Good article on annuity vs lump sum

[Big_Hitter]

https://www.metlife.com/assets/cao/...aycheck-or-Pot-of-Gold-Study-Final4-11-17.pdf

"1 in 5 individuals who took a lump sum
either from a DB plan or DC plan depleted
their lump sum, on average, in 5½ years."

"Nearly all of those who took an annuity (96%)
are happy they chose the guaranteed monthly
annuity payments rather than a lump sum."

 

[fosterscik]

A nice survey. I suspect the findings are not too useful for this community (especially the information that many lump sum recipients overspend early and worry about running out of money). Nevertheless, even knowing about safe withdrawal rates etc. I would probably annuitize some of my stash to meet a guaranteed minimum income, were it not for my small $1500/mnth pension plus SS).

 

[Fedup]

I'm glad I took the annuity option instead of the lump sump.

 

[haha]

When I reverse engineer this I wonder what keeps more people from applying this same logic to SS, and waiting the longest possible time to draw benefits?

Without getting into too much consideration of are SS payments as secure as XYZ corp retirement annuities, SS has the glaring advantage of being linked to inflation, a feature which somewhere between few and no corporate retirement payments share.

Ha

 

[savory]

I'm glad I took the annuity option instead of the lump sump.

+1 - At the time of making the lump sum/annuity decision, I read a study that people with annuities were happier (at least that is how I remember summarizing the information). Knowing that the check is coming and it meets most of my monthly regular expenses, just makes things easier, no matter what happens in the market.

When SS fully comes into play, it will provide tremendous financial flexibility. Even in down market years, I do not think I will need to compromise the extra travel time. In good years, I will be able to build on my discretionary spending.

With what I know now, I would make the same decision and take the annuity.

 

[karen1972]

I'd have taken the lump sum, hands down, but then again I was offered it in 2009, so sure, I'd have loved to triple my return in a short amount of years. Obviously like all things timing has a huge impact.

 

[DrRoy]

I chose annuity for my pension but would not buy one.

 

[Fedup]

I'd have taken the lump sum, hands down, but then again I was offered it in 2009, so sure, I'd have loved to triple my return in a short amount of years. Obviously like all things timing has a huge impact.

It has gone up quite a bit since I took the pension option but I'm still glad I did. One less pile I have to worry about.

 

[OldShooter]

What a surprise! A company that sells annuities releasing a study that is favorable to annuity sales. Maybe the foxes have a study on best henhouse door locks, too.

https://www.wsj.com/articles/metlif...ra-penalty-over-variable-annuities-1462285389

Met Life settles suit, earmarks $1.7 billion for deception claims

 

[bw5972]

A nice survey. I suspect the findings are not too useful for this community (especially the information that many lump sum recipients overspend early and worry about running out of money). Nevertheless, even knowing about safe withdrawal rates etc. I would probably annuitize some of my stash to meet a guaranteed minimum income, were it not for my small $1500/mnth pension plus SS).

I have never been a fan of annuities.

I took the lump sum 152K instead of the $950 a month annuity (current age 57 value).

All rolled into my IRA along with my 401k, not to be touched until I start SS between 63 - 66 depending on how long I can stretch my after tax savings.

 

[street]

I took lump and rolled it over to an IRA account. I have done very well on that decision. It has been 6 years and have increased that lump sum by 600K plus. I feel I can make more money investing it then I would with a monthly cash. I had to take mine out after 31 years of employment and do what I want with it. I then started over with a second retirement and retired 5 year later and I also took a lump sum on that retirement.

 

[audreyh1]

When I reverse engineer this I wonder what keeps more people from applying this same logic to SS, and waiting the longest possible time to draw benefits?

Without getting into too much consideration of are SS payments as secure as XYZ corp retirement annuities, SS has the glaring advantage of being linked to inflation, a feature which somewhere between few and no corporate retirement payments share.

Ha

I figure there are many folks who need the money as soon as possible, so they take the lower payout.

 

[Fedup]

Or they might not think longevity is in the card for them. Health issues. Or they don't want to touch their savings.

 

[rodi]

For me it was a math decision and a risk decision. I looked at what kind of annuity (SPIA) the lump sum would buy... and came to the conclusion the annuities from my former employers were a better deal than I could buy. (Math). The interest rate was higher than I could get in a SAFE fixed income investment of the lump sum.

My annuities are microscopic (total of both is < $500/month) but it still reduces the market risk of my overall retirement plan. Having a (small) income stream reduces my need to pull from my nest egg as much during down markets. I'm a big fan of the 3 legged stool (savings, SS, and pension) and this provided my (very short) third leg.

 

[Running_Man]

I think the fact annuity lovers love their annuities is that there have been no major implosions of annuities and anyone that took an annuity probably wanted the safety and surety of the annuity and is getting it with no penalty.

The bigger question is whether lump sum recipients on average really go through the lump sum so quickly and it would not surprise me that is how long it takes to go through it as that is exactly what my parents did.

Ha’s point is absolutely correct about waiting on SS and I wish more retirees would give that point deeper mathematical consideration about their funding of retirement. But the ability to defer gratification when not certain, even when more likely than not goes against the instinct of most individuals. An immediate decision to take an annuity and start getting another paycheck is easier and more comfortable than deferring to take SS for a number of years, I think in all these cases since the future is always unsure the impetus is to grab what one can now.

Met Life is certainly in the business of making sales of annuities and so everything they say should be taken with a grain of salt and other reviews taken to avoid a one sided study. There is no individual right or wrong answer, which only lead some to throw up their hands rather than to dig further as I think most here do.

 

[meierlde]

Note that the decision re SS benefits also needs to factor in the issue of RMD's at some point its better to get some income earlier so that the tax bite due to RMDs is not so great.

 

[donheff]

Interesting survey. So 1 in 5 blew through their lump sum over more than a decade (average 5 years) and 70% of those had no regret with only a smattering seriously regretting it. That doesn't sound like bad behavior, except for a few. I would like to see if the group that blew through the money in just a year or two made sensible decisions or really blew it. I can see someone getting a $25-100K lump sum deciding to pay off debts, buy a car, take a once in a lifetime vacation as long as they had long term needs covered.

 

[scrabbler1]

I took a lump sum in the form of a company stock cashout when I ERed back I 2008. I invested it in a bond fund and its monthly dividends cover around my annual expenses, maybe a little less. (I have other investment income streams to cover the rest.) So, I turned a lump-sum payout into a backhanded annuity and that has worked out jus fine for me.

 

[nun]

There are a number of factors that go into lump sum vs annuity/pension

1) Size of lump sum......If it's a small amount the utility of the lump sum might be worth more than just a few dollars every month.

2) You income sources. If you have other guaranteed income sources do you need another?

3) Inheritance and survivor benefits.

4) The terms of the annuity, ie IRR, payout, COLA, survivor benefit.

A an example I had the choice of lump sun vs annuity from two employers. the first was a lump sum of $281k for a pension of $20k per year with a COLA starting at age 55. The second was for $35k lump sum or a pension of 2.5k per year starting at age 55. I took the first larger pension as it would give me enough income to cover my expenses and the second lump sum for flexibility. I dumped it into Vanguard Balanced Index and it is actually beating the IRR implied by the pension.

 

[Texas Proud]

https://www.metlife.com/assets/cao/...aycheck-or-Pot-of-Gold-Study-Final4-11-17.pdf

"1 in 5 individuals who took a lump sum
either from a DB plan or DC plan depleted
their lump sum, on average, in 5½ years."

"Nearly all of those who took an annuity (96%)
are happy they chose the guaranteed monthly
annuity payments rather than a lump sum."

Where to begin....

OK.. the quote you gave has some telling info around it...

The average lump sum amount for those who took a lump sum from their DB plans was approximately $192,357 ($232,507 for men compared to $144,793 for women). One in five DB plan participants who took a lump sum from their DB plans (22%) did so in conjunction with receiving notice of a lump sum window. The average DC plan balance at retirement was approximately $239,792 ($274,859 for men, compared to $188,178 for women

​

SOOO, if you take a lump sum you get lets say $200,000 in cash... which using the 4% rule means a monthly 'pension' of $667..... now, we know that they pay higher than the 4%, so lets bump it to what I get on an annuity site which is about $1,100.... the next paragraph in the study...

For those receiving monthly annuity payments from their former employer’s DB plan, the average monthly payment is about $2,661. The average monthly annuity payment among those who receive annuity payments from their DC plans is about $1,691. Many DB and DC plan participants are also collecting (or have collected) benefits from Social Security (63% and 82% for DB and DC plan participants, respectively).



​

So, you are comparing a cohort of people making almost $2,700 per month in one case or $1,700 per month in another with a group of people who would make $1,100 per month... so right off the bat the group who took the lump sum is starting at a disadvantage...


NOW, we know that the avg means there are people who had more and who had less... I doubt it is a perfect bell curve... it is probably skewed with more people having less $200K and many with less than $100K... which gives you about $500 per month.... So, they make a decision... do I take the lump sum since the $500 per month will not get me what I want or just live with the $500....

So now we have a cohort of people who took the lump sum... and 20% of them ran out of money... well, of course!! There are at least 20% who got less than $100K.... and maybe even less than $50K...



Now, if they did a slice of that date to show the % of people who ran out of money based on how much they got (say $10K bands or even $25K bands) that would be more telling... but it probably would show the people who got a small lump sum ran out of money and the people who got a large lump sum still has it....

 

[Midpack]

I'm glad I took the lump sum in 2011, though it wouldn't have been a large portion of our income either way. That money has grown considerably since then, and I could buy a substantially larger annuity with a higher payout today if I wanted to (principal gains, shorter duration and higher yields) - as hoped/planned. But I am not planning on buying an annuity ever unless I get close to our annuitization hurdle.

For folks who can't keep their hands off the lump sum money, an annuity is probably the better choice - few here are in that camp. But it's a decent article for a company who profits from selling annuities...

 

[Fedup]

There are a number of factors that go into lump sum vs annuity/pension

1) Size of lump sum......If it's a small amount the utility of the lump sum might be worth more than just a few dollars every month.

2) You income sources. If you have other guaranteed income sources do you need another?

3) Inheritance and survivor benefits.

4) The terms of the annuity, ie IRR, payout, COLA, survivor benefit.

A an example I had the choice of lump sun vs annuity from two employers. the first was a lump sum of $281k for a pension of $20k per year with a COLA starting at age 55. The second was for $35k lump sum or a pension of 2.5k per year starting at age 55. I took the first larger pension as it would give me enough income to cover my expenses and the second lump sum for flexibility. I dumped it into Vanguard Balanced Index and it is actually beating the IRR implied by the pension.

All good points, particularly 1 and 3. Survivor benefits.
But I did the opposite to you. I picked the lump sum for an overseas pension because getting GBP 4,000-5000 a year to me is not life changing enough. So we liquidated and spent. However, I picked the annuity option for the US pension for survivor benefits as well as steady reliable stream of income. My husband would not like to manage money if I go before him.

 

[Cobra9777]

I took the annuity on a DB plan (6.5% payout ratio, non-COLA). The lump was ~20% of investable assets. Main reason was to complete the 3-legged stool and convenient early access to tax-deferred funds. At the time (52), I did not want to be completely dependent on the stock market combined with our rather smallish taxable account. Downside is that the taxable income limits our ability to do Roth conversions. Although I suppose had I taken the lump, I'd have a larger pile to convert.

Three years later, DW took the annuity as well, although she only had a partial lump sum option. Also, hers has a COLA and a better payout ratio. The 2 pensions currently cover 60% of spend with the rest coming from our taxable account. At the time we take SS, the income mix will be 40/40/20 (pensions/SS/investments), which is probably a bit heavy on the annuitization side. Given that, plus market performance last several years, in retrospect, the lump sum on mine may have been a better choice, although the peace of mind from the steady paycheck helped with the transition into retirement.

 

[Music Lover]

When I reverse engineer this I wonder what keeps more people from applying this same logic to SS, and waiting the longest possible time to draw benefits?

There are plenty of reasons to take it early. I'm taking early CPP at 60 because I feel that the extra money will be more useful when I'm younger and more active. By the time I reach the "break even" point (IF I reach it) I'll be in my mid-70's. Taking it early is a lifestyle choice, rather than a strict financial decision to try to maximize every single penny until the day I die.

 

[ZMAN]

We have the question coming up in 4 years on DW's pension plan from her former employer CitiBank. What I want to see is the pay out from the annuity coming out of the pension plan as compared to the pay out on the same money if we purchased the annuity at retail. If they are the same, I do not see the point. I can buy the same annuity any time. We might as well roll the money into an IRA and wait for better interest rates. If it is better, perhaps because Citi gets better than street rates or pays less or no fees, we might go for it. At this point the money is earning 6% so we are letting it ride until she turns 70, at which time we must make the decision.