Take the 575K lump sum.
Immediately invest all 575K into a simple 3-fund portfolio:
Vanguard Total Stock Market Index
Vanguard Total Bond Index
Vanguard Total International
The effective payout of the pension is 6.5% which may be a wash for someone in their late 60s but it's not a wash for someone who is 60, especially with a COLA. I don't see how anyone would make this choice unless life expectancy was known to be short.
John Z wrote:
My wife and I retired last July and she had a pension coming. We looked at all the options and although the annuity was more generous than what we could find online anywhere (for comparison purposes), when we added all the pluses and minuses, we took the lump sum. Why?
With an annuity, you cannot control your income as it relates to being taxed on SS benefits. With a pension constantly providing income, you could most likely have some/all of your SS taxed; it would have happened in our case. By taking the lump sum and investing it in Wellesley Admiral, we have the option to withdraw any amount or let it ride to grow and compound and collect dividends. Because of this, we have planned and estimated that we will pay no income tax (nor will any SS be taxed) for the next 4 years (until RMD) while converting some IRA funds into ROTH again avoiding the trigger that would cause any federal taxation. So see if you can determine for your brother a method to avoid taxes on SS.
The second reason we took the lump sum is to have it in our account for any reason or need that would require a large amount of money, and, finally, for our heirs if we don't make it to the ripe age of ~90.
Hope this helps,
If there are tax considerations, like $10,000 in lifetime tax savings, then that would just be added to the break even calculation. That may or may not be enough to tip the scale to one choice or the other. Someone with other investments also wouldn't place a premium on control of the assets for a lump sum.
johnep wrote:I agree with lump sum, especially if this is a non COLA annuity. Investing the lump sum even in moderate AA should have good change of producing comparable income to annuities while preserving principle. Inflation, even at current low levels, would dramatically reduce the spending power of this annuity over 10 to 20 years.
Investing in a moderate allocation and potentially producing similar income is a far fetched conclusion (6.5% inflation adjusted w/d rate??) It's also a hugely different risk calculation.
What is also absent in the discussion about the lump sum is the transfer or risk, the primary benefit of a pension. Should the market do poorly or longevity risk appear, that risk transfer to the retiree is no small matter.