# Lump sum or annuity

#### runnerr

##### Recycles dryer sheets
Lump sum or annuity

Ok what is the best way to go taking the lump sum or the company’s annuity? The annuity does not have a cost of living built in. What you receive today you will receive 20, 30 years from now. The annuity would be 780 a month and the lump sum 109,500. My additional savings amounts to around 660,000 of that 180,000 are after tax and I can pull from it as needed any time. I am 56 and just retired but not by choice. ASny ideas on the lump or annuity?

Thanks runnerr

runnerr said:
Lump sum or annuity

Ok what is the best way to go taking the lump sum or the company’s annuity? The annuity does not have a cost of living built in. What you receive today you will receive 20, 30 years from now.  The annuity would be 780 a month and the lump sum 109,500.  My additional savings amounts to around 660,000 of that 180,000 are after tax and I can pull from it as needed any time. I am 56 and just retired but not by choice. ASny ideas on the lump or annuity?
Thanks runnerr
Not retired by choice- - -I guess a key question would be - - -Do you think you may go back to work somewhere?
If not I assume you need to tap something right now.?
Are you good to go with social security when the time comes?

Runerr:

To my counts, if you think you will live longer than another say another 15 years (71) then you are probably better off taking the 780 PM. If you think that you will live longer than that, or you can manage the money better (Not touch it for 10 years) Then take the lump. If you take it and spend it, then it defeats the object. This is my opinion, with no complex calculating. If you wanted tou could work the numbers based on true return and life expencancies.

SWR

Hmmm... first I jumped and said that you should go for the lumpsum - but the annuity is actually calculated as 8.5% of the lumpsum which is a pretty good return considering the safety (I assume it is with a safe company) despite the lack of inflation adjustments.

Personally I THINK I would take the annuity (presuming you are not going back to work) and then I can instead be a little more aggressive (less fixed income/more equity or similar) with my other investments.

Cheers!

As he watches his old company struggle, my FIL is very very glad that he chose to take the lump sum.

He's been pretty conservative-- bonds & CDs.

Another option might be a large-cap dividend fund like the DVY ETF.

My father's retirement was split into 2 parts. The part his company paid and the part he paid into it. He took his part and bought bonds which paid 13-15% (early 1980s). The company part was put in an annuity. He worked for United Airlines, so the annuity portion is now at risk. Even though it's been 25 years, he is at jeopardy of losing his greatest income.

Thanks for all the feed back. Here is how I figured it. If I take the annuity the 780 that seems great right now stays at 780 forever and that scares me. Even though the return would be 8.5% with inflation at around 3% and no adjustment that would make the realized return 8.5 – 3=5.5%. I figure with a little luck and research I can find that somewhere. With the lump sum I would have around \$770,000 and of that \$170, 000 is accessible right now. In less than 6 year I will be eligible for SS at around \$12,000 a year. My health insurance is about \$4,200 a year. I live fairly conservative and can get by on \$30,000 a year so I figured the lump sum is the best way to go. I do plan on working but even if I didn’t I should be ok. Any thoughts on my thinking.? Thanks runnerr

PS the company is Pfizer

I wouldn't count on that 8.5% number.  You've got to realize some of the \$780 is return of principal.  You are actually probably looking at closer to 4.5 - 5% with your age and the actuarial stats.  Be careful, find out the actual info before you leap.

Runnerr,
You might try taking the lump sum and calculating what kind of annuity you could get on your own through Vanguard -- that would take away any potential risk from the employer, and give you a second opinion on whether your annuity being offered is a good value or not.

I don't get the 8.5% calculation previously discussed -- these things are apples and oranges -- how would you compare them with a single percentage?

The lumpsum continues to grow with time, and could produce a real return of 4% to 4.5% for you over the long haul, while keeping principal intact in real terms.

The annuity payments just keep getting smaller and smaller in real terms, and there is no principal to hand over to heirs or spend down in your old age.

If nothing else, you could see what a non-inflation-adjusted annuity of 780 per month would cost at Vanguard, although I think they are mosly all immediate annuities there. You might even be able to do better ; take the lumpsum, and buy the same annuity from VG (it is an AIG annuity, btw) and pocket some extra cash.

A pretty tough call. Getting 8.5% may not be easy, and for sure you would need some equity exposure which raises your risk.
I guess if you feel fairly certain that you can keep from drawing on the lump sum for 5-10 years I'd take it and take my chances with a balanced portfolio. Haven't heard the evil word taxes yet. That's important long and short term.

Thanks again for the great feed back. I am going to take th elump sum as I feel in the long run it is a much wiser choice. As for me drawing on it not a chance. i am going to have it go into an active IRA acount and not touch it for some time. I will draw from my othe investment first: after tax, 401k, ira and then the roth ira. i feel prety good. Beside I just got married and she has 20 more years to work. I can get on her insurance till I am 65 then if I want at that time I have to get back on Pfizers. So I feel I will only have to draw 400 to 500 a month and that will extend the nest egg. Thanks for th egreat feed back. I did not check the spelling so be kind

Check this link to see what an immediate annuity would yield:

http://www.immediateannuities.com/

I ran the numbers and found that for your age with no payments
to a beneficiary you would get about \$606/month.   \$780/month
for life seems good by comparison.

I also ran the numbers on Vanguard's immediate annuity through
AIG and found that you would get about \$385.14/month with

If you invested in Vanguard's Wellesley with a 3.8% dividend, you
with inflation.  Assuming the dividend rate holds constant at 3.8%
and assuming you spend the dividend, you would be lucky to get
a net 4% growth in NAV.  At that rate, it would take about 21
years for the \$346.75 to grow to \$780.  Break even would be
much longer.

Of course, you would still have your nest egg if that's important
to you.

Personally, I would be inclined to take the annuity.  You can always
fight inflation with your other assets and a fixed base of \$780/mo
would be pretty nice under a lot of future economic scenarios.

Cheers,

Charlie

Charlie,
Wow, an inflation adjustment knocks 50% off the monthly number for the annuity... kinda makes you think. About the power of inflation, that is.

More like 30%. From about 600\$ to 400\$ - still a lot. Cheers!

ESRBob said:
Charlie,
Wow, an inflation adjustment knocks 50% off the monthly number for the annuity...  kinda makes you think.  About the power of inflation, that is.

Not to throw a monkey wrench into an otherwise pristine analysis, but is your house paid off? If not, what is the mortgage payment and would the lump sum pay it off? Lower expenses means pulling out less from your investments, which means lower tax bracket. Lots of numbers would have to be crunched, but it's worth looking into.

ben said:
More like 30%. From about 600\$ to 400\$ - still a lot. Cheers!

I'm probably comparing apples and oranges, but I was thinking of the difference between Runnerr's \$780 a month and an (equivalent, but inflation adjusted?) \$400 a month from Vanguard/AIG. I guess the more apt comparison is between VG/AIG's own inflation-adjusted and raw annuities -- good point.

Yes my house is paid off.