Pension annuity or Lump Sum

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Richard6593969
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Pension annuity or Lump Sum

Post by Richard6593969 »

Hello,
I would appreciate your thoughts on whether it makes sense to take the lump sum offered by my pension, or the monthly annuity payment.
The lump sum amount is $149,791 and the monthly payment would be $899 a month for as long as I live. The pension has no cola.
I am age 70 now. I am single, no children. I just started taking social security at age 70. I do have some other retirement income streams in addition to this pension.
If I took the lump sum I would roll it over to Vanguard to an IRA I already have at Vanguard.
I like the idea of the monthly payment, but feel that with inflation it might be better to let the money grow in the IRA. I also think of my age, 70, and I think generally the older one gets before taking a pension, the more sense it makes to take the lump sum.
Thank you for your thoughts about this. I appreciate it.
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FiveK
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Re: Pension annuity or Lump Sum

Post by FiveK »

Richard6593969. welcome to the forum.

Do you have access to Excel? If so, you could put $149,791 and $10,788 into cells B101 and B102 respectively on the 'Misc. calcs' tab of the personal finance toolbox. That will show you the pure math, over which you can put your expectations/concerns for life expectancy and investment returns.

Depending on what one assumes, good cases can be make for either choice.
niagara_guy
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Re: Pension annuity or Lump Sum

Post by niagara_guy »

I just went to Immediateannuities.com and used their calculator, for your 150k and age 70, male, you would get 861/month, so similar to your offer. I took the lump sum about 5 years ago, I like to control my investments but it's a personal decision and a gamble (if you live to be 110 the annuity will probably be better, if you die tomorrow the lump sum is better). Could you take part as an annuity and part as a lump some?
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JoeRetire
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Re: Pension annuity or Lump Sum

Post by JoeRetire »

Richard6593969 wrote: Sat Oct 16, 2021 12:33 pm I would appreciate your thoughts on whether it makes sense to take the lump sum offered by my pension, or the monthly annuity payment.
Take the lump sum.
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123
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Re: Pension annuity or Lump Sum

Post by 123 »

With no information about a spouse or survivor's benefits I'm assuming it's just you. Even not considering the possibility that the principle could grow you would have to receive monthly benefits for over 13 years before you would "lose out" by taking the lump sum.

You should take the lumpsum option and roll it over into an Traditional IRA. Yes you will have to take RMDs starting the year you turn 72 but you'll have the funds working for you. You don't have to wait till age 72 to start taking it out and you can take out more than the RMDs if you want. You can use a 60/40 stock/bond blend.

A lot depends on your perspectives about your own mortality and inflation. If you invest the lumpsum that gives you some inflation protection, taking the monthly pension in an inflationary environment can erode the value of the pension over time.
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Watty
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Re: Pension annuity or Lump Sum

Post by Watty »

Richard6593969 wrote: Sat Oct 16, 2021 12:33 pm I just started taking social security at age 70. I do have some other retirement income streams in addition to this pension.
If I took the lump sum I would roll it over to Vanguard to an IRA I already have at Vanguard.
You will also need to be taking RMDs soon.

A big question is what you will do with the money if you take the Pension annuity option.

If it is not needed because Social Security, "other income streams", and the RMDs already cover your expenses then you would just be paying taxes on the pension then investing it in a taxable account then the lump sum is likely a better choice.

You could just leave the lump sum invested and then when you are older and might need the income you could buy an annuity then. In ten years when you are 80 an annuity would pay out a lot more just because you are older, and interest rates may be higher then.

There is an old saying, "Buying an elephant for a dime is only a good deal if you need an elephant, and have a dime."
Jamech
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Re: Pension annuity or Lump Sum

Post by Jamech »

Without doing any calculations, I have a difficult time with the concept of giving an insurance company a 6 figure check so they can give me a 4 (or 3) figure check each month in return.
Also some months I may want more, some months none at all.
At age 70 I would go conservative on the lump sum to IRA investments, like about 30/70 or Wellesley.
venkman
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Re: Pension annuity or Lump Sum

Post by venkman »

What percentage of your expenses are already covered by your current income streams, and what percentage (if any) would you need to draw down from your IRA annually? Also, what are your estate goals (i.e. leave a sizeable estate to heirs/charity, or spend down most of the money before you pass)?

If your expenses are already covered, you don't need the annuity. But, if you don't care about leaving an estate, the annuity could be a good way to help spend down your money without worrying about it ever running out.

If your expenses aren't covered, the annuity would help, and the IRA could be invested for moderate growth to help keep up with inflation. Or, if the annuity and IRA combined are large enough that you would need less than, say, a 2% withdrawal each year, you could take the lump sum and live off the growth and dividends, without needing to worry about drawing down principal.

The upshot is that, whether or not the annuity is the optimal choice strictly from a financial point of view, there are other considerations that may be just as important in making the decision.
Jovby
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Re: Pension annuity or Lump Sum

Post by Jovby »

Do you have enough guaranteed income to cover your “needs,” and some of your “wants?” If not then adding more via this annuity may be something to consider.

Do you have enough investments to provide you flexibility, and hedge against inflation? If not then the lump sum may be something to consider.
Colorado Guy
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Re: Pension annuity or Lump Sum

Post by Colorado Guy »

Richard6593969 wrote: Sat Oct 16, 2021 12:33 pm I like the idea of the monthly payment, but feel that with inflation it might be better to let the money grow in the IRA. I also think of my age, 70, and I think generally the older one gets before taking a pension, the more sense it makes to take the lump sum.
Am a similar age as you and facing the same decision soon, a non-cola annuity or lump sum. I am strongly considering my lump sum option, as I realize my IRA is not all my money (a good sized chunk of it belongs to our beloved IRS). The lump sum/IRA combination can grow with inflation trends, I hope. Mentally, I am putting my IRA into two baskets, mine and the IRS. My pension lump sum would go into the IRS bucket, freeing up most of the rest of the IRA as my money. It will however affect RMDs.

With a non-cola pension, it is a roll of the dice if the US does not have significant inflation in the next 30 years. IMHO, an assumption of minimal inflation during that period is quite optimistic. There is no guarantee that the US will stay on a low inflation course. Thinking back to the 60's, who would have ever thought then that a cup of coffee today would cost $5. I knew people who had a non-cola pension after the 70's, and they were struggling then due to the fact their pension did not keep up with inflation. I also know people who essentially dropped out of the stock market in 2008, and are today having to deal with a lower than expected retirement fund.
Topic Author
Richard6593969
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Re: Pension annuity or Lump Sum

Post by Richard6593969 »

Thank you for your thoughts, I appreciate it.
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BrooklynInvest
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Re: Pension annuity or Lump Sum

Post by BrooklynInvest »

Great question.

Me, I'm a fan of the approach that you use unitized income to create an income floor - annuities, pensions and social security together ensure your critical expenses are taken care of even if you live to 110. Then it's OK to accept some market and longevity risk on top of that.

For you it may mean that you do the lump sum here since you have other sources of steady income?

Good luck OP. Sounds like the math of lump versus annuity is close either way.
capran
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Re: Pension annuity or Lump Sum

Post by capran »

Seems like your health and historical family longevity as well as your financial needs are a piece of the puzzle, as is any goal that may include wanting to pass on to charity or extended family member. I did the excel sheet, and to compare apples to apples, did not figure any gain into a lump sum payment (since there is no COLA on the monthly payment. At 10788 a year, if one were to need and therefore reduce the lump sum amount in similar fashion, your lump sum would be gone before the end of your 84th year.
70 149791 10788
71 139003 10788
72 128215 10788
73 117427 10788
74 106639 10788
75 95851 10788
76 85063 10788
77 74275 10788
78 63487 10788
79 52699 10788
80 41911 10788
81 31123 10788
82 20335 10788
83 9547 10788
84 -1241 10788
And finally, I often think I am the only person in the world that thinks given the historical rise in the markets since the lows of March 2009, that it's not unreasonable to assume that this bull market will not continue forever. How might a market downturn the likes of the dot com bubble or the 08-09 cycle affect what you need? To put it another way, my employer had 2 plans. Plan 2 was a guaranteed 2% times years of service times highest 5 years of salary. Plan 3 was keep all your self-directed investments and get 1% x YOS x salary. I'm in the minority camp of the sure thing.
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FiveK
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Re: Pension annuity or Lump Sum

Post by FiveK »

capran wrote: Fri Nov 05, 2021 3:38 pm Seems like your health and historical family longevity as well as your financial needs are a piece of the puzzle, as is any goal that may include wanting to pass on to charity or extended family member.
+1
I did the excel sheet, and to compare apples to apples, did not figure any gain into a lump sum payment (since there is no COLA on the monthly payment.
Don't know about that being apples to apples. It is an assumption of 0% returns on the lump sum, and one can make that assumption. But one may also assume different non-zero returns with constant withdrawals (to match the non-COLA payments) and reach different conclusions.

See this post for a quick way to do so.
capran
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Re: Pension annuity or Lump Sum

Post by capran »

FiveK wrote: Fri Nov 05, 2021 3:51 pm
capran wrote: Fri Nov 05, 2021 3:38 pm Seems like your health and historical family longevity as well as your financial needs are a piece of the puzzle, as is any goal that may include wanting to pass on to charity or extended family member.
+1
I did the excel sheet, and to compare apples to apples, did not figure any gain into a lump sum payment (since there is no COLA on the monthly payment.
Don't know about that being apples to apples. It is an assumption of 0% returns on the lump sum, and one can make that assumption. But one may also assume different non-zero returns with constant withdrawals (to match the non-COLA payments) and reach different conclusions.

See this post for a quick way to do so.
That is very true. It seems like we may never see the likes of the bear markets of 01 and 08, after all, they certainly ranked amongst the historically near worst bears in market history. It is quite rare that anyone urges caution and very little discussion about what a revert to the mean would look like. In a worst-case scenario, say a prolonged bear market that could begin early during your retirement years, that might influence the OP's decision making. If he doesn't intend to use or need the money, potential market volatility may have no bearing on the decision.
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