$1M Settlement - Lump Sum or Annuity?? Taxable AA???

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Topic Author
enebyberg
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$1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

I have a Workman’s Comp settlement coming to a close that will be between $750,000 and $1.25 million tax-free depending on if I take a lump sum pay out or a structured settlement (20-22yrs). I would like to continue working but only 30-50%, but maybe not.

1. Any thoughts on the lump sum vs. structured settlement??
2. Since it will go into my taxable Vanguard account... any thoughts on asset allocation or best funds heading into retirement?

Age: 59 1/2
Married: Wife 45 (earns 50k to 72k a year) and 3 teenagers

Assets
Emergency fund: yes, 6 months
House: no mortgage

Taxable: $50,000 (split between VMMXX Prime, VTSAX Total Stock, VGTSX Total Int.
Rollover IRA: $450,000 equal 50/50 split: VAIPX TIPS, VBTLX Total Bond, VTSAX Total Stock and VTIAX Total International
Roth IRA: $62,000 VTWNX Target 2020

I would really appreciate feedback. :happy
Last edited by enebyberg on Fri Sep 20, 2013 5:55 am, edited 4 times in total.
YttriumNitrate
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by YttriumNitrate »

enebyberg wrote:I have a Workman’s Comp settlement coming to a close that will be between $750,000 and $1.25 million tax-free depending on if I take a lump sum pay out or a structured settlement. I would like to continue working but only 30-50%, but maybe not.

1. Any thoughts on the lump sum vs. structured settlement??
It depends on the time periods associated with the structured settlement. If the structured settlement is ten dollars a year for the next 125,000 years, definitely take the lump sum. :mrgreen:
Topic Author
enebyberg
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

The time period has yet to be finalized. They are talking 20 to 22 years.
YttriumNitrate
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by YttriumNitrate »

Figuring a rather modest rate of return for the next 20 years, the lump sum seems to be a good option. With 4.5% non-inflation adjusted rate of return, that $750,000 grows to $1.25 in a little over a decade. However, with three teenagers in the house, if any of them might want to go to a private university, that $750k+ sitting in a non-retirement account would seriously hurt your ability to get need based financial aid.
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pteam
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by pteam »

The problem with most people for lump sums is they can't manage money and they spend it too fast and it won't last 20 years. This is what happens to the majority of lottery winners who choose lump sum.
john94549
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by john94549 »

Depends on the structure of the "structured settlement". If you are basically "buying" an annuity at today's horridly-low interest rates (major "argh"), with no adjustments for COLA, then a lump-sum might be better. That said, structured settlements are better for folks who have ancillary issues (if you get my drift). Claimants' attorneys (I assume you are represented) were always pretty savvy on the details. Suggest you start with your attorney.
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Peter Foley
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by Peter Foley »

I would go with the lump sum. You can invest it fairly conservatively in terms of AA and come out better. Some of it could go into 529 plans for your 3 teenagers if you are so inclined.

Edit: As to AA you could follow the same approach you did with your rollover IRA. (I would opt for short term bonds, however.)
Topic Author
enebyberg
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

Thank you for the replies!! I do have a small 529 plan set up for the kids but it will only get them through the first year at this point. I am also concerned how schools will look at us if we apply for scholarships. I thought they might view us differently because the settlement must also cover present and future health issues.

What specific bond funds could work in taxable. I don't think I have enough space in tax deferred and will need a new 50/50 asset allocation to cover taxable and non-taxable.
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patriciamgr2
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by patriciamgr2 »

I agree with earlier posters. Taking an annuity now, calculated at today's low interest rates, does not seem desirable. There's also an issue with creditworthiness of the annuity issuer. $1MM is higher than many states' guaranty fund amount (ie the fund that pays out annuities if an insurer goes bankrupt). You should check out what that limit is for your state.

If for some reason you decide later than you'd prefer an annuity stream, you could always buy annuities in smaller amounts from different insurers--perhaps spreading out the purchases over a few years to dollar cost average (in effect) the underlying interest rates.

There's a website [savingforcollege.com] which has information on 529 plans. If that website doesn't have information on whether annuity income would be treated more favorably than investments (given the health care expenses you will be incurring), I'd strongly suggest contacting someone experienced on filling out the Financial Aid forms for advice.

In particular, it would be worth asking whether placing the settlement proceeds immediately into a trust of some sort for the benefit of you (as a disabled person because of the injury) would be viewed differently on the Financial Aid forms. I recall that friends of mine got information from the guidance counselor at their kid's high school as well as financial aid professionals at a local college, but they just had general questions on location of savings (student's name vs. parents' etc.)

Other forum members with kids may have some recent experience on the financial aid process. Good Luck

(edited to correct typos & try to fix link)
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enebyberg
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Re: 1M$ Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

Thanks for the insight and ideas to check out going forward. The final details won't be fully known until October but I need to know how to respond when the final numbers are in. I sure don't want to make mistakes with 529's or financial aid down the road. Good thing they are still 3 years away from graduation.

Any thoughts into particular short term funds that would be best for taxable? Vanguard Short Term TIPS, Short Term Tax Exempt, Short Term Investment Grade or Short Term Bond Index?
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SnapShots
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by SnapShots »

Are your future medical expenses going to be high and take a majority of the settlement?
the best decision many times is the hardest to do
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enebyberg
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

SnapShots wrote:Are your future medical expenses going to be high and take a majority of the settlement?
No one knows at this time. They might be $250,000, and they might not be. I do have a catastrophic coverage plan that will cover most of the costs if things get out of hand. Plus my current plan that covers 90% of health costs that will be in place after the settlement. (WC currently covers 100% of the cost)
MN Finance
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by MN Finance »

It's not clear to me. You have the option of $750,000 today or 1.25M over 20-22 years? I don't have my financial calculator here but that's an internal rate of return of 5.5%. Unless I'm misunderstanding the facts, that hardly leads to the consensus being posted that a lump sum is the best choice. Not saying it's not, but 5.5% return with no risk (some small risk) is a 2% premium over treasuries and 1% over AAA corporate bonds.
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by abuss368 »

20 plus years is a long time. I would probably go with the lump sum payout. With 4-5% growth over 20 years you should come out the same or better. As for private college? Is that necessary compared to the excellent public university options that are available?
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Topic Author
enebyberg
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

This is a lot to think through. Thanks for insight. The final figures have not come to me and are being finalized as part of discovery in the case. The figures I give are the approximate figures that have been given to me. They might be slightly higher on both ends.

Our kids are looking at State universities at present and one private university with fairly reasonable rates.
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Frugal Al
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by Frugal Al »

I agree with MN Finance, this is not necessarily a clear cut case. Everything about it is marginal. I'm not certain we have enough information about living expenses and other income. Does the spouse work? It's good that the home is paid off. When I say marginal, I don't mean that in a bad way. The OP is in a position to do very well financially, but there is a long time horizon with the young family.
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enebyberg
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by enebyberg »

My wife works and usually brings in from 50k to 72k a year. She will continue to work for at least another 12+ years.
MN Finance
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Re: $1M Settlement - Lump Sum or Annuity?? Taxable AA???

Post by MN Finance »

abuss368 wrote:20 plus years is a long time. I would probably go with the lump sum payout. With 4-5% growth over 20 years you should come out the same or better.
I'd love to get into this math class. The IRR of the structured settlement is 5.45%, so how 4-5% growth comes out the same or better would be great to know.
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