Pension or Annuity?

[Rianne]

Well if you took the $628k and put it into a 20 year CD/UST ladder that averaged 3%, you could get $3,483/month over 20 years... IOW, the present value of $3,483/month for 20 years discounted at 3% is $628k.... a lot better than $2,617!

Plus, if they both die early then the remaining balance of the CD/UST ladder is inherited by their heirs.

Best advice, thanks pb4uski. Edit: We are 65 at end of 2022.

 

[pb4uski]

Well, this is surprising to me... according to immediateannuities.com a $628k premium would yield $3,892/month for a 20 year period annuity... better than a 3% CD/UST ladder... I get a rate of 4.26%! Can someone please check my math?

Seems too good to be true. I wonder who the issuer is and what their rating is. I guess it is plausible in that a 10-year MYGA on Blueprint income for a B++ rated carrier is 4.6% and for an A rated carrier is between 3.65% and 4.20%.

 

[ShokWaveRider]

For a purchase of 3 ($628k/3 = ~$209k) 5 or 10 year MYGAs, at 4.5% (Current Best Rates) with up to 10% annual withdraws. Keeping the total below the State Guarantee of $250k.

You would get $2,355 a month in interest alone. You could take that interest and an additional $1,128 as part of your penalty free 10% annual withdrawal allowance. That is only 5.5% of the total in the first year. It would take some math, but not hard math to get your $3,483 per month, you could also five yourself a nice COLA too. Then after the 5 or 10 years you could so the same thing again.

You would need to do more precise calculations, but I think it could be done. I think the returns would be higher in the long run. Just a thought.

This is what we plan on doing with ~8 x $250k MYGAs once I take my SS at 70 and DW is on Medicare. Till then we will tax defer everything to get Max ACA Subsidies.

 

[Jerry1]

Well, this is surprising to me... according to immediateannuities.com a $628k premium would yield $3,892/month for a 20 year period annuity... better than a 3% CD/UST ladder... I get a rate of 4.26%! Can someone please check my math?

Seems too good to be true. I wonder who the issuer is and what their rating is. I guess it is plausible in that a 10-year MYGA on Blueprint income for a B++ rated carrier is 4.6% and for an A rated carrier is between 3.65% and 4.20%.

Probably not wrong. When I left work, the pension, compared to an annuity, was much better. It may act like an annuity, but it’s not. The pension structure should hopefully be better - mine was and I took the pension. The pension (mine) is also guaranteed by the PBGC, which was another factor in my decision.

 

[finnski1]

Well, this is surprising to me... according to immediateannuities.com a $628k premium would yield $3,892/month for a 20 year period annuity... better than a 3% CD/UST ladder... I get a rate of 4.26%! Can someone please check my math?

Seems too good to be true. I wonder who the issuer is and what their rating is. I guess it is plausible in that a 10-year MYGA on Blueprint income for a B++ rated carrier is 4.6% and for an A rated carrier is between 3.65% and 4.20%.

yes , Those are the same numbers($3892 20 yr certain) I posted earlier
I also get 4.26%

 

[finnski1]

The original premise by the OP was to hope to get a lifetime annuity at $3-4k/month and she wanted to know if that was possible.
A joint life annuity would pay $2878/month. Close but not quite but better than the $2625/month offered by her employer
A single life and 20 yr certain would pay $3417 for a female and $3483 for a male.
So that would cover 20 years with a much higher monthly than just taking the 628k and dividing by 20 years ($31500/yr) as the OP did at one point in this thread. That would be with no investment, no return, no COLA and just simply spending it. It now appears that they can get either a $628k lump sum or $31500/yr for life. The 20 year figure thrown out earlier has just confused us all, or at least me anyway

As usual with an annuity you have to wait many years "just to get your money back" and the IRR isn't good for a long time.

 

[finnski1]

Best advice, thanks pb4uski. Edit: We are 65 at end of 2022.

Yes but you still run out at year 20. you were looking for a life annuity. You could live for 30 or more years

 

[pb4uski]

^^^ True, but if they invested $628k in a 3% CD/UST ladder and only withdrew $31,500 (same as the pension) it would last until they are 95. The reality is that they could probably get 3.25% today, which would extend to age 96-97. Below is a table of the IRRs of the pension option.

	-628,000
65	31,500
66	31,500
67	31,500
68	31,500
69	31,500
70	31,500	-156.09%
71	31,500	-20.92%
72	31,500	-16.77%
73	31,500	-13.52%
74	31,500	-10.91%
75	31,500	-8.80%
76	31,500	-7.06%
77	31,500	-5.61%
78	31,500	-4.40%
79	31,500	-3.36%
80	31,500	-2.48%
81	31,500	-1.72%
82	31,500	-1.05%
83	31,500	-0.48%
84	31,500	0.03%
85	31,500	0.48%
86	31,500	0.87%
87	31,500	1.23%
88	31,500	1.54%
89	31,500	1.82%
90	31,500	2.08%
91	31,500	2.30%
92	31,500	2.51%
93	31,500	2.70%
94	31,500	2.87%
95	31,500	3.02%
96	31,500	3.17%
97	31,500	3.30%
98	31,500	3.41%
99	31,500	3.52%
100	31,500	3.62%

 

[Phroig]

A single life and 20 yr certain would pay $3417 for a female and $3483 for a male.

For the couple then, does it make sense to split the lump sum and get a single life with 20 year certain for $314K each? Would that give them $3,450 combined for 20 years, and then if one spouse was deceased, the surviving one would continue to get $1,700 for the remainder of his/her lifetime?

 

[jazz4cash]

For the couple then, does it make sense to split the lump sum and get a single life with 20 year certain for $314K each? Would that give them $3,450 combined for 20 years, and then if one spouse was deceased, the surviving one would continue to get $1,700 for the remainder of his/her lifetime?

If you split the lump sum wouldn’t taxes be due on the spouse’s share? The employees share can rollover to the annuity as qualified funds.

 

[target2019]

Seems I’ve not presented this situation correctly. Bottom line, our choice is:
$628,000 January 1, 2023, one lump sum.
Or $31,500/ year for life, 100% survivorship. I die, DH gets that amount and visa versa. No COLA on January 1, 2023.
Thus our dilemma.

Wife's pension did not offer lump sum. So, she took the 10-year guaranteed payout. We did this because it is a certainty that I will be checking out well before her. That is just based on health analysis...but if she does get hit by a bus then I will be ok for x number of year remaining of the 10 years.

1. Since your two choices are equal (as presented in another post) it comes down to estimating how much risk is in one choice vs. the other. For example, the monthly pension, non-COLA, has some unknown risk due to future inflation.

2. You also might think, as we did, of considering the entire amount in an account we could pass on to heirs. Since we had no lump sum choice that was moot.

3. I'd measure how much this income was needed monthly.

These are things we thought of. Can't say this helps you at all. I do know that agreeing on the decision is very important.

 

[ShokWaveRider]

If you have a stash of $1m or $2m, taking a portion of it for a 10 - 15 year Certain does make sense after 65 or 70. Although I prefer to manage my own with MYGAs, if you do the math, the payout is better.

I use this calculator to compare. The 10 years I have seen only pay ~2.7%. You can get 4.3 with a MYGA for 5 years.

https://iqcalculators.com/calculator/annuity-rate-of-return-calculator/

 

[finnski1]

^^^ True, but if they invested $628k in a 3% CD/UST ladder and only withdrew $31,500 (same as the pension) it would last until they are 95. The reality is that they could probably get 3.25% today, which would extend to age 96-97. Below is a table of the IRRs of the pension option.

-628,000
65 31,500
66 31,500
67 31,500
68 31,500
69 31,500
70 31,500 -156.09%
71 31,500 -20.92%
72 31,500 -16.77%
73 31,500 -13.52%
74 31,500 -10.91%
75 31,500 -8.80%
76 31,500 -7.06%
77 31,500 -5.61%
78 31,500 -4.40%
79 31,500 -3.36%
80 31,500 -2.48%
81 31,500 -1.72%
82 31,500 -1.05%
83 31,500 -0.48%
84 31,500 0.03%
85 31,500 0.48%
86 31,500 0.87%
87 31,500 1.23%
88 31,500 1.54%
89 31,500 1.82%
90 31,500 2.08%
91 31,500 2.30%
92 31,500 2.51%
93 31,500 2.70%
94 31,500 2.87%
95 31,500 3.02%
96 31,500 3.17%
97 31,500 3.30%
98 31,500 3.41%
99 31,500 3.52%
100 31,500 3.62%

Thanks for the IRR table

Yes and the beauty of this method is that you still have your remaining principal at any point in time should a need arise.

 

[Phroig]

If you split the lump sum wouldn’t taxes be due on the spouse’s share? The employees share can rollover to the annuity as qualified funds.

You’re right. There’s probably also a withholding unless the employee does a rollover. I forgot about that. Perhaps the single life annuity isn’t the way to go, then, unless OP is comfortable with the risk that her spouse might not receive anything after 20 years.

In any case, I also wonder if it makes sense to wait until after the September rate hike before doing anything long-term.

 

[Rianne]

Edit: If we took the $628 on Jan. 1 it would go directly into our tIRA for the year 2023. Our situation is good for 2023 with the cash we have and cashing out matured EE Bonds. We'll have time to look at all options, but I think Pb4uski's table of the IRRs pension option is a good one.

The thought of the $31,500/year for life keeps crossing my mind. If one of us dies the other will continue to get $2626/month for life but that would eliminate any benefit to our beneficiaries if both of us die. I think this option of one and done, not having to figure out interest and if we feel comfortable with the insurance co. delivering the annuity etc. Or staying on top of UST interest rates and following through with laddering, we're kind of lazy. We appreciate the many options presented!

There could be an AHA moment where everything rings clear. Right now we're surprised the company offered that $628 buy out. We though it would be much less.

 

[target2019]

You can invest part of the monthly pension check into an account you've ear-marked for the child...or set aside a yearly gift amount.

 

[copyright1997reloaded]

Rianne - what state are you located in and do you intend to stay there? I am asking because some states treat pension income as tax free, some also allow IRA/401K distributions, some do not. Also, a treasury ladder would be state income tax free.

Some of these factors may swing the decision.

I know for me, it was an easy decision to take a pension over the lump sum. But that was because my employers lump sum calculation was not good and because inflation was so low. If it were me (and it is not), I would also factor in an expectation of inflation which might sway against a non-cola'd pension.

 

[SevenUp]

For what it's worth, below is a picture that matches pb4uski's table. You just need to pick the x and y coordinates.

The chart was generated by the case study spreadsheet, near row 100 on the 'Misc. calcs' tab, if you want to replicate it.

 

[38Chevy454]

For what it's worth, below is a picture that matches pb4uski's table. You just need to pick the x and y coordinates.

The chart was generated by the case study spreadsheet, near row 100 on the 'Misc. calcs' tab, if you want to replicate it.

Unless you expect poor rate of return, this chart seems to show that taking the lump sum is the way to go. I would suggest this:
1) put approx half into conservative fixed income and use that to take most of the required income. SS being the other main contributor now for OP's SS and then supplemented with DH's SS in 5 years at 70. This $314k should last well past 10 years, depending on rate of return and withdrawal rates There also might be some adjustments for taxes, see number 2 below.
2) put other half into equities (broad based fund type) and let it ride with dividend reinvestment until it is needed for income. If this [half of $6128k] is in taxable account, then it might be advantageous to take the dividends as income, with their favorable long term gains tax rate. If you use the long term market return avg of approx 9%, and the rule of 72 [divide 72 by rate of return gives time to double], then this will double after 8 years, and increase more depending how long you let it ride.

The best part of not having an annuity is that you can always access the principle if needed for an unexpected large expense. Plus assuming you get a reasonable good rate of return on the equities side, you should have plenty of money left over after 20 years.

 

[Rianne]

Checking out the compound interest calculator I found putting $628K in a 3.5% UST for 10 years would get us 885,000. If we bought a high-quality individual bond at 5% for 10 years: $1,022,000. In Jan. 2028 our combined SS will be $61K. That's $5083/month. I'm starting to feel more comfortable about our options.

I'm thinking to spend down the current tIRA to meet monthly needs. Roll some over to the Roth. Let that $628 mature and hope our 50% index funds come back in that 10 years.

 

[Rianne]

Unless you expect poor rate of return, this chart seems to show that taking the lump sum is the way to go. I would suggest this:
1) put approx half into conservative fixed income and use that to take most of the required income. SS being the other main contributor now for OP's SS and then supplemented with DH's SS in 5 years at 70. This $314k should last well past 10 years, depending on rate of return and withdrawal rates There also might be some adjustments for taxes, see number 2 below.
2) put other half into equities (broad based fund type) and let it ride with dividend reinvestment until it is needed for income. If this [half of $6128k] is in taxable account, then it might be advantageous to take the dividends as income, with their favorable long term gains tax rate. If you use the long term market return avg of approx 9%, and the rule of 72 [divide 72 by rate of return gives time to double], then this will double after 8 years, and increase more depending how long you let it ride.

The best part of not having an annuity is that you can always access the principle if needed for an unexpected large expense. Plus assuming you get a reasonable good rate of return on the equities side, you should have plenty of money left over after 20 years.

This is what we're thinking now. The #2 part would be gradual back door Roth contributions into equity funds taken from tIRA laddered UST. Initially, it has to be rolled into the tIRA. Can you imagine the tax bill on this

 

[I am He]

Listen to Stan the annuity man on YouTube.

If you're going for a monthly payment, he mentioned that about 90% of the time that the company's offering is better than if you used the cash to buy your own as he figures they can do about as good as the next guy and would rather keep the cash under their control for longer than letting it go.

That said, I bet that he would be the one to structure a deal that's better for your family taking into consideration your thoughts about needing money, both for yourself and your beneficiaries better than just a pension from your company.