Ex-employer turning pension into annuity, rate of return too good to believe

[MikeyInMarin]

For a 66 year old male a standard quote from an Annuity you would be able to select is $14,383 per year with a 10 year guarantee. Dell is not giving you a great rate unless there are additional riders.

Having worked in companies that were closing pensions down, the only goal is to get the pension liability off the balance sheet and make a profit. Paying an annuity or lump sum is far cheaper than the rules for valuation of a pension. Here is the EMC pension assets per the 2024 DELL 10K. As the recent increases in stock market has led to elimination of underfunded status, Dell did not need a distressed approval from Pension Guaranty Fund. My guess is they will make about 100 million off of this conversion. I would recommend based on all these factors that you take the lump sum as Dell incentive is to take the cheapest annuity charge from a company that meets the Pension Guaranty minimum qualifications in order to avoid future litigation.

View attachment 56880

Thanks!
Wow, that was an unexpected deep dive. That information matches the annual reports I get. But you bring up the *why now* issue I wondered about. I wanted the immediate income boost, but maybe I might need or want the IRA cash later.

 

[Koolau]

Thanks!
Wow, that was an unexpected deep dive. That information matches the annual reports I get. But you bring up the *why now* issue I wondered about. I wanted the immediate income boost, but maybe I might need or want the IRA cash later.

When I think about annuities vs a tIRA or other stack of cash, I figure I can structure my own "income" and do it precisely (IOW, if this month I need only $1000 extra, I can take that. If next month, I I need $1500, I can take $1500).

With the annuity, you have no flexibility. Just thinking out loud, but under your circumstances I think I'd still look at taking the lump sum. Clearly, YMMV. Best luck.

 

[big-papa]

When I think about annuities vs a tIRA or other stack of cash, I figure I can structure my own "income" and do it precisely (IOW, if this month I need only $1000 extra, I can take that. If next month, I I need $1500, I can take $1500).

With the annuity, you have no flexibility. Just thinking out loud, but under your circumstances I think I'd still look at taking the lump sum. Clearly, YMMV. Best luck.

Agree - My DW worked at a company for 10 years which had pensions as well as a 401K, which she rolled over to her TIRA after she left the company. A few years after she left to be a SAHM, her former employer also decided that they wanted to get their pensions off the books. As she was still fairly young and because this was in the middle of the constant news cycle regarding underfunded pensions, she opted to take the lump sum as a rollover to her TIRA, which she then invested it as she invested other assets in her TIRA.

Earlier this year, we took the assets and purchased a 30 year TIPS ladder inside her IRA.

Cheers.

 

[TheWizard]

When I think about annuities vs a tIRA or other stack of cash, I figure I can structure my own "income" and do it precisely (IOW, if this month I need only $1000 extra, I can take that. If next month, I I need $1500, I can take $1500).

With the annuity, you have no flexibility. Just thinking out loud, but under your circumstances I think I'd still look at taking the lump sum. Clearly, YMMV. Best luck.

That's not right.
The annuity or pension income just sets a base amount each month. The annuitant can easily take additional funds from his remaining investible assets in one account or another when needed...

 

[jazz4cash]

That's not right.
The annuity or pension income just sets a base amount each month. The annuitant can easily take additional funds from his remaining investible assets in one account or another when needed...

I read this as “never” use 100% of your nest egg to buy a life annuity. Makes sense.

 

[TheWizard]

I read this as “never” use 100% of your nest egg to buy a life annuity. Makes sense.

Umm, never even use 50% of your nest egg for that purpose.

I used less than that, but still a significant amount, when I annuitized for lifetime monthly income with TIAA back in 2013.
This was all tax-deferred 403(b) money that was going to be taxed as Ordinary Income no matter how withdrawn.

Together with age 70 SS, I now have excess retirement income most months without needing to withdraw from investible assets, so they continue to grow nicely...

 

[big-papa]

That's not right.
The annuity or pension income just sets a base amount each month. The annuitant can easily take additional funds from his remaining investible assets in one account or another when needed...

I dunno. I took it to mean he was only talking about the flexibility of the annuity itself, or rather the lack thereof.

 

[TheWizard]

I dunno. I took it to mean he was only talking about the flexibility of the annuity itself, or rather the lack thereof.

WADR, you don't need really need flexibility from an annuity or pension.
If your annuity/pension + SS income is $5000 a month and your average monthly expenses are $4000/month, then you put the extra $1000 in savings or investments for some unexpected expense that's sure to come along.

Since most pensions and annuities are taxed as Ordinary Income, it's generally best to keep those income streams steady.
It's not tax efficient to withdraw $$ from tax-deferred on as needed basis for infrequent large expenses, like a new car...

 

[pb4uski]

See my signature! If someone is paying you x% on an annuity then they must make significantly more than x% so there has to be a catch somewhere in the fine prints. I would take a lump sum and invest in 60:40 portfolio. YMMV.

The annuities that pension plans typically use for pensioners is a plain old SPIA. Nothing to be concerned about and no catch anywhere so the post above is unnecessarily alarming.

OP, has the Dell pension plan indicated who the issuer of the annuity is? That said, it doesn't really matter much as your annuity would be well within state guaranty fund limits.

If you prefer the guaranteed income, take the annuity and don't fret a bit about the payments being made, the credit risk of such annuities are much closer to none than to slim.

PS. Part of the reason why the payout rate from the pension plan is better than immediateannuities.com may be because the sales cost to the insurer are lower.

 

[TheWizard]

The annuities that pension plans typically use for pensioners is a plain old SPIA. Nothing to be concerned about and no catch anywhere so the post above is unnecessarily alarming.

OP, has the Dell pension plan indicated who the issuer of the annuity is? That said, it doesn't really matter much as your annuity would be well within state guaranty fund limits.

If you prefer the guaranteed income, take the annuity and don't fret a bit about the payments being made, the credit risk of such annuities are much closer to none than to slim.

I agree with this line of thinking.
A certain amount of monthly income, along with eventual SS, is a good idea...

 

[jazz4cash]

The annuities that pension plans typically use for pensioners is a plain old SPIA. Nothing to be concerned about and no catch anywhere so the post above is unnecessarily alarming.

OP, has the Dell pension plan indicated who the issuer of the annuity is? That said, it doesn't really matter much as your annuity would be well within state guaranty fund limits.

If you prefer the guaranteed income, take the annuity and don't fret a bit about the payments being made, the credit risk of such annuities are much closer to none than to slim.

PS. Part of the reason why the payout rate from the pension plan is better than immediateannuities.com may be because the sales cost to the insurer are lower.

I tried to understand how the protection works for DB pensions converted to annuities. The premium may easily exceed the State Guaranty Assoc limit. It was confusing and I never figured it out.

 

[big-papa]

WADR, you don't need really need flexibility from an annuity or pension.
If your annuity/pension + SS income is $5000 a month and your average monthly expenses are $4000/month, then you put the extra $1000 in savings or investments for some unexpected expense that's sure to come along.

Since most pensions and annuities are taxed as Ordinary Income, it's generally best to keep those income streams steady.
It's not tax efficient to withdraw $$ from tax-deferred on as needed basis for infrequent large expenses, like a new car...

WADR I never said otherwise.

Cheers

 

[pb4uski]

I tried to understand how the protection works for DB pensions converted to annuities. The premium may easily exceed the State Guaranty Assoc limit. It was confusing and I never figured it out.

If the lump sum is $183k it seems very unlikely.

 

[jazz4cash]

If the lump sum is $183k it seems very unlikely.

Yes, I think the OP is fine but many will likely have a larger lump sum. In some cases the annuity is the only option.

 

[Koolau]

That's not right.
The annuity or pension income just sets a base amount each month. The annuitant can easily take additional funds from his remaining investible assets in one account or another when needed...

It's true that money is fungible, but I'd rather have more money under my control (in for instance, mutual funds that I can change around or balance) rather than have some in an annuity (not under my control) and the remainder under my control.

I'm sure there are times/situations where an annuity is appropriate but, for me, I don't see an annuity as a useful tool - especially at this time in my life.

Of course, YMMV.

 

[pdxgal]

I would also want to know the tax implications of lump sum vs. annuity.

+1. Apparently in France you're only taxed on the payout portion that is not return of capital, so you'd need to know that (maybe in the US too?)

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