Annuity vs. Lump Sum - How to decide?

[Travis Bickle]

Hi All -

I am planning to retire at end of March, and have recently received the document package from my employer pension service that I need to file and make the final decision as to whether to go with the lump sum or with the annuity for my pension payout.

The leading choices in this packet are as follows:

1 Default (the "normal form of payment"): 50% Joint & Survivor Annuity: $6817 per month ($3408 per month for spouse after my death)

2 - Lump Sum at time of retirement: $1,611,471

There are a bunch of other options such as 75% joint and survivor, single life annuity, and 5 to 25 year "certain and life annuity" that my wife and I agreed do not make a lot of sense for our situation.

I am age 60 with decent health (no major issues aside from controlled high cholesterol) with a very healthy 56 year old wife. Our life expectancy should be average or better.

I am not solely dependent on the pension for retirement funds as I also have about $2.2M in a 401k (plus SS at age 70) that will be used to fund as well. I am also likely to do some part time consulting after retirement, and my wife will continue to work part time as well. We have two daughters - one in grad school and one a senior in undergrad - and feel they are more than adequately covered for the near term as beneficiaries of the 401k.

My employer is a large pharma company in very good shape financially. Pension fully funded (they stopped offering to anyone hired after 2000 so not too many of us left to cover) and "guaranteed" by PBGC.

My thinking of 10-15 years ago was to take the lump sum, but since the 2008 hiccup our conversation has moved more towards taking the "safer" annuity route.

In the latest paperwork, there is an interesting section where they disclose the "relevant value" of the various options, and all are shown as "equivalent" except the lump sum, which is shown as "107%". The description says that the comparison is conducted via the relevant IRS mortality table and appicable interested rates (.7% first 5 years, 2.55% next 15 years, ,and 3.06% for >20 years).

As I look to make this critical decision in the next couple of weeks, I am hoping someone here may have some thoughts on what to consider when making the decision and if there are any relevant tools or info that can help.

I'm also curious about the "107%" value of payment option for the lump sum. Any thoughts on why they would offer this enhance value and if it should slant my decision towards taking the lump sum?

Thanks for any help or thoughts.

 

[rothlev]

congratulations: Given the fact that apparently you don't need the pension income and taking the lumpsum leaves you with a larger estate to pass on , if I were in your enviable position, I would take the lump sum, invest it grow it and use it to help the future generations. It looks like the numbers would favor taking the monthly income, I just wouldn't do it in your situation

 

[ExPatKiwi]

First off you should contact the admin of this site to change your user name to something else so as not to identify yourself publicly.


Looking at your numbers I'd take the lump sum that is being offered. Based on the i-rates you have provided they have used September, 2021 minimum present value (MPV) IRS rates. See following link: https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates


If you plan to delay taking the pension this year you need to understand which MPV segment rate look back period do they use e.g. the previous September or rolling 3 month ago rates.


I can tell you that the MPV rates have been trending up and the mortality tables used going forward may also be negatively impacted by the reduced life expectancy from the COVID pandemic. Basically last year and this year look to be the best years ever for large lump sum pension values.

 

[pacergal]

It is a decision only you can decide. How much of the monthly would cover your budget? Do you tend to worry if the stock market crashes?, (which it will again maybe more than once on your lifetime).
DH and I both have pensions, we took the 100% joint and survivor. Together, our pensions cover our budget with some left over., and added SS makes for an Easy decision. And our investments are left to grow.

 

[easysurfer]

First off you should contact the admin of this site to change your user name to something else so as not to identify yourself publicly.

....

FYI .. Travis Bickle is a fictional character's name from the movies. Similar to Tony Montana. The questions is, who had the better line?

 

[gamboolman]

Is the Pension Cost of Living Adjusted (COLA) ?

I retired from megaoil and the pension was not COLA

We are terrified of Inflation - thus we took the Lump Sum

Interestingly our Lump Sum was dang near the same as yours

 

[racy]

FYI .. Travis Bickle is a fictional character's name from the movies. ...

https://tinyurl.com/y6r6pa8k Short clip of Travis Bickle, Taxi Driver

 

[ExPatKiwi]

https://tinyurl.com/y6r6pa8k Short clip of Travis Bickle, Taxi Driver

I learn something everyday from the ERE website....now I've shown my age as this movie really dates me.

 

[all4j]

Congratulations! You've already gotten some good feedback. Current interest rates, inflation in upcoming years, etc But I'll add a little I'd consider.

I didn't pick up on whether this is qualified or not, so taxes is a key area. There isn't a universal right thing here & your tax situation could have a big impact. This might impact/allow plans for roth conversions; you'd have time before medicare/irmaa to get some done. Investing a lump sum gives you more control on type of income & timing also.

Your estate plan may handle your current needs, but I wouldn't discount possible grandkids later. Having the $ in your estate might help toward college, 1st houses, etc

You can always take part of lump sum & buy a spia (or ladder of them). Rising interest rates will have an impact there also. This is a bit of a compromise. I can only guess about the 107% figure. If pension plan is currently overfunded, they may be trying to get as many out as possible now to reduce further liability. Or, if this is taxable, maybe bulking up for withholding?

Also, I'd make sure that whatever you do, your wife buys into the approach & is comfortable.

 

[jazz4cash]

In your situation the lump sum seems like a no brainer but we don’t know the whole story. Is there any type of benefit like healthcare that is tied to selecting the annuity? I find it interesting that your employer provided relevant values for comparison. I believe employers sometimes subsidize one choice over another depending on their motives. My Megacorp provided a list of “relative” values and the 65% joint survivor option had a much higher relative value compared to the many other choices. You can get a feel for this by checking the lump vs annuity numbers at immediateannuities.com or similar. Congratulations. It’s a great dilemma!

 

[savory]

It is a decision only you can decide. How much of the monthly would cover your budget? Do you tend to worry if the stock market crashes?, (which it will again maybe more than once on your lifetime).
DH and I both have pensions, we took the 100% joint and survivor. Together, our pensions cover our budget with some left over., and added SS makes for an Easy decision. And our investments are left to grow.

This is what we did except it was only my pension. Its been about 15 years. I like the idea of a 'paycheck'. In addition for now, I have a deferred bonus payment which i use for yearly ongoing expenses as well as my pension. It will be replaced by SS when it runs out.

The market has little impact on my life. And, I invest my savings with my children's profiles in mind. The growth has been very good, as you know, over this time period.

I have a small COL adjustment in my pension program so I expect I will feel an inflation hit at some point. SS however is about 70% of pension so that will deliver some COL adjustment.

One of my decision factors was quality of life considerations. At that time, the 'studies' showed people with pensions were more comfortable with their life. I expect that might have changed with the outstanding market growth over the last few years. Those that invested their lump sum are likely feeling very comfortable, now. Having said that, I think knowing what I know today, given my personality, I am OK with the pension. The doubt about company funding has not left me. But, I think I am OK given their performance and my age. I am sure I am not going to the poor farm even if something happens to the pension plan given the growth I enjoyed over the last 10 years. Unless of course, the pension plan and my savings disappear at the same rate.

Good luck with your decision. I expect the good news is you really can't make a bad one.

 

[youbet]

I expect that might have changed with the outstanding market growth over the last few years. Those that invested their lump sum are likely feeling very comfortable, now.

So true! I made my lump sum or annuity decision for my private corp pension about 4 years ago (at 70) and went with the annuity. It's non-cola'd. Now, since market returns have been good and inflation is now high, I find myself questioning my decision! But it's OK as we're all right either way. I just gotta stop reliving the decision!

 

[Travis Bickle]

First off you should contact the admin of this site to change your user name to something else so as not to identify yourself publicly.

No worries - that’s solid advice regardless - [emoji4]


Thanks to all for the thoughts.

To answer the questions I initially see - no it’s definitely not COL adjusted.

Someone asked if it was “qualified” or not - which I think means is it taxable? If so - yes the annuity is taxable as retirement income from what I understand, but the lump sum can be rolled into an IRA and taxed only on withdrawal.

Also - it’s not tied in any way to healthcare. I am separately eligible for retiree healthcare until Medicare kicks in.

 

[FIREd_2015]

If I were in your shoes I'd go with the pension. As I get older I find myself less interested in squeezing the last percentage return from my portfolio. The whole point of my working career was to get to a point where I didn't have to worry about money. You don't say what your expenses are but I'm assuming you are in that position. I wouldn't want to worry whether or not I will out live my money or if I made the right investment choices when I'm 85 y.o. or even whether I will have the mental capacity to make the right investment choices at that age. I still like to watch the markets and might play now and then but there is a huge difference between playing in the market for fun vs. depending on the market for survival. Last year I had the option to take a pension of $736/mon. or $135k cash out and I went with the pension. On the more macabre side, if your heirs know that there is a steady income stream as long as you are living vs. a drain on their inheritance the longer you live maybe that could be an incentive to help live a long prosperous life.

 

[latexman]

First off you should contact the admin of this site to change your user name to something else so as not to identify yourself publicly.

No worries - that’s solid advice regardless - [emoji4]

I was almost sure you were going to say, “You talking to me?”

 

[target2019]

No worries - that’s solid advice regardless - [emoji4]


Thanks to all for the thoughts.

To answer the questions I initially see - no it’s definitely not COL adjusted.

Someone asked if it was “qualified” or not - which I think means is it taxable? If so - yes the annuity is taxable as retirement income from what I understand, but the lump sum can be rolled into an IRA and taxed only on withdrawal.

Also - it’s not tied in any way to healthcare. I am separately eligible for retiree healthcare until Medicare kicks in.

I think it's best to examine your entire portfolio. How will all of the income inputs work in retirement to pay expenses.

TBH, without knowing your complete picture it sounds like a coin flip.

There probably isn't one major factor that tilts this one way or the other.

In our case spouse has longevity on both sides, and the lump sum is not great. We've considered several factors, like pension stability (not solid like yours), monthly impact on expected expenses (covers about 60% monthly).

If the decision were tomorrow, I'd say annuity for us. I will be out of the equation in a few years maybe, so I give more weight to spouse using that annuity for another 25-30 years. The lump sum would add 15% to our invested portfolio, which is great, but at least for today I am giving greater lifetime value to the monthly.

 

[Travis Bickle]

I was almost sure you were going to say, “You talking to me?”

All solid advice - and thanks to all again. These forums continue to be a great source of knowledge and information that is much appreciated.

Definitely seems like a coin flip type situation and the good thing is that it's definitely a nice problem to have. Regardless of the decision, I am 100% certain that I will have many opportunities in the future to second guess my decision - lol.

Some people had asked about my overall picture - which is probably best shown in this post "age-59-and-more-than-ready-update"from early last year. Everything in that note is still pretty accurate except that the 401k has continued to grow and is now close to $2.2M and of course that my leave date is now fixed as March 31 of this year.

So - to sum up what I'm hearing from the awesome collective minds here so far:

Pros of Lump Sum:
- More "high side" potential if market growth stays strong for next 30-40 years - chance to leave a legacy for future generations
- Less risk of the (very unlikely) scenario that something funky happens to the pension plan
- Slightly better protection against inflation (if I understand correctly, this is because if interest rates continue increasing then growth should also be stronger?)

Pros of Annuity:
- Less long term portfolio risk if markets tank
- More peace of mind knowing that pension + social security will cover future living expenses so that I can stop wdwls from 401k during down markets if necessary
- Less likely to be murdered by my heirs

Next steps for me:
- Try to project and understand the different scenarios for covering expenses in retirement of w or w/o pension "paychecks"
- Try to understand how the lump sum vs. annuity offering compares to commercially available annuities.

Meeting with Fidelity next week so I will be reviewing also with them.

Thanks again all and Happy Friday!!

 

[LRDave]

It is worth a trip over to immediateannuities.com and get a quote (quickly/online) for the lump sum amount - inputting your particulars. It looks to me that the monthly payment you've been offered is pretty attractive (compared to the market for annuities). Food for thought.....

 

[latexman]

Your wife is younger. How is her family longevity compared to your family? Will she most likely be the last one standing? If so, how is her financial acumen? Will she be comfortable managing a big nest egg, or would a pension check every month be more her style?

Also, extrapolate out to after you kick the bucket. The lowest SS payment will go away. Your pension gets cut in half. If managing the nest egg is not her style, how is she going to react at that time when her income is reduced substantially?

My wife wants nothing to do with the finances, and, judging by our family longevities, she'll outlive me by many years. I am going to pick the 100% joint and survivor pension plan in June for that reason.

Lots to think about!

 

[all4j]

Definitely seems like a coin flip type situation and the good thing is that it's definitely a nice problem to have.

Good summary. I'd personally stress a point that I'm not sure was explicit.

Flexibility. In >1 form. An annuity locks in one return -- it is known & that has understandable appeal. A lump sum gives you a chance -- not a requirement -- to change over time. Perhaps that is re-balancing between stocks & bonds. Taking more $s early in retirement when more active &/or to reduce RMDs later. Would you take the lump sum & buy a single government bond & lock in a negative real return?

Timing of this is interesting. Your lump sum was 'locked in' at very low interest rates. I don't guess the very bottom, but rates seem headed up. So a few months down the road if rates go up, the same lump sum buying an spia should get a higher monthly amount (I will confess I'm not clear on how the difference in age, survivor option etc would temper that).

Hope your meeting with Fidelity goes great. No need to 2nd guess yourself -- the decision you make WILL work out.

 

[Floridaman10]

Travis, The annuity gives you a very low interest rate as shown in your first post. As they state the lump sum is advantaged by 7% and that 7% is assuming your lump sum gets paltry interest similar to the annuity and note it is still 7% better. Now if I had this option I would take the lump sum and invest it in equities/fixed income but much more equity. The returns would overwhelmingly be expected to materially out perform those interest rates and you get to start out 7% ahead to boot. For me it is a no brainer, the lump some would provide much better returns. What did Fidelity recommend?

 

[Travis Bickle]

Just a quick update -

After consultation with Fidelity they wanted to put me in touch with some "partners" that would manage the extra money - for a fixed percentage of AUM of course. Definitely not going down that path.

After much discussion with wife, we chose the "50% joint and survivor annuity". While I do think we give up some upside, we do have our 401k money that will continue to grow and provide a certain future for our daughters even if we both croak early. We also know with certainty that between SS and pension (or even pension alone) we will never be in the poor house so it removes any stress or uncertainty.

At the end of the day both options were good, and with the decision behind us we feel really great about where we are.

Now just trying to tolerate the remaining 40 working days until the end of March!