Lump Sum vs Annuity

^ It's a great tool if you know when you are going to die and exactly how much you will earn year after year on your lump sum amount.

All it's doing is calculating the pv of the payment stream (based on user inputs) and comparing it to the lump sum.
 
Which is better: Cash up front or payments over time?

Here's how easy it was for me.

I plugged in the lump sum amount.

Next was the % return on investment. I started out small, then worked my way up. This was an IMPORTANT variable for me. I had to know this in order to answer the lump sum vs payments question.

Next was compounding frequency. I chose 'Annual' since I hopefully have a very long time horizon.

Next was Annual payment. Plugged in the annual pmt from pension plan.

Next I entered Zero since my pension has no COLA.

Next plugged in the number of years between now and my end of life estimated age. I used 29 years.

In the graph, when the green and red bars are equal or nearly equal, then you know the rate of return % it would take for your Lump Sum, when invested, WITH you taking annual withdrawals, with your money lasting only until end of life.

For me the rate of return was 11.5%. This was too high of a rate for me to take a chance that I could average this between now and death while receiving a "regular paycheck".

Under Explanation of Results you get the following recommendations. Either:

You would be better off receiving payments as the value today of your discounted payments today is $----- compared to $------ up front.

OR

You would be better off taking a lump sum today as the value today of your discounted payments is $----- compared to $----- up front.



Valuable tool to use for this decision? Yes.


"It's a great tool if you know when you are going to die and exactly how much you will earn year after year on your lump sum amount."
A: Yes, these are 2 of the variables involved. Calculators help you with your what-if questions by allowing you to adjust the variables. Don't you understand this?

For me the rate of return was THE important variable. Yes, end of life age is truly an unknown. Who knows the answer to this question? Next to no one. I used age 95 in mine and am happy with that choice.

"All it's doing is calculating the pv of the payment stream (based on user inputs) and comparing it to the lump sum."
A: Yes! That's the math that's required to reach a decision on this question. Wow!

Jeez! Comments like yours may keep people from trying this tool and other tools like it. I would hate for people to not try them based upon your comments. People often need help with making this decision... it's an important decision. People.... please ignore this guy and try the tool! It (and others like it) will help you.

It's a difficult decision to make for many. A tool like this one helps to easily answer some questions. You can what-if with it. This is EXACTLY WHAT I NEEDED AND MANY OTHER NEED when working through the variables.



Enjoy the tool. I didn't write it, but was sure glad that someone had and made it available free of charge for what-if variable testing to help with this decision.
 
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Happily Retired said:
In the graph, when the green and red bars are equal or nearly equal, then you know the rate of return % it would take for your Lump Sum, when invested, WITH you taking annual withdrawals, with your money lasting only until end of life.

For me the rate of return was 11.5%. This was too high of a rate for me to take a chance that I could average this between now and death while receiving a "regular paycheck".

For me the rate of return was THE important variable. Yes, end of life age is truly an unknown. Who knows the answer to this question? Next to no one. I used age 95 in mine and am happy with that choice.

It's a difficult decision to make for many. A tool like this one helps to easily answer some questions. You can what-if with it. This is EXACTLY WHAT I NEEDED AND MANY OTHER NEED when working through the variables.
Click to expand...
That's too much trial and error just to figure out the rate based on life expectancy.

Excel's IRR function actually works better for figuring out the breakeven point between lump-sum and annuity. That's what I use to figure where the breakeven point is for SPIA to see whether they're even worth considering. :)
 
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tcaron20 said:
Very interesting. My numbers are almost identical but I am 62 and working in new position without any retirement options.
Currently have a $34,000 with survivor benefits also but the lump sum number is $602,000 currently. The new CCBR 2016 lump sum calculation is based on this August, September and Octobers numbers. The lower they go, the higher the lump sum. Current direction favors waiting to take it in 2016.

I am surprised that your lump sum is so low. Maybe based on age?

I am favoring a lump sum since there is no pension COLA and a premature death of me or my spouse results in the pension balance going back to my employer as a credit and not to my survivors.

Just me 2 cents. Oh wait, just checked my portfolio, it is now 1.5 cents!










Sent from my iPad using Early Retirement Forum
Click to expand...

I just went through this and my lump sum / annuity ratio is much closer to OP's than to yours. Also, the lump sum offer and annuity payment are almost exactly equal to what's available from immediateannuities.com or Fidelity for a single life annuity. The kicker for me was that my Megacorp subsidizes the survivor benefit so it is much much less expensive than what I could obtain elsewhere. My pension documents include a relative value calculation and the Lump Sum calculates to 105%, the Surviving Spouse Coverage is 104%. The Baseline relative value is the Single Life Annuty = 100%.

I do believe taking the Lump Sum now and holding it to purchase an annuity after interest rates rise would be the most bang for the buck, but I took the Megacorp annuity for peace of mind among other reasons.
 
You are being suckered into the annuity with the fixed payment that seems high now, but down the line it will put you in poverty.
 
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Just recently I received from benefits calculations for my pension options. Corporation I retired from added lump sum option to our benefits. I have option to take lump sum or annuity at 55, or higher payout lump sum or annuity at 60. I entered those numbers into calculator and in both cases I am better off to take annuity. I used 3% return, and 0 annual increases.
Thank you for posting link to this calculator. Very helpful tool.
 
Big_Hitter said:
actually lump sum distributions cause poverty - I started another thread on that topic


The Transition from Defined Benefit to Defined Contribution Pensions: Does It Influence Elderly Poverty? | Center for Retirement Research
Click to expand...
Yes, we had a good discussion, here's the thread. It might be true that lump sum distributions are associated with poverty (when compared to a monthly check), but this poorly done study does a crummy job of indicating there's an association, much less causation.
 
It really doesn't matter what the influence of the transition of DB to DC pensions have on elderly poverty because, like it or not, DB pensions are going the way of the do-do bird. Companies don't want to take the investment risk.

I have both DB and DC and I actually prefer the DC plan I had but I'm probably more risk accepting than most people.
 
It is true that DB plans are disappearing; but annuitization of a portion of ones nest egg may immunize some retirees from panic and other financial mistakes while providing longevity insurance. I don't ascribe to the apparent general opinion of this forum that all annuities are bad. I think there is a place for SPIA is many retirees' plans.
 
robertf57 said:
It is true that DB plans are disappearing; but annuitization of a portion of ones nest egg may immunize some retirees from panic and other financial mistakes while providing longevity insurance. I don't ascribe to the apparent general opinion of this forum that all annuities are bad. I think there is a place for SPIA is many retirees' plans.
Click to expand...
+1. Particularly so if the retiree is likely to blow through the lump sum quickly if left to their own devices.
 
I posted this on another thread recently. Not good news about the future of Lump Sum Payout options, or (eventually) Traditional Pensions. Could see corporations moving further away from Traditional Pensions with stricter regulations in place.

Treasury Curtails Lump Sum Pension Payouts

Edited to remove link to Pension Retirement Ctr as I could no longer find the reference link on their front page regarding this issue.
 
Last edited:
emerytura said:
Just recently I received from benefits calculations for my pension options. Corporation I retired from added lump sum option to our benefits. I have option to take lump sum or annuity at 55, or higher payout lump sum or annuity at 60. I entered those numbers into calculator and in both cases I am better off to take annuity. I used 3% return, and 0 annual increases.
Thank you for posting link to this calculator. Very helpful tool.
Click to expand...
You will only be "better off" in the short term with an annuity. But eventually you'll be living in poverty with an annuity. It's the only guarantee you get with an annuity -- inflation eats away at the fixed payment rate. As far as ROI the annuity will wind up paying between 0% and 3% if you're lucky. Not good for beneficiaries.
 
Still on the fence about the lump sum or monthly payments. I agree with the piece of mind benefit with the payments but do not like the fact that there is no COLI. The longer I wait, the higher interest rates will go reducing the lump sum amount.

Fixed Indexed Annuities look interesting but I do not like the indexes, bogus Ins. Company forecasts in their marketing materials and the 10 year wait period. Basically they are just giving you back your own money for about 15 - 20 years.

Can anyone here convince me that these annuities are a goof deal? I see too many variables with forecasts that are too rosey.

Tom C


Sent from my iPad using Early Retirement Forum
 
ETFs_Rule said:
You are being suckered into the annuity with the fixed payment that seems high now, but down the line it will put you in poverty.
Click to expand...

People need to do the maths and see if the annuity is good value for money given your circumstances. Right now a lump sum payout might be good value because interest rates are so low......and obviously the payments from a commercially available annuity will also be low. However, if we are talking about DB pensions there might still be some good deals available. Also videos like the one above make no distinction between annuity products and assume that putting all your eggs into the "market basket" is going to be the best in all scenarios and circumstances. It also ignores differing financial personalities and the possibility that some people might like to trade potential returns for a lower guaranteed return and stable income. There are obviously many annuities that are really bad value for money and should be avoided in basically all circumstances, but you need to do the calculations and think about your required income stream and make a considered choice rather than just rejecting all annuities.

Personally I just took a lump sum from a company pension plan because the implied interest rate was 5% and I already have sufficient pension/annuity type income at better rates. This is because I have the opportunity to buy into another employer's DB plan for $263k and it will give me a $19.5k annual payment starting at age 55 (I'm 54 now) with a 2% annual COLA. I'd be an idiot not to buy into this as if I have an average lifespan the internal rate of return is 8.4%.

Is there anyone who wouldn't use part of their portfolio to buy into an annuity that has an internal interest rate of 8.4% assuming you live an average lifespan?
 
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tcaron20 said:
Still on the fence about the lump sum or monthly payments. I agree with the piece of mind benefit with the payments but do not like the fact that there is no COLI. The longer I wait, the higher interest rates will go reducing the lump sum amount.

Fixed Indexed Annuities look interesting but I do not like the indexes, bogus Ins. Company forecasts in their marketing materials and the 10 year wait period. Basically they are just giving you back your own money for about 15 - 20 years.

Can anyone here convince me that these annuities are a goof deal? I see too many variables with forecasts that are too rosey.

Tom C


Sent from my iPad using Early Retirement Forum
Click to expand...

I'd have a hard time buying a fixed lifetime annuity now because you'd lock in historically low rates and I would never buy an indexed annuity because of their expense and complexity.

You might consider a fixed term annuity, but I wouldn't want to invest a lot in one and would do it to guarantee income rather than see any substantial growth. In fact forget about annuities as investments, they are really insurance.
 
Last edited:
tcaron20 said:
Still on the fence about the lump sum or monthly payments. I agree with the piece of mind benefit with the payments but do not like the fact that there is no COLI. The longer I wait, the higher interest rates will go reducing the lump sum amount.

Fixed Indexed Annuities look interesting but I do not like the indexes, bogus Ins. Company forecasts in their marketing materials and the 10 year wait period. Basically they are just giving you back your own money for about 15 - 20 years.

Can anyone here convince me that these annuities are a goof deal? I see too many variables with forecasts that are too rosey.

Tom C


Sent from my iPad using Early Retirement Forum
Click to expand...
I have no intention of trying to convince you to buy an annuity. Odds are I won't, but if I do it won't be until I am 75-80 years old.

However, while they are becoming scarcer, you can buy COL adjusted annuities from some providers still. They cost about twice as much as a fixed SPIA (or have initial payouts of about half that of a fixed SPIA, for a given initial same cost). So you could take the lump sum and buy a 'pension' by buying a COL adjusted annuity. Another option...

If I wanted an increasing payout SPIA, I'd be looking for a fixed increase (e.g. 3% per year) annuity, and not a CPI based COL adjustment. The uncertainty of CPI based over future (up to 40) years forces providers to charge a lot to protect themselves and other annuitants. From what I've read, COL adjusted annuities are becoming understandably scarce.
 
Last edited:
Midpack said:
I have no intention of trying to convince you to buy an annuity. Odds are I won't, but if I do it won't be until I am 75-80 years old.

However, while they are becoming scarcer, you can buy COL adjusted annuities from some providers still. They cost about twice as much as a fixed SPIA (or have initial payouts of about half that of a fixed SPIA, for a given initial same cost). So you could take the lump sum and buy a 'pension' by buying a COL adjusted annuity. Another option...

If I wanted an increasing payout SPIA, I'd be looking for a fixed increase (e.g. 3% per year) annuity, and not a CPI based COL adjustment. The uncertainty of CPI based over future (up to 40) years forces providers to charge a lot to protect themselves and other annuitants. From what I've read, COL adjusted annuities are becoming understandably scarce.
Click to expand...

The maths for annuities right now isn't good, so if you buy one it has to be for other reasons and for some people those reasons do exist.
 
nun said:
People need to do the maths and see if the annuity is good value for money given your circumstances. Right now a lump sum payout might be good value because interest rates are so low......and obviously the payments from a commercially available annuity will also be low. However, if we are talking about DB pensions there might still be some good deals available. Also videos like the one above make no distinction between annuity products and assume that putting all your eggs into the "market basket" is going to be the best in all scenarios and circumstances. It also ignores differing financial personalities and the possibility that some people might like to trade potential returns for a lower guaranteed return and stable income. There are obviously many annuities that are really bad value for money and should be avoided in basically all circumstances, but you need to do the calculations and think about your required income stream and make a considered choice rather than just rejecting all annuities.

Personally I just took a lump sum from a company pension plan because the implied interest rate was 5% and I already have sufficient pension/annuity type income at better rates. This is because I have the opportunity to buy into another employer's DB plan for $263k and it will give me a $19.5k annual payment starting at age 55 (I'm 54 now) with a 2% annual COLA. I'd be an idiot not to buy into this as if I have an average lifespan the internal rate of return is 8.4%.

Is there anyone who wouldn't use part of their portfolio to buy into an annuity that has an internal interest rate of 8.4% assuming you live an average lifespan?
Click to expand...
And it looks like based on past market performance, 1969 was the worst year. A conservative portfolio survived that OK. So the basic bond stock portfolio has survived all past market scenarios including the great depression the last recession. Insurance salesmen love to sell fear that has never exited.

NO annuity pays an 8.4% ROI when it's all said and done. You are mixing up "interest rate" with ROI. Again, insurance salesmen love to confuse the two. Your actual ROI with a SPIA is going to be between zero and 3% over a lifetime. The insurance company always wins. 8.4%? Not a chance.
 
ETFs_Rule said:
And it looks like based on past market performance, 1969 was the worst year. A conservative portfolio survived that OK. So the basic bond stock portfolio has survived all past market scenarios including the great depression the last recession. Insurance salesmen love to sell fear that has never exited.

NO annuity pays an 8.4% ROI when it's all said and done. You are mixing up "interest rate" with ROI. Again, insurance salesmen love to confuse the two. Your actual ROI with a SPIA is going to be between zero and 3% over a lifetime. The insurance company always wins. 8.4%? Not a chance.
Click to expand...
Iirc, worst case starting point so far is 1966.

Please note, poster said IRR not ROI. Also, pensions with COLA can have nominal IRR of 8.4% or even higher assuming you and/or your survivor live long enough. Some DB pension plans allow you to buy a larger pension by putting in after-tax money or transferring funds from a qualified, tax-deferred plan and terms are generally more favorable than what you can get commercially.

SPIA from an insurance company, though, you're right. Based on quotes from immediateannuities, IRR I'm seeing after 20 years is typically just at 0-2% nominal and even if you live forever, IRR is just 5-6% nominal.
 
Last edited:
ETFs_Rule said:
....NO annuity pays an 8.4% ROI when it's all said and done. You are mixing up "interest rate" with ROI. Again, insurance salesmen love to confuse the two. Your actual ROI with a SPIA is going to be between zero and 3% over a lifetime. The insurance company always wins. 8.4%? Not a chance.
Click to expand...

I plugged nun's opportunity into an annuity IRR spreadsheet that I developed and the IRRs are decent if you live long enough,,, no surprise there as you get the benefit or mortality credits if you live long. There is not much to argue with here... it is just basic math calculating an IRR that equates the benefit payments commensurate with the premium.

A 55 year old male would be expected to live to 82... at that age the IRR for the fixed annuity is 5.9%... much better than the 0-3% you suggest. Again simple math in that the IRR of $1,625/month for 27 years based on a $263,000 premium is =RATE(27*12,1625,-263000)*12 or 5.9%.

Note that if you live long enough, the IRR would eventually converge to equal the payout rate (benefits/premium).

Also, these are returns based on a fixed annuity and his is a COLA so the IRRs will be higher because the premium will be the same but the benefits will increase 2% a year.

Lump Sum263,000
Monthly benefit1,625
AgenIRR
550
561-326.2%
572-140.8%
583-79.2%
594-50.2%
605-33.8%
616-23.6%
627-16.8%
638-11.9%
649-8.4%
6510-5.7%
6611-3.6%
6712-1.9%
6813-0.6%
69140.5%
70151.4%
71162.2%
72172.8%
73183.4%
74193.8%
75204.2%
76214.6%
77224.9%
78235.1%
79245.4%
80255.6%
81265.7%
82275.9%
83286.0%
84296.2%
85306.3%
86316.4%
87326.5%
88336.6%
89346.6%
90356.7%
91366.8%
92376.8%
93386.9%
94396.9%
95407.0%
96417.0%
97427.0%
98437.1%
99447.1%
100457.1%
101467.1%
102477.2%
103487.2%
104497.2%
105507.2%
106517.2%
107527.2%
108537.3%
109547.3%
110557.3%
 
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Actually, I was curious so I calculated the IRR at each age assuming the annuity is bought at age 55 for $263,000 and pays $19,500 the first year and increases 2% each year thereafter.

The IRR exceeds 4% from age 72 on... and is 7.7% if he lives to age 82.

AgeCash FlowIRR
55(263,000)
5619,500-92.6%
5719,890-68.5%
5820,288-48.6%
5920,694-34.7%
6021,107-24.9%
6121,530-17.9%
6221,960-12.8%
6322,399-8.9%
6422,847-5.9%
6523,304-3.5%
6623,770-1.6%
6724,246-0.1%
6824,7311.2%
6925,2252.2%
7025,7303.1%
7126,2443.9%
7226,7694.5%
7327,3055.1%
7427,8515.5%
7528,4085.9%
7628,9766.3%
7729,5556.6%
7830,1476.9%
7930,7507.1%
8031,3657.3%
8131,9927.5%
8232,6327.7%
8333,2847.9%
8433,9508.0%
8534,6298.1%
8635,3228.2%
8736,0288.3%
8836,7498.4%
8937,4848.5%
9038,2338.6%
9138,9988.7%
9239,7788.7%
9340,5738.8%
9441,3858.8%
9542,2138.9%
9643,0578.9%
9743,9188.9%
9844,7969.0%
9945,6929.0%
10046,6069.0%
10147,5389.1%
10248,4899.1%
10349,4599.1%
10450,4489.1%
10551,4579.2%
10652,4869.2%
10753,5369.2%
10854,6069.2%
10955,6999.2%
11056,8129.2%
 
hnzw_rui said:
.......SPIA from an insurance company, though, you're right. Based on quotes from immediateannuities, IRR I'm seeing after 20 years is typically just at 0-2% nominal and even if you live forever, IRR is just 5-6% nominal.
Click to expand...

I agree. Below is a IRR analysis based on a quote for a 5.78% payout rate for a 55 year old male from immediate annuities.com. Note that the IRR converges towards the payout rate at older ages.

Lump Sum100,000
Monthly benefit482
AgenIRR
550
561-348.3%
572-155.3%
583-90.0%
594-58.8%
605-41.2%
616-30.0%
627-22.4%
638-17.0%
649-13.0%
6510-10.0%
6611-7.6%
6712-5.7%
6813-4.2%
6914-2.9%
7015-1.8%
7116-1.0%
7217-0.2%
73180.4%
74191.0%
75201.5%
76211.9%
77222.3%
78232.6%
79242.9%
80253.1%
81263.4%
82273.6%
83283.8%
84293.9%
85304.1%
86314.2%
87324.3%
88334.4%
89344.5%
90354.6%
91364.7%
92374.8%
93384.9%
94394.9%
95405.0%
96415.1%
97425.1%
98435.1%
99445.2%
100455.2%
 
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