally Posted by Big_Hitter matching fixed income streams with fixed expense flows in retirement is one way to make it work,

And could not ChicagoGal create her own "fixed income" stream from her lump of $852,000? To match her expense flows?

OR from her other retirement assets of about $2 million?

OR a combination thereof?

While still retaining the flexibility to "turn off" some of that income stream to manage her tax situation, or when she just realizes she does not need "so much" income in any given year? With the pension she is "forced" to take the income regardless--meanwhile losing ground to inflation.

She is in an enviable position, regardless, to have such a "nice" choice to make!!

[DayDreaming]

I spent a few years waving between lump sum vs monthly annuity. But recently I took the plunge and started taking my pension as a monthly annuity.

I'm single, healthy, no heirs to leave my money to. My savings are more than enough for me to live on, even without pension or social security. My pension is enough for me to live on even without any other savings. The pension is well funded, but non-COLA, so I realize that years down the road it won't be enough to cover my expenses, but until then, I won't need to touch my savings at all, so those savings will grow even faster for a while. That helped me to decide on the pension as a monthly annuity. I find it very comforting to have the pension payment appear in my checking account each month. And if the market crashes, I still don't have too much to worry about. If I had taken the lump sum option, I'd probably still be okay, but I'd really be sweating out an big dips in the market.

In short, I like the 3-legged stool of pension, savings & social security.

[gamboolman]

We just retired effective 1-Feb-21.

We took the Lump Sum from megaoil corp.

The Pension was/is NCOLA and that was the deciding factor in taking Lump Sum.

We are scared of inflation over potential 30 to 40 year retirement.

And while not a driving motive - we hope that we can leave some monies for #1 Daughter, and hopefully some grand babies, when the time comes for ms gamboolgal and I to cross the Jordan...

And finally, on a purely personal basis - I have lost confidence in the Sr. Mgt of megaoil corp and do not trust them for the potential time frame of retirement - if we had elected to take the Pension......but admittedly this may be the onset of " Mean Old Man " retirement syndrome and me telling all the youngsters how we "used to do it".....back in the "old days" ha......

gamboolman.....

Lifes A Dance And You Learn As You Go....

[Big_Hitter]

Quote:

Originally Posted by gamboolman We are scared of inflation over potential 30 to 40 year retirement.

so was my dad when he retired from Hess in 92 - he took the 100J&S and my mom is still getting that check

[RetireeRobert]

Would be interesting to hear from the OP ChicagoGal, what her final decision was, and the decisive factors for her final decision whatever it was. As I recall, today was the day her decision was due. And however it went, congratulations ChicagoGal!