lump sum or annuity

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beatle2020
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lump sum or annuity

Post by beatle2020 »

My 1st post. Thanks for the quality of questions and answers. This is a great site with a tremendous depth of knowledge. Thanks to all!
My question:
I just turned 64 and will be retiring at the end of the year. My spouse(60) will be retiring next May. I have a pension from a previous employer that I have not activated yet. I can take a lump sum of $104,000 and roll into an IRA or take a monthly annuity of $514.(This is with a 100% spousal option if I die 1st)
My income:
Social Security approximately $2000 month
My spouse's state pension $2450 month.
That's it for guaranteed income.
We have $500,000 in retirement accounts(Vanguard 2015 target and Fidelity 2015 target) Of that $30,000 is in a Roth.
We have $185,000 in cash(primarily money market paying .65%)

We have no debt, house/cars paid for. We may want to use up to $100,000 to buy a retirement home.(That would be taking the proceeds of our home sale plus $100,000 to purchase outright.)

I believe our monthly expenses to be around $4000. My thought is that we probably need the pension income of $514 to help with basic monthly expenses but, of course, the real question: Can I invest the $104,000 to generate the same of better income over the long term?
Thanks in advance for your thoughts!
Infinity
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Re: lump sum or annuity

Post by Infinity »

I think the annuity is a better bet in this case. You're getting over $6100 per year with full spousal continuation. Assuming both of you are in good health, there's a pretty good chance that at least 1 of you makes it to 90. So this annuity might pay out for 30 years.

I don't think there's a way to invest $100k (without taking on a lot of risk) that would allow you to make 6% withdrawals per year for the next 20-30 years.
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Frugal Al
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Re: lump sum or annuity

Post by Frugal Al »

Agree with Infinity. It seems to be a good annuitization rate with 100% survivorship.
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Taylor Larimore
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Re: lump sum or annuity

Post by Taylor Larimore »

Beatle:

Welcome to the Bogleheads Forum!

You wrote:
I just turned 64 and will be retiring at the end of the year. My spouse(60) will be retiring next May. I have a pension from a previous employer that I have not activated yet. I can take a lump sum of $104,000 and roll into an IRA or take a monthly annuity of $514.(This is with a 100% spousal option if I die 1st)
I went to http://www.immediateannuities.com and discovered that a male age 64 and a female age 60, with $104,000, can purchase an immediate joint lifetime monthly annuity (SPIA) with an estimated monthly payment of $467

It appears that your employer's monthly lifetime annuity is very competitive and should be strongly considered.

Edit in red.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
dickenjb
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Re: lump sum or annuity

Post by dickenjb »

Taylor Larimore wrote:Beatle:

Welcome to the Bogleheads Forum!

You wrote:
I just turned 64 and will be retiring at the end of the year. My spouse(60) will be retiring next May. I have a pension from a previous employer that I have not activated yet. I can take a lump sum of $104,000 and roll into an IRA or take a monthly annuity of $514.(This is with a 100% spousal option if I die 1st)
I went to http://www.immediateannuities.com and discovered that a male age 64 and a female age 60, with $104,000, can purchase an immediate joint lifetime monthly annuity (SPIA) of $601 (highest quote) or $568 (lowest quote).

It appears that your employer's monthly lifetime annuity is not competitive.

Best wishes.
Taylor
Taylor, if he took the lump sum of $104K and paid taxes on it, he will only have perhaps $75K left with which to purchase an SPIA. Now his pension payments are 100% taxable and the SPIA payments will only be partially taxable.

I am just pointing out that comparing the $514 with the $601 is not a straight up comparison.

Or are you suggesting he roll the lump sum into an IRA and then annuitize it? Can you purchase an SPIA with qualified money? I know Berkshire Direct did not sell SPIA's in qualified accounts.
TareNeko
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Re: lump sum or annuity

Post by TareNeko »

If you get the $514 annuity, will it be inflation adjusted over the years? It is hard to get a return of 12 x $514 =~ $6000 from the lump sum amount of $104000. But over time, due to inflation, you may come ahead if you invest somewhere else.
Retread
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Re: lump sum or annuity

Post by Retread »

Certainly, a qualified IRA annuity would be purchased with the full $104,000
Bruce
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Ron
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Re: lump sum or annuity

Post by Ron »

Creating an XRR (not XIRR) spreadsheet for an annuity paying $6168/year for 30 years with a $104,000 preimum, you would be getting a return of 4.21%. If you/wife would be receiving the income over more/less years, your actual returns would be greater/less than that percentage.

Compared to todays rates? It certainly is better, and without investment risk related to direct investment in alternative market alternatives. Could you do better over the long run? Perhaps. Could you do worse? Perhaps :oops: ....

I faced this quandary when I retired at age 59. I had no pension but did receive a lump sum from my previous employeer (cash balance plan). They offered the same deal - to convert the cash to a "pension" (e.g. SPIA). What I did was to investigate on my own what different companies were offering for the same preimum (as Taylor has aluded to).

It turned out that I took the lump sum, purchased a joint life/guaranteed period (pays off to your estate if you/wife pass before the end of the term, so it does have cash value if you are both gone) with a portion of the lump sum, from another company (Fidelity). We decided to take an amount equal to 10% of our total retirement portfolio (with the lump sum considered part of that) to purchase the SPIA. At the time (2007), our calculated rate, based upon the guaranteed term, was 4.79%. Lower than todays rates, but then again rates have dropped in that period of time. Funny that one of our concerns was that we were getting a SPIA at a rate lower than historical terms; look what happened :mrgreen: ...

FWIW, I would get an SPIA, but not necessarily through your company. You can do better.

- Ron
Last edited by Ron on Tue Dec 03, 2013 10:59 am, edited 3 times in total.
Retread
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Re: lump sum or annuity

Post by Retread »

Taylor Larimore wrote:Beatle:

Welcome to the Bogleheads Forum!

You wrote:
I just turned 64 and will be retiring at the end of the year. My spouse(60) will be retiring next May. I have a pension from a previous employer that I have not activated yet. I can take a lump sum of $104,000 and roll into an IRA or take a monthly annuity of $514.(This is with a 100% spousal option if I die 1st)
I went to http://www.immediateannuities.com and discovered that a male age 64 and a female age 60, with $104,000, can purchase an immediate joint lifetime monthly annuity (SPIA) of $601 (highest quote) or $568 (lowest quote).

It appears that your employer's monthly lifetime annuity is not competitive.

Best wishes.
Taylor
Taylor,
Please check that again. I found a quote of $467
Bruce
absit iniuria verbis
Topic Author
beatle2020
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Re: lump sum or annuity

Post by beatle2020 »

This pension annuity is not inflation adjusted, $514 monthly for life. Since this is in a pension, and if I take the lump sum of $104,000, I should be able to roll it into an immediate annuity(if it is a better monthly amount) without any taxes due on the lump sum roll over.
I am somewhat skeptical of the companies offering immediate annuities. How do you know they are safe/above board?
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Taylor Larimore
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Re: lump sum or annuity

Post by Taylor Larimore »

dickenjb wrote:
Taylor Larimore wrote:Beatle:

Welcome to the Bogleheads Forum!

You wrote:
I just turned 64 and will be retiring at the end of the year. My spouse(60) will be retiring next May. I have a pension from a previous employer that I have not activated yet. I can take a lump sum of $104,000 and roll into an IRA or take a monthly annuity of $514.(This is with a 100% spousal option if I die 1st)
I went to http://www.immediateannuities.com and discovered that a male age 64 and a female age 60, with $104,000, can purchase an immediate joint lifetime monthly annuity (SPIA) of $601 (highest quote) or $568 (lowest quote).

It appears that your employer's monthly lifetime annuity is not competitive.

Best wishes.
Taylor
Taylor, if he took the lump sum of $104K and paid taxes on it, he will only have perhaps $75K left with which to purchase an SPIA. Now his pension payments are 100% taxable and the SPIA payments will only be partially taxable.

I am just pointing out that comparing the $514 with the $601 is not a straight up comparison.

Or are you suggesting he roll the lump sum into an IRA and then annuitize it? Can you purchase an SPIA with qualified money? I know Berkshire Direct did not sell SPIA's in qualified accounts.
Dickenjb:

If Beatle decides on the annuity, yes, I am "suggesting he roll the lump sum into an IRA and then annuitize it."

It would be a huge mistake for Beatle to take his prior pension and put it into a taxable account.

I believe, but not sure, that the figures I quoted are available in either a tax-deferred or taxable account. This will require further investigation by Beatle if he decides to go that route.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Ron
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Re: lump sum or annuity

Post by Ron »

Taylor Larimore wrote:
Dickenjb:

If Beatle decides on the annuity, yes, I am "suggesting he roll the lump sum into an IRA and then annuitize it."

It would be a huge mistake for Beatle to take his prior pension and put it into a taxable account.

I believe, but not sure, that the figures I quoted are available in either a tax-deferred or taxable account. This will require further investigation by Beatle if he decides to go that route.

Best wishes.
Taylor
In addition, by doing a qualified (e.g. tax advantaged $$$) rollover/purchase of an SPIA, he removes those funds for consideration at age 70.5 under RMD rules. Sure, he will have to pay FIT on the distribution on an annual basis starting immediately, but if his other investments result in "excess RMD's" (e.g. those withdrawls due by tax law - not by income needs) at age 70.5, it should also be part of the analysis of what should be done.

- Ron
Infinity
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Re: lump sum or annuity

Post by Infinity »

"It appears that your employer's monthly lifetime annuity is not competitive."

Fair enough, I stand corrected. I was just thinking about investing the $100k, not about finding a better annuity.

Another thing worth investigating: some insurance companies offer higher rates on annuities because they have lower credit ratings. A purchase of $100k is almost certainly backed up by your state, but I would doublecheck that the company from which you buy the annuity is at least A rated.
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Taylor Larimore
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Re: lump sum or annuity

Post by Taylor Larimore »

Taylor,
Please check that again. I found a quote of $467
Bruce
Bruce:

I re-entered into http://www.immediateannuities.com the husband and wife ages (64 & 60), the amount ($104,000), and got the same monthly figures I posted ($601 highest and $568 lowest) ?

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Frugal Al
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Re: lump sum or annuity

Post by Frugal Al »

When I enter $104k annuity, with 100% joint life, I get $467/month. Taylor, I don't believe you're looking down the listing to the 100% joint life.
Retread
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Re: lump sum or annuity

Post by Retread »

Taylor Larimore wrote:
Taylor,
Please check that again. I found a quote of $467
Bruce
Bruce:

I re-entered into http://www.immediateannuities.com the husband and wife ages (64 & 60), the amount ($104,000), and got the same monthly figures I posted ($601 highest and $568 lowest) ?

Best wishes.
Taylor
Taylor,
Yore reading the wrong chart. You read the chart for a single life scroll down to joint and survivor
Bruce
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Taylor Larimore
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Re: lump sum or annuity

Post by Taylor Larimore »

Taylor,
You're reading the wrong chart. You read the chart for a single life scroll down to joint and survivor
Bruce
Bruce:

You are correct. I will edit my post to the figures in Chart 3. I should know better. We bought two joint life annuities from immediateannuities.com.

Thank you for the correction!

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Retread
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Re: lump sum or annuity

Post by Retread »

Taylor Larimore wrote:
Taylor,
You're reading the wrong chart. You read the chart for a single life scroll down to joint and survivor
Bruce
Bruce:

You are correct. I will edit my post to the figures in Chart 3. I should know better. We bought two joint life annuities from immediateannuities.com.

Thank you for the correction!

Best wishes
Taylor
See my PM, Taylor
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Frugal Al
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Re: lump sum or annuity

Post by Frugal Al »

beatle2020 wrote: I believe our monthly expenses to be around $4000. My thought is that we probably need the pension income of $514 to help with basic monthly expenses but, of course, the real question: Can I invest the $104,000 to generate the same of better income over the long term?
To wrap up this thread, the pension payout IS indeed very competitive with 100% survivorship. The OP can't invest the $104K elsewhere and get a better payout without taking on much more risk. Unless the OP and spouse anticipate a less than average lifespan, they should probably take the annuitized pension of $514/month. The bulk of their retirement expenses will be met by their SS and pensions. If they seek more risk/return, they can accomplish that in the remainder of their portfolio.
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Watty
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Re: lump sum or annuity

Post by Watty »

I just turned 64 and will be retiring at the end of the year. My spouse(60) will be retiring next May.

I can take a lump sum of $104,000 and roll into an IRA

Social Security approximately $2000 month

When were you planning on starting social security and what you and your spouse's Social security benefit amounts at 62, full retirement age, and 70?

If you rolled the $104K out to an IRA then it could be used to pay your expenses for 52 months(104K/2000) so you could delay starting social security to get a larger social security check. That would in effect be buying an inflation adjusted annuity that not only has a 100% survivor benefit but also might get your spouse a larger spousal benefit while you are both alive if that is larger than their own benefit.

Rolling the money out to an IRA and then keeping it invested then buying an annuity when you are in your 70's might be worth considering too.
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Taylor Larimore
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Re: lump sum or annuity

Post by Taylor Larimore »

Taylor,
Please check that again. I found a quote of $467
Bruce
Bruce:

Thank you so much for catching my error. I have edited my first post in red.

A quote of $467 is considerably less than Beatle's $514 offer from his former employer. In my opinion, Beatle should strongly consider the company joint lifetime annuity paying $514/month.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Frugal Al
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Re: lump sum or annuity

Post by Frugal Al »

Watty wrote:If you rolled the $104K out to an IRA then it could be used to pay your expenses for 52 months(104K/2000) so you could delay starting social security to get a larger social security check. That would in effect be buying an inflation adjusted annuity that not only has a 100% survivor benefit but also might get your spouse a larger spousal benefit while you are both alive if that is larger than their own benefit.
Good suggestion, of course there's nothing that precludes the OP from doing this with the existing retirement accounts and still taking the pension.
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