Pension (annuity) vs lump sum decision

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Topic Author
ciscovp
Posts: 125
Joined: Wed Apr 30, 2008 10:02 pm

Pension (annuity) vs lump sum decision

Post by ciscovp »

My previous company (private company - publicly traded) is offering me the option of lump sum or annuity with an insurance company. The company had previously suspended the pension plan and now is in the process of terminating the plan. Termination is July 1 2015. Hence the options.

I am 42 years old. Wife is 41. We have a net worth of about $1.7 million. We are in good health. I am in IT and wife is a physician.

Below are the options. I will list the main ones.

Option 1: Take a lump sum and rollover to an IRA or another 401k: $49,376.92

Option 2: Start Monthly Annuity Payments Now (starting July 1 2015): No COLA
50% Joint & Survivor (Me: 209.24, Surviving Spouse: 104.62)
75% Joint & Survivor (Me: 205.37, Surviving Spouse: 154.03)

Option 3: Receive Monthly Annuity payments at a later date: (I used 55 and 65 years). No COLA.
65 years
100% Joint & Survivor (Me: 634.46, Surviving Spouse: 634.46)
50% Joint & Survivor (Me: 695.66, Surviving Spouse: 347.83)
75% Joint & Survivor (Me: 663.64, Surviving Spouse: 497.73)
10 year certain and continuous (Me: 718.84, Surviving Spouse: 718.84)

55 years
100% Joint & Survivor (Me: 424.15, Surviving Spouse: 424.15)
50% Joint & Survivor (Me: 452.52, Surviving Spouse: 226.26)
75% Joint & Survivor (Me: 437.88, Surviving Spouse: 328.41)
10 year certain and continuous (Me: 473.82, Surviving Spouse: 473.82)

So my questions:

1. Which is the better option? I am inclined to take the lump sum.

2. Does the fact that the annuity will be with an insurance company change things? I don't have any information on the insurance provider.
Last edited by ciscovp on Thu May 14, 2015 6:33 am, edited 1 time in total.
LeeMKE
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Re: Pension (annuity) vs lump sum decision

Post by LeeMKE »

I'm assuming you are a Boglehead. I would take the lump sum.

The insurance company will use a lower yield to calculate payments to you, than you can earn by investing at lower cost yourself. We can leave out of the equation the fact that many insurance companies lag market returns because they tend to be conservative, yet make some bad bets.

Besides, the monthly payment will be a nuisance to keep track of. It's not enough to make a difference, but too much to ignore. Keep it Simple.
The mightiest Oak is just a nut who stayed the course.
Topic Author
ciscovp
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Joined: Wed Apr 30, 2008 10:02 pm

Re: Pension (annuity) vs lump sum decision

Post by ciscovp »

Thanks Lee. I have been a practicing Boglehead since 1998 from the Morningstar boards.
Topic Author
ciscovp
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Re: Pension (annuity) vs lump sum decision

Post by ciscovp »

Seems lump sum is the answer.
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Frugal Al
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Re: Pension (annuity) vs lump sum decision

Post by Frugal Al »

I didn't look at every option due to taxation rendering most of them a poor choice. However, even assuming a conservative 5% nominal return over the next 23 years or so until age 65, the annuity payout then needed to provide $636 would be about 7.6% for a 100% jt survivorship SPIA. Today that annuity only pays out about 5.36%. A lot can happen in 23 years. How much interest rates might increase over the next 23 years is anyone's guess. On the flip side is inflation risk over 23 years, or more.

The real driving factor here is whether or not there will be a perceived need for a guarantee of this cash flow at retirement age, given that it's a relatively minor sum--or will be 23 years hence. Although we don't know the anticipated retirement expenses the OP may have in retirement, with the couple's current net worth and professional level income streams entering what should be the highest earning years, it's highly doubtful that an annuity decision needs to be made at this time. I'd take the lump sum.
Topic Author
ciscovp
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Re: Pension (annuity) vs lump sum decision

Post by ciscovp »

Thanks!
cricket49
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Re: Pension (annuity) vs lump sum decision

Post by cricket49 »

I had the same decision to make last year.

These were my reasons for taking the lump sum.

1. I could rollover the money into an IRA and invest in Vanguard funds.

2. In my case, the option to leave the money was available. However, according to employees the company
might be heading into financial problems and sell in the future.

3. The unknown of an insurance company being around in 20 or more years.

Good luck in the choice you make.

:mrgreen:
Expect the best. Prepare for the worst.
JW-Retired
Posts: 7189
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Re: Pension (annuity) vs lump sum decision

Post by JW-Retired »

ciscovp wrote: My previous company (private company - publicly traded) is offering me the option of lump sum or annuity with an insurance company. The company had previously suspended the pension plan and now is in the process of terminating the plan. Termination is July 1 2015. Hence the options.

I am 42 years old. Wife is 41. We have a net worth of about $1.7 million. We are in good health. I am in IT and wife is a physician.

Below are the options. I will list the main ones.

Option 1: Take a lump sum and rollover to an IRA or another 401k: $49,376.92

1. Which is the better option? I am inclined to take the lump sum.
Do you have any other tIRAs? It appears you are likely to go above the income limits to contribute directly to a Roth IRA. If you have no existing tIRAs, rollover IRAs, or SEP/Simple IRAs, you can totally get around that limit use a "backdoor" Roth strategy. If you have a $50k IRA it pretty much ruins that option. So it might be better to roll it to a 401k not an IRA, or take the annuity.

See the wiki on Backdoor Roth. https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
JW
Retired at Last
Leeraar
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Re: Pension (annuity) vs lump sum decision

Post by Leeraar »

You could work through the process outlined in the Wiki, look for Lump Sum vs. Pension.

However, the amount is small enough you should probably just take the lump sum. Be careful about the rules on withholding tax and rolling it to an IRA.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Topic Author
ciscovp
Posts: 125
Joined: Wed Apr 30, 2008 10:02 pm

Re: Pension (annuity) vs lump sum decision

Post by ciscovp »

JW Nearly Retired wrote:
ciscovp wrote: My previous company (private company - publicly traded) is offering me the option of lump sum or annuity with an insurance company. The company had previously suspended the pension plan and now is in the process of terminating the plan. Termination is July 1 2015. Hence the options.

I am 42 years old. Wife is 41. We have a net worth of about $1.7 million. We are in good health. I am in IT and wife is a physician.

Below are the options. I will list the main ones.

Option 1: Take a lump sum and rollover to an IRA or another 401k: $49,376.92

1. Which is the better option? I am inclined to take the lump sum.
Do you have any other tIRAs? It appears you are likely to go above the income limits to contribute directly to a Roth IRA. If you have no existing tIRAs, rollover IRAs, or SEP/Simple IRAs, you can totally get around that limit use a "backdoor" Roth strategy. If you have a $50k IRA it pretty much ruins that option. So it might be better to roll it to a 401k not an IRA, or take the annuity.

See the wiki on Backdoor Roth. https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
JW
Yes, we have used backdoor Roth to contribute to an IRA. I can roll over the lump sum to my existing company's 401k. However, my plan is to roll over to Vanguard IRA and then roll over to my 401k in a matter of days.

Will rolling it over temporarily in an IRA affect me from using the backdoor Roth approach?
JW-Retired
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Joined: Sun Dec 16, 2007 11:25 am

Re: Pension (annuity) vs lump sum decision

Post by JW-Retired »

ciscovp wrote:
Yes, we have used backdoor Roth to contribute to an IRA. I can roll over the lump sum to my existing company's 401k. However, my plan is to roll over to Vanguard IRA and then roll over to my 401k in a matter of days.

Will rolling it over temporarily in an IRA affect me from using the backdoor Roth approach?
No, that shouldn't be a problem. The way other IRAs interfere is if you still hold them at the end of the year you do the conversion step. You want all IRA account balances to be zero on 12/31/2015. You can dry run filling out the 8606 form to see how it works.
JW
Retired at Last
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