# Lump Sum & Invest Vs SWR

#### perez99

##### Recycles dryer sheets
So I feel confortable in making the decision between lump sum or monthly pension. Good threads here on that.

I'm not as clear cut when comparing those outcomes with the SWR rate when taking the lump sum and invest.

If taking the monthly pension for living expenses, then I'm losing purchasing power every year. Got it. However If I take the lump sum and invest, I believe it will likely require a withdrawal higher than SWR (say 4%) to match the monthly pension.
If above is correct, I don't understand the right way to compare these options.

In my case the lump sum and monthly payment seem to be fair when using immedateannuities.com. I don't want to assume significantly superior market performance, which will bias the comparison toward lump sum and invest. Yet, the SWR is based on historical..

This pension will be between 7 to 10% of yearly income. Majority of income will be from portfolio, so I'm ok with taking lump sum and invest. Is just not as evident to me the mathematical (?) way to understand this in relation to SWR.

To be clear: Computing the average market gain that will allow the lump sum & invest approach to match the monthly nominal pension payout (means no inflation adjustment) results in 6.2%. The withdrawal in year 1 is 5.3% and increases in the following years. This is higher than SWR 4% and yet it only match the pension nominal payout. All calculations with an ending portfolio balance of zero at the end of 30 years.
How is this better than taking the monthly payout? There is something missing in my thinking or my math here. I can only conclude that one hopes that market is better than 6.2%, but even it its not, your heirs get to keep some money assuming you don't deplete it before..

Any pointers?
Thanks!

Does the pension have COLA, or survivor benefits ?

Is it an all or nothing choice, or can you split and take 1/2 lumpsum and 1/2 pension ?

I went with the monthly pension benefit, but it was an easy decision as the lump sum amount was a rip off. I like that we have diversified sources of income... my small pension (about 15% of our spending), SS and portfolio withdrawals.

I can easily adjust the federal tax withholding from my pension online and I use that instead of making estimated payments for my expected tax liability.

...To be clear: Computing the average market gain that will allow the lump sum & invest approach to match the monthly nominal pension payout (means no inflation adjustment) results in 6.2%. The withdrawal in year 1 is 5.3% and increases in the following years. This is higher than SWR 4% and yet it only match the pension nominal payout. All calculations with an ending portfolio balance of zero at the end of 30 years.
How is this better than taking the monthly payout? There is something missing in my thinking or my math here. I can only conclude that one hopes that market is better than 6.2%, but even it its not, your heirs get to keep some money assuming you don't deplete it before..

Any pointers?
Thanks!

The problem with this analysis is the 30 years assumption... it could be 20 or it could be 40.

The table below shows the internal rate of return of a life annuity with a 5.3% payout rate if you live to various ages... if it is a joint life annuity it would be the second to die.

 Lump Sum 120,000 Monthly benefit 530 Payout rate 5.30% Age n IRR 65 0 66 1 -98.5% 67 2 -82.1% 68 3 -62.3% 69 4 -47.0% 70 5 -35.9% 71 6 -27.8% 72 7 -21.8% 73 8 -17.2% 74 9 -13.7% 75 10 -10.9% 76 11 -8.6% 77 12 -6.8% 78 13 -5.2% 79 14 -4.0% 80 15 -2.9% 81 16 -2.0% 82 17 -1.2% 83 18 -0.5% 84 19 0.1% 85 20 0.6% 86 21 1.0% 87 22 1.4% 88 23 1.8% 89 24 2.1% 90 25 2.4% 91 26 2.6% 92 27 2.9% 93 28 3.1% 94 29 3.3% 95 30 3.4% 96 31 3.6% 97 32 3.7% 98 33 3.8% 99 34 3.9% 100 35 4.1%

It is pretty much an individual decision. We went with rolling them into IRAs, both DW and myself. It is 2 less entities to deal with. It also allows something left at the end for our children. Plus, with the benefit of slightly higher outcome later in life, we consider it part of our LTC funding. The higher, the better IMO.

YMMV

Only a 53k non cola pension for me, so taking it as a lump sum. Did the monthly vs lump sum comparison.

I went with the monthly pension benefit, but it was an easy decision as the lump sum amount was a rip off. I like that we have diversified sources of income... my small pension (about 15% of our spending), SS and portfolio withdrawals.

I can easily adjust the federal tax withholding from my pension online and I use that instead of making estimated payments for my expected tax liability.

I had a similar situation and went a similar route. In my case, my mega-corp had some early retirement like subsidy in the pension (as an annuity) which was lost if one did a lump sum. So no lump sum for me (for that at least). I also like that I have diversified income sources and like you tend not to do estimated but instead adjust my traditional pension withholding.

To the OP, I always figured my pension was worth about 25x (at least back when I was 50) in terms of an equivalent lump sum. But using Immediate annuities' to compare is a reasonable approach.

In terms of 4% SWR from the lump sum, since that is adjusted for inflation another way to play the calc would be to 1) determine the initial 4% SWR vlue 2) Since the pension will be eaten away by inflation, re-invest (i.e. don't spend) the difference between the pension and what the 4% SWR would be. I didn't do this (instead my pension - taxes is the first leg of my retirement stool and things like my investments and eventually social security will provide the more inflation hedged portions.)

Does the pension have COLA, or survivor benefits ?

Is it an all or nothing choice, or can you split and take 1/2 lumpsum and 1/2 pension ?
NO COLA and no splits... all calculations with joint life.

The problem with this analysis is the 30 years assumption... it could be 20 or it could be 40.

I used 30 years in an attempt to be somewhat with the Trinity study 30 year span.

It is pretty much an individual decision. We went with rolling them into IRAs, both DW and myself. It is 2 less entities to deal with. It also allows something left at the end for our children. Plus, with the benefit of slightly higher outcome later in life, we consider it part of our LTC funding. The higher, the better IMO.

YMMV

+1. I took the Lump Sum from megacorp. I used FIRECalc to compare the 2. I entered in the pension amount as "Other Income" in that tab. Vs just adding that Lump Sum \$ to my starting portfolio on the the "Start Here" section. IIRC I got 100% success rate with Lump Sum (since I was investing it using my desired 70/30 AA) vs less than 100% taking the pension. It was a no brainer to me because 1) I am very comfortable investing and managing that \$ myself, and 2) if for some reason megacorp failed or TSHTF then I had that \$ now vs possible losing it. Yea I know the Pension would most likely survive a bad situation due to the Pension Benefit Guarantee Corp. But ya never know. At least if the investments I make fail then that is on me (risk tolerance) and not a failure that is out of my control. I rolled the Lump Sum into my existing IRA at Schwab and bought the various funds to stay at my AA.

In terms of 4% SWR from the lump sum, since that is adjusted for inflation another way to play the calc would be to 1) determine the initial 4% SWR vlue 2) Since the pension will be eaten away by inflation, re-invest (i.e. don't spend) the difference between the pension and what the 4% SWR would be. I didn't do this (instead my pension - taxes is the first leg of my retirement stool and things like my investments and eventually social security will provide the more inflation hedged portions.)

The issue I have is that the 4% is less than what the pension will pay in nominal terms (\$8.5K vs \$15K). I was trying to get "evidence" that is so much better to take the lump sum and invest while taking withdrawals for living expenses at the same rate that the pension payout. To get the sense that it was better, I was hoping that the withdrawal will be close to the 4% SWR. Does not seem the case, it needs to be higher. Which put into question the sustainability of that approach for 30 years (trinity).

+1. I took the Lump Sum from megacorp. I used FIRECalc to compare the 2. I entered in the pension amount as "Other Income" in that tab. Vs just adding that Lump Sum \$ to my starting portfolio on the the "Start Here" section.

Good idea. Will give it a try over the weekend. Thanks

I was faced with a similar decision, but I took the annuity. Why? I wanted longevity insurance for at least our basic living expenses. We have other funds on top of that, but the non-COLA'd pension annuity (when combined with COLA'd SS for both DW and I) gives me a floor that I'm comfortable with.

IMO the two things you're leaving out are:
1) Risk - What are you assuming you'd "invest" in if you took the lump sum? If anything other than FDIC guaranteed low-return investments, then it's not a fair comparison.

2) Time horizon - If you live until 105, the annuity will still pay. Your "invested" funds may be gone by then.

IMO the two things you're leaving out are:
1) Risk - What are you assuming you'd "invest" in if you took the lump sum? If anything other than FDIC guaranteed low-return investments, then it's not a fair comparison.

2) Time horizon - If you live until 105, the annuity will still pay. Your "invested" funds may be gone by then.

Actually for #1, I was ok to say that you still need to invest consistent with SWR studies, so yeah assume higher volatility investments. The issue is that even doing that it seems I'm still not matching the monthly pension payout unless I exceed the SWR 4%. So even an unfair comparison its not showing a great advantage to taking the lump sum and invest fi you are concerned about exceeding the SWR.

For #2 I guess it can go both ways. The pension will be a much lower real value, while the investment may have growth into a significant value in real terms.

+1. I took the Lump Sum from megacorp. I used FIRECalc to compare the 2. .

as per above, I loaded the pension options with an hypothetical \$1MM portfolio. Results with very small rounding for readability are:

Option: Take my Pension
Portfolio \$1MM
Other income: \$15K
95% confidence spend : \$55.4K
100% confidence:\$51K

Option: Lump Sum and Invest
Portfolio \$1MM + \$211.7K= \$1.211MM
Other income: \$0
95% confidence spend : \$49K
100% confidence:\$43.5K

These numbers indicate monthly pension option is better (>13%). This prompted me to confirm if lump sum payout is fair.
Immediate annuities quote (Life, Joint) = \$1,186 monthly vs my pension payout of \$1,251. So an advantaged to my pension.

So decided to compare just the immediate annuities monthly payment to get back to my original inquire about SWR comparison.
Option: Take lower immediate annuities income
Portfolio \$1MM
Other income: \$1,186 x 12 = \$14.2K
95% confidence spend : \$54.6K
100% confidence:\$50K

Still same outcome, seems in my case is mathematically better to take the pension. Before this I would have always said that if you are confortable with managing your portfolio, then should take the lump sum. I guess that market for annuities ( e.g. prevalent interest rates) is much more relevant than I originally thought. I mention this because my lump sum is much less than just a few year ago when interest rates where much lower.

Actually for #1, I was ok to say that you still need to invest consistent with SWR studies, so yeah assume higher volatility investments. The issue is that even doing that it seems I'm still not matching the monthly pension payout unless I exceed the SWR 4%. So even an unfair comparison its not showing a great advantage to taking the lump sum and invest fi you are concerned about exceeding the SWR.

For #2 I guess it can go both ways. The pension will be a much lower real value, while the investment may have growth into a significant value in real terms.

On your point #1, rhis is mostly because you are effectively comparing different stock/bond asset allocations. The investment underlying the annuity is bonds, so when you take the annuity, you've switched your portfolio to one with more bonds. The low SWR conditions like 4% occur when stocks do badly, so a more bond-heavy portfolio does better in that environment. But as you see in your point #2, holding fewer stocks also limits your upside.

Annuities real feature is to provide insurance against longevity that stocks and bonds don't. That's useful if you are in the "maybe I can retire" level. The insurance company charges you a bunch for that insurance of course. If you work a little longer and get to the "I got plenty" level, you no longer need that insurance, then the choice of buying an annuity comes down to the simplicity and comfort of a steady check, not an optimization of \$ (not to say that is purely an emotional decision, older you may need the simplicity of a check showing up in the bank.)

Actually for #1, I was ok to say that you still need to invest consistent with SWR studies, so yeah assume higher volatility investments. The issue is that even doing that it seems I'm still not matching the monthly pension payout unless I exceed the SWR 4%. So even an unfair comparison its not showing a great advantage to taking the lump sum and invest fi you are concerned about exceeding the SWR.

For #2 I guess it can go both ways. The pension will be a much lower real value, while the investment may have growth into a significant value in real terms.
I took a lump sum 13 years ago, the comparison was a wash at the time and higher than average longevity is in my family history. So I don’t have anything invested in this, so just a cursory view food for thought ?

There’s almost no relationship to SWR. Comparing a pension vs lump sum-SWR is apples and oranges, the pension is not inflation adjusted with zero residual value, the latter is inflation adjusted with some residual value probable.

Furthermore using 30 years isn’t accurate unless that is your actuarial longevity. The pension amount should use your actuarial longevity. And if you know your longevity is likely longer (pension) or shorter (lump sum) than average, that would be significant.

And finally we don’t know if you’re single/married or what the pension, beneficiary payment terms, etc. Those factors should factor in your pension amount.

It’s back to the immediateannuities.com. Given a pension amount X, if the annuity from the lump sum is more, take the lump sum and withdraw that amount, 6.2%? You could actually take more since you’re avoiding the fees the annuity would charge. I would not recommend this if it represented a large portion of your retirement income, but it appears it’s a small portion, so not much risk.

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Since every person/lifestyle is different one question is do you need that pension money to live now. Monthly payment or lump sum can be a change of numbers and decision on what to do.
I took a lump for a few other reasons than most when this topic comes up. I wanted ACA which saved us, ~ \$170,000. I also didn't need the money to live so investing a large sum was a better long-term outcome for me. In 7.5 years, that lump sum a grown 175%.
I also wanted to leave a legacy and with an annuity if I die the money is gone. No one knows how long you will be alive and the future. Every decision you make you are gambling with how long you live. Pension maybe the right number game but if you die one year after you start than maybe it wasn't such a good deal. In my case I wanted total control of the money and not an institution paying me a monthly check.

Good Luck

Perez99, your results just didn't feel right to me. To test your answers, I tested both the pension and the lump sum against the same spend rate of 51k/yr for success rate. This is the same spend rate that you said was 100% success for the pension. Here are my results.

1M + lump sum of 212K = 93.5% success
1M + 15k pension = 91.9% success

This would suggest that the lump sum would be a slightly better choice, no?

There must be something wrong with my entries, with FireCalc's formulas for investigating spending, or maybe we are using different assumptions. I used the default values except for portfolio value and pension amount.

Perez99, your results just didn't feel right to me.
I didn't look at the actual success factor, but rather at the spending allowed at the same confidence level. Not sure where the difference is. (I do agree that higher success ratio is better)

I guess that market for annuities ( e.g. prevalent interest rates) is much more relevant than I originally thought. I mention this because my lump sum is much less than just a few year ago when interest rates where much lower.

I took lump sum in 2018 after trying the same exercise. I have concluded that the trade off favors lump sum more with low rates and less with high rates. If the monthly payment is based on guaranteed bond rates then it makes sense that lower rates produce a lower monthly payout. Where the delta is I don’t know.
ETA: it would also follow that if rates rise or fall from your retirement date, you could be stuck with low payments or if they fall you could be in “tall cotton” or sitting pretty. Like a long term CD unable to garner the higher rates or gathering in higher rates than current rates.

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There’s almost no relationship to SWR. Comparing a pension vs lump sum-SWR is apples and oranges, the pension is not inflation adjusted with zero residual value, the latter is inflation adjusted with some residual value probable.

Agree, that the comparison is tough to do, but hopefully not meaningless. After all one still need to be judicious how much to withdraw from a portfolio in order to last, and the spending was the same in all comparisons.

I'm my case the 30 years will take my to 90, so hopefully close enough to actuarial. It also matches the timeframe for the 4% study, so that is a plus.

But yes, not sure what I learned from the exercise beyond the good threads already in here. Maybe in my case the lump sum is just too low to mathematically be the better option (not counting other factors).

Thanks to all for the great inputs!