## Take The Lump Sum or The Immediate Annuity?

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michaellarimore
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Joined: Wed Oct 01, 2008 8:19 pm

### Take The Lump Sum or The Immediate Annuity?

I have to make a decision shortly to take my pension plan as a lump sum of \$197,800 or an immediate annuity for myself of \$1,170/mo.
Looking at Vanguard's annuity calculator they offer \$1,085/mo.

I'm 65 in good health, married to a 60 wife, no children, both retired and taking social security at 70.
We are financially fine without the pension.

All ideas will be very appreciated...

NYC_Guy
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### Re: Take The Lump Sum or The Immediate Annuity?

michaellarimore wrote:
Mon Sep 18, 2017 10:07 pm
I have to make a decision shortly to take my pension plan as a lump sum of \$197,800 or an immediate annuity for myself of \$1,170/mo.
Looking at Vanguard's annuity calculator they offer \$1,085/mo.

I'm 65 in good health, married to a 60 wife, no children, both retired and taking social security at 70.
We are financially fine without the pension.

All ideas will be very appreciated...
Assuming (i) the lump sum and the annuity payment are taxed at the same marginal rate (that may not be a correct assumption) and (ii) there is no COLA on the pension payment, I would take the lump sum.

aristotelian
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### Re: Take The Lump Sum or The Immediate Annuity?

A 5% withdrawal rate on the \$200k gives you \$833 per month. I would go with the annuity.

ResearchMed
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### Re: Take The Lump Sum or The Immediate Annuity?

Is there a choice that allows some sort of joint annuity?
Either 100% or something less to the survivor/etc.?

RM
This signature is a placebo. You are in the control group.

doneat53
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### Re: Take The Lump Sum or The Immediate Annuity?

The way to answer this question is to model it. Make a spreadsheet, estimate your life expectancy, see what you come out with if you take the lump sum or annuity... Everybody's situation is different so this is the only way to be sure what is right for you.

gordoni2
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### Re: Take The Lump Sum or The Immediate Annuity?

I wrote a calculator that computes the actuarially fair price of an immediate annuity that might be helpful here. Using today's Treasury yield curve, if you are as healthy as the average 65 year old (which includes some people who are sick) the net present value of \$1,170/month is \$193k. If you are as healthy as the average 65 year annuity purchaser the net present value is \$233k. With \$198k as the proposed payout it may depend on how healthy you really think you are. There are a number of life expectancy questionnaires on the web that can be used to help assess this.

The bigger question though is how does this fit into you overall portfolio. If most of your retirement income is coming from Social Security and pensions, you might want to increase your equity exposure. This is only possible if you take the lump sum.

itstoomuch
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### Re: Take The Lump Sum or The Immediate Annuity?

A few permutations with SS, taxables, and qualified.
YMMV
GL
Last edited by itstoomuch on Tue Sep 19, 2017 10:10 am, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & \$\$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

FiveK
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### Re: Take The Lump Sum or The Immediate Annuity?

You could take your best guess at the values on each axis for your personal situation. This is based on your lump sum and annuity numbers. See rows 94-113 on the 'Misc. calcs' tab in Tools and calculators - Personal_finance_toolbox - Bogleheads.

If concerned with low life expectancy or high inflation (x-axis is nominal, not real, return), you may gravitate toward the lump sum.

If concerned with low market returns you may gravitate toward the annuity.

If assuming ~25 year life expectancy (age 90 for a 65 year old) and ~5% nominal annual return, you may gravitate toward coin-flipping. Good luck!

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### Re: Take The Lump Sum or The Immediate Annuity?

michaellarimore wrote:
Mon Sep 18, 2017 10:07 pm
... lump sum of \$197,800 or an immediate annuity for myself of \$1,170/mo. ... I'm 65 ...
Using my longevity estimator with the SSA 1950 Cohort Life Table, a survival-weighted \$1,170 per month represents a 2.2% return on the \$197,800 lump sum for a 65-year old man. I consider this adequate only if the pension is indexed to the Consumer Price Index or (maybe) if it has some other Cost of Living Adjustment. If it is not CPI-indexed and has no other COLA, I'd choose the lump sum if it can be rolled into an IRA.
gordoni2 wrote:
Mon Sep 18, 2017 11:34 pm
I wrote a calculator that computes the actuarially fair price of an immediate annuity that might be helpful here. Using today's Treasury yield curve, ...
Here is the link to Gordon's excellent and sophisticaged calculator: Actuarially fair SPIA and DIA price calculator. But note that he used "U S Treasury" as the "Assumed bond type". Choosing "U S Corporate" -- which I believe better corresponds to the safety of most pensions -- produces \$174,000 and \$205,000 instead of \$193,000 and \$233,000 as the fair value.

Watty
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### Re: Take The Lump Sum or The Immediate Annuity?

As others have said more information is needed to know if it is a good deal or not including if it includes a survivor benefit for your spouse and if it has a COLA adjustment.

That said when you mentioned,
michaellarimore wrote:
Mon Sep 18, 2017 10:07 pm
or an immediate annuity for myself of \$1,170/mo.
Looking at Vanguard's annuity calculator they offer \$1,085/mo.
That is good but not a real compelling great deal if you are comparing "apples to apples". I would turn the question around and ask, "I have about \$200K in an IRA, should I buy an annuity with it?" That is really the same question but it sounds a lot different that way and a lot fewer people would choose to buy the annuity in that situation.

A lot depends on the rest of your situation but without a compelling reason to choose the annuity I would tend to keep the lump sum and invest the money. When you are 75 or 80 you could then buy an annuity if it makes sense then and in addition to getting a larger payment because of your age you you have a lot fewer years for inflation to be a problem.

michaellarimore wrote:
Mon Sep 18, 2017 10:07 pm
All ideas will be very appreciated...
It would be good to have a very good physical to find out as much about your health as you can before your decide. Ask your doctor if there are any additional tests that they would recommend even if the insurance will not pay for the test. Spending a couple of hundred dollars out of pocket to get more information could be well worth while.

If you take the annuity then that may reduce the amount of Roth conversions that you can do before your turn 70 and start Social Security.

You called it an annuity and not a pension. If that means that it is a real annuity that an insurance company is providing then you may not have much in the way of protection if the insurance company runs into financial problems so be sure to look at how that insurance company is rated.

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### Re: Take The Lump Sum or The Immediate Annuity?

michaellarimore wrote:
Mon Sep 18, 2017 10:07 pm
I have to make a decision shortly to take my pension plan as a lump sum of \$197,800 or an immediate annuity for myself of \$1,170/mo.
Looking at Vanguard's annuity calculator they offer \$1,085/mo.

I'm 65 in good health, married to a 60 wife, no children, both retired and taking social security at 70.
We are financially fine without the pension.

All ideas will be very appreciated...
I think you have to look at many things
Is there a cola
Is there a surivior benefit
Is the company sound and you don't have to worry about the pension
If you take the lump sum can you match the monthly pension for life
It will take you around 15 yrs to equal the lump sum
Since you are FI do you feel better with the monthly income and not have to worry about investing the lump sum
Will the annuity you purchase with Vanguard keep with up with inflation or any investment

I think you have to look at what will 200k get you monthly invested. Can you get the same amount as the monthly pension with increases to keep up with inflation.

I had to make the same choice 6 years ago when I entered our pension drop program. My lump sum looked nice but the monthly pension with a cola and survivor benefit for wife when I am gone. The monthly pension is better for us.

Sheepdog
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Location: Indiana, retired 1998 at age 65

### Re: Take The Lump Sum or The Immediate Annuity?

I took my pension as a lump sum in 1998 instead of an annuity which would cover my wife's and my life time. This is the result as of today.

History of my 1998 pension lump-sum rollover to IRA (10/29/1998 to 9/18/2017---18years +11 months) My present age is 84.
I could have taken an annuity payment instead which would have been \$1479.39 per month, not adjusted for inflation. That would last for both my and my wife's lives.
(If I had taken an annuity to cover just my life, the payout, of course, would have been higher. However, if I had died early, that would have affected my wife too much, so I accepted the joint payout.)

1. 10/29/1998 pension lump was invested conservatively in a Vanguard Rollover IRA, Initial balance...\$222,283

2..Total distributions from that rollover IRA distributions to 9/18/2017...\$258,413.
I did not take any distributions until age 70.5

3. Present remaining Rollover IRA balance = \$238,847 as of 9/18/2017
If I had taken the offered 100% to the survivor annuity (\$1479.39 per month), I would have received to date (11/1/98-.9/30/17) \$332,863. How does that compare with present balance plus distributions to date?
The Rollover IRA current account balance is \$238,647. That amount plus the \$258,413 distributions received to date totals \$497,060. For me, taking the lump sum was the economically correct decision.
Last edited by Sheepdog on Sat Sep 23, 2017 7:57 am, edited 1 time in total.
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

DC3509
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### Re: Take The Lump Sum or The Immediate Annuity?

I wrote some other threads recently on this subject as my parents faced the same choice with similar numbers as you.

As other posters have already said, the "right" decision depends on a lot of factors which you haven't discussed -- the rest of your portfolio, life expectancy, etc. For now, I think you should consider the different risks profiles for an annuity and lump sum. For the annuity the biggest risk is inflation and a longer than expected life span. You can't necessarily control either of these (within reason anyway unless the annuity has a COLA option -- I am pretty sure this one doesn't based on your numbers) and both can demolish that annuity over time. But at the end of the day, there will always be some payment and for many people that security is worth it.

The biggest risk to the lump sum is more behavioral -- you will not manage the money correctly and it will be gone when you need it the most.
As the last poster's real-life experience shows -- if you invest the money wisely and stick to a specific withdrawal plan that is supported by research, you should come out ahead -- way ahead in fact. Consider that the last poster has survived two significant economic downturns, taken out more than the original amount in distributions, and yet still has more than the original amount as the balance today. That's incredible when you think about it, but not uncommon. The biggest problem with investing a lump sum is not the market, but the person in the mirror and whether you have the discipline necessary to manage it correctly.

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### Re: Take The Lump Sum or The Immediate Annuity?

Sheepdog wrote:
Tue Sep 19, 2017 7:34 am
If I had taken the offered 100% to the survivor annuity (\$1479.39 per month), I would have received to date (11/1/98-.9/30/17) \$332,863. How does that compare with present balance plus distributions to date? The Rollover IRA current account balance is \$238,647. That amount plus the \$258,413 distributions received to date totals \$497,060. For me, taking the lump sum was the economically correct decision.
It's good that you're happy with your choice, Sheepdog. But in case another reader considers taking your case as a guide, I need to point out that your evaluation method is wrong. You can't validly conclude that investing the lump sum in the IRA was the better choice just because the sum of the IRA withdrawals plus the current IRA balance exceeds what the pension payments would have been to date. This ignores two considerations:
• When the IRA withdrawals were taken
• (More importantly) The remaining pension payments
If these two things are considered, it's possible taking the pension would have been the better choice. I don't know your situation so the following assumptions could be completely wrong. But at least they will let me illustrate a proper comparison method.
• You've taken 14 equal annual withdrawals of \$18,458 from the IRA (258413 / 14) age 71 - 84.
• You and your wife are both alive, both age 84, and in average health such that your life expectancies correspond to the SSA 1930 Cohort Life Table.
Given these assumptions and that exactly 19 years have elapsed to date, the table below shows how I would compare the two options. Investing the \$222,283 lump sum in the IRA has had a pretax 5.5% Internal Rate of Return (IRR as calculated with the Excel IRR function); while the pension represents an expected pretax 6.6% return on the same lump sum.

Code: Select all

``````IRR -->  6.6%         5.5%
----- Cash Flow ------
Age    Pension        IRA``````

Code: Select all

`````` 65   (222,283)    (222,283)
66     17,753            0
67     17,753            0
68     17,753            0
69     17,753            0
70     17,753            0
71     17,753       18,458
72     17,753       18,458
73     17,753       18,458
74     17,753       18,458
75     17,753       18,458
76     17,753       18,458
77     17,753       18,458
78     17,753       18,458
79     17,753       18,458
80     17,753       18,458
81     17,753       18,458
82     17,753       18,458
83     17,753       18,458
84     17,753      257,105
85     17,684
86     17,407
87     16,851
88     16,023
89     14,946
90     13,657
91     12,208
92     10,662
93      9,086
94      7,546
95      6,100
96      4,796
97      3,668
98      2,732
99      1,984
100      1,408
101        977
102        662
103        438
104        282
105        177
106        107
107         63
108         36
109         20
110         10
111          5
112          2
113          1 ``````
Notes:
• For the pension age 66 - 84 have already been collected at \$1,479.39 per month. The remaining years are the survival-weighted amounts from my longevity estimator according to the SSA 1930 Cohort Life Table for a male/female couple both age 84.
• For IRA: age 66 - 83 is the assumed annual withdrawal of \$18,458. For age 84 it is this plus the ending IRA balance of \$238,647.

Dandy
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### Re: Take The Lump Sum or The Immediate Annuity?

You are currently in a very good financial position. You really don't need the lump or the immediate annuity. I would almost always suggest the annuity assuming personal health and health of the annuity provider is very good. Life has many potential bad surprises and having a more than needed secure income provides lots of protection. A lump sum can be invested wisely and still be subject to significant losses. You can certainly invest the excess annuity payments if you choose so you would also be building your current nest egg.

One note of caution is that each surviving spouse should have more income than they need or at least enough. It can be true with joint incomes or non-joint annuities/pensions that the couple's income looks great but one may have a large pension and/or annuity that doesn't pass after death.

Nothing usually beats having more income than you really need. Talk about sleeping well.

michaellarimore
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### Re: Take The Lump Sum or The Immediate Annuity?

Thank you everyone for the information-
My health is good and I expect to live to my nineties, baring significant medical breakthroughs....
There are options to the annuity, however it significantly lowers the payout.
My wife has a similar annuity/financial situation, so survivor benefit is not needed.
I would not consider purchasing the Vanguard annuity at this time, though probably will at 80yrs. So perhaps my greatest question is if the additional 7% monthly amount of my pension over the Vanguard annuity amount makes this a good deal that should not be passed up?

Thanks again... Michael

JBTX
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### Re: Take The Lump Sum or The Immediate Annuity?

michaellarimore wrote:
Tue Sep 19, 2017 5:27 pm
Thank you everyone for the information-
My health is good and I expect to live to my nineties, baring significant medical breakthroughs....
There are options to the annuity, however it significantly lowers the payout.
My wife has a similar annuity/financial situation, so survivor benefit is not needed.
I would not consider purchasing the Vanguard annuity at this time, though probably will at 80yrs. So perhaps my greatest question is if the additional 7% monthly amount of my pension over the Vanguard annuity amount makes this a good deal that should not be passed up?

Thanks again... Michael
While the survivor benefit may not be needed, it does affect the real value of the annuity.

What shape is the company in? Look up its bond rating.

Using an IRR calculator if it pays out 25 years it is a 5.0% rate of return. If it pays out 30 it is 5.75%.

Another factor is whether you are concerned with leaving money to children.

OnTrack2020
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### Re: Take The Lump Sum or The Immediate Annuity?

My husband was in this position late last year. He is not yet 60 years of age. We chose to do a lump sum rollover. Bottom line----we wanted to manage it ourselves, and we wanted to be able to leave some to our children.

I am quite impressed with the numbers the poster who invested conservatively over the past two decades--especially during the 2008 period.

Iliketoridemybike
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### Re: Take The Lump Sum or The Immediate Annuity?

In situations like this, all else being equal, the lump sum favors the issuer. The annuity favors the individual.

itstoomuch
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### Re: Take The Lump Sum or The Immediate Annuity?

When I was running Firecalc in our time, I discovered that the more (up to point) we had in SS/pensions/annuities, the more successful our Indexes, greater monte carlo odds of overall financial success over all time periods, longer we would have Index draws and higher income.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & \$\$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Iliketoridemybike
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### Re: Take The Lump Sum or The Immediate Annuity?

itstoomuch wrote:
Tue Sep 19, 2017 7:34 pm
When I was running Firecalc in our time, I discovered that the more (up to point) we had in SS/pensions/annuities, the more successful our Indexes, greater monte carlo odds of overall financial success over all time periods, longer we would have Index draws and higher income.
YMMV
Same can be said for bonds. Stocks will give you the greatest chance for the best returns for your portfolio, but instruments like bonds or pensions, etc, will make sure you actually have a portfolio.

123
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### Re: Take The Lump Sum or The Immediate Annuity?

When interest rates are low the lump sum is often the better choice, depending on how you view mortality issues. In most cases the calculation of the lump-sum is based on a complex formula that includes immediate, intermediate, and long-term interest rates determined annually by the IRS. Mortality is calculated from standard table values.
The closest helping hand is at the end of your own arm.

itstoomuch
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### Re: Take The Lump Sum or The Immediate Annuity?

Iliketoridemybike wrote:
Tue Sep 19, 2017 7:50 pm
itstoomuch wrote:
Tue Sep 19, 2017 7:34 pm
When I was running Firecalc in our time, I discovered that the more (up to point) we had in SS/pensions/annuities, the more successful our Indexes, greater monte carlo odds of overall financial success over all time periods, longer we would have Index draws and higher income.
YMMV
Same can be said for bonds. Stocks will give you the greatest chance for the best returns for your portfolio, but instruments like bonds or pensions, etc, will make sure you actually have a portfolio.
I forget if I modeled with a bond portfolio or blended 60/40 to 80/20 or 100/0. For most of our investment years we had a blended 60/40, so there may have been a bond component in the modeling. I forget exactly. But what surprised me that a component of higher SS/pension/annuity affects the longevity and portfolio success. My then assumptions were and probably is very different than a model done for an today's early retiree or for someone as the OP.
YNumbersMV.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & \$\$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Taylor Larimore
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### Re: Take The Lump Sum or The Immediate Annuity?

Take The Lump Sun or The Immediate Annuity?
Dear Michael:

Researchers Mitchell, Frank and Wade Pfau published a study on this very subject in which they found that, for most of us, Single Premium Immediate Annuities (SPIAs) are best purchased in our early 80s (if we make it that far). This is the link:

https://papers.ssrn.com/sol3/papers.cfm ... id=2317857

I made a Boglehead post with the reasons why it is often better to wait until around age 80 to purchase a life-time annuity (which is what your mother and I did). The link is below:

viewtopic.php?t=167448#p2519874

Not everyone should take cash instead of a pension. In fact, I think most retirees are better off taking the pension because as DC3509 wrote: "The biggest problem with investing a lump sum is not the market, but the person in the mirror and whether you have the discipline necessary to manage it correctly."

Knowing that you have investment acumen, and that you are mostly invested in Three-Fund Portfolio, I am not worried about the person in your mirror.

Love
"Simplicity is the master key to financial success." -- Jack Bogle

Miriam2
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### Re: Take The Lump Sum or The Immediate Annuity?

Taylor Larimore wrote:
Fri Sep 22, 2017 9:06 pm
Take The Lump Sun or The Immediate Annuity?
Dear Michael:

Researchers Mitchell, Frank and Wade Pfau published a study on this very subject in which they found that, for most of us, Single Premium Immediate Annuities (SPIAs) are best purchased in our early 80s (if we make it that far). This is the link:

https://papers.ssrn.com/sol3/papers.cfm ... id=2317857

I made a Boglehead post with the reasons why it is often better to wait until around age 80 to purchase a life-time annuity (which is what your mother and I did). The link is below:

viewtopic.php?t=167448#p2519874

Not everyone should take cash instead of a pension. In fact, I think most retirees are better off taking the pension because as DC3509 wrote: "The biggest problem with investing a lump sum is not the market, but the person in the mirror and whether you have the discipline necessary to manage it correctly."

Knowing that you have investment acumen, and that you are mostly invested in Three-Fund Portfolio, I am not worried about the person in your mirror.

Love
Taylor, what a beautiful post (I'm weeping with emotion)

michaellarimore
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### Re: Take The Lump Sum or The Immediate Annuity?

Thanks to everyone for their impressively knowledgeable advice -

While either choice looks to work for me, I've come to see the lump sum as best fitting my needs...
The small additional payout on my pension is not a significant advantage over buying an annuity on the open market; which i would not consider at this point in my life. I'll be investing the lump sum in my 40/60 allocation and using it to purchase a SPIA much further down the road...

Michael

jalbert
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### Re: Take The Lump Sum or The Immediate Annuity?

Comparing to a SPIA you can buy has the difficulty that the SPIA payout depends on the credit rating of the insurance company. The insurance company will target a credit rating as a business strategy with their portfolio management strategy, taking a little more risk to offer a higher payout.

SPIAs are guarantied by state guaranty pools, and private pensions federally. I tend to think the federal protection of a pension is more solid than the unfunded state guaranty pools.
Risk is not a guarantor of return.

bertilak
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### Re: Take The Lump Sum or The Immediate Annuity?

michaellarimore wrote:
Mon Sep 18, 2017 10:07 pm
All ideas will be very appreciated...
As much of the above says, one can compare the annuity offer to other available annuities and their costs. This will tell you if the offer is fair and that's good to know.

A bigger question is do you or do you not want an annuity at all? My answer is that you need to look at your retirement expenses. It is important that essential expenses (food, shelter, medical, transportation, etc. -- you decide what is "essential") are matched by reliable sources of income. Until you have made that match, a (fairly pried) annuity is probably what you need as opposed to market investments that have "expected" income but come with the associated risk that you might not get the income you expect. You have ESSENTIAL NEEDS that you don't want to put at risk. Be sure you have that covered and therefore really are "financially fine without the pension." Perhaps you might want to roll more expenses into the "essential" category and bump up your lifestyle. Another thought -- if you or your spouse pass away, will that reduce income for the survivor to the point of no longer being "financially fine."

I'm only trying to give you another way to think about this beyond the market value of the annuity vs. the lump sum.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

basspond
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### Re: Take The Lump Sum or The Immediate Annuity?

I would rather have control of the money, lump sum.

itstoomuch
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### Re: Take The Lump Sum or The Immediate Annuity?

If OP is fine without the annuity/pension, I'd take the Lump Sum.
Why, because, OP can afford the Risk in the Market, whichever the Market he choses.
He could lose this sum in the Market and still be OK.
More questions need to be asked.
YMMV

Disclaimer: We have GLWB annuities. We needed the floor income (insurance that annuities provide). I am contemplating in killing a couple of GLWB annuities ( 8 annuities in laddered amounts) because we no longer need the insurance, I think that I can beat the 5% initial GLWB income return by using an Index, RE, individual stock/dividends. Age 67. GLWB in 8th year. FR>1.1 without this GWLB income.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & \$\$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

nedsaid
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### Re: Take The Lump Sum or The Immediate Annuity?

Iliketoridemybike wrote:
Tue Sep 19, 2017 7:32 pm
In situations like this, all else being equal, the lump sum favors the issuer. The annuity favors the individual.
123 said:
When interest rates are low the lump sum is often the better choice, depending on how you view mortality issues. In most cases the calculation of the lump-sum is based on a complex formula that includes immediate, intermediate, and long-term interest rates determined annually by the IRS. Mortality is calculated from standard table values.
These were two posts that caught my eye. The first post is generally true, most people are better off taking the pension as it guarantees lifetime income. The second post shows that while rules of thumb are generally true, you still need to do the calculations. If you have a guaranteed lifetime monthly amount from your pension, it will take more money to fund those monthly payments with low interest rates than with high interest rates. This is one reason private and public pension plans are running into trouble.
A fool and his money are good for business.

DC3509
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### Re: Take The Lump Sum or The Immediate Annuity?

nedsaid wrote:
Sat Sep 23, 2017 9:15 pm
Iliketoridemybike wrote:
Tue Sep 19, 2017 7:32 pm
In situations like this, all else being equal, the lump sum favors the issuer. The annuity favors the individual.
123 said:
When interest rates are low the lump sum is often the better choice, depending on how you view mortality issues. In most cases the calculation of the lump-sum is based on a complex formula that includes immediate, intermediate, and long-term interest rates determined annually by the IRS. Mortality is calculated from standard table values.
These were two posts that caught my eye. The first post is generally true, most people are better off taking the pension as it guarantees lifetime income. The second post shows that while rules of thumb are generally true, you still need to do the calculations. If you have a guaranteed lifetime monthly amount from your pension, it will take more money to fund those monthly payments with low interest rates than with high interest rates. This is one reason private and public pension plans are running into trouble.
Yes, it guarantees income, but there can be a cost. If you do not have a COLA adjustment on it, inflation will erode the value over time. That said, its better than nothing especially if you manage money poorly.

michaellarimore
Posts: 20
Joined: Wed Oct 01, 2008 8:19 pm

### Re: Take The Lump Sum or The Immediate Annuity?

Inflation is a very big concern-
At 65yrs old, I might go another 30 years; over 30 years there are likely to be significant medical advances, so perhaps even longer ...
Taking an average inflation of 3%, my small 1,200/mo pension buying power at age 75 dwindles to \$893, at age 85 just \$664, and at 95 a useless \$494. Even at a young 75, my pension income is significantly down Delaying my SPIA purchase lessens inflation risk and increases the payout. Interest rates might also be higher, bringing a larger pension payout.

nedsaid
Posts: 10673
Joined: Fri Nov 23, 2012 12:33 pm

### Re: Take The Lump Sum or The Immediate Annuity?

DC3509 wrote:
Sat Sep 23, 2017 10:45 pm
nedsaid wrote:
Sat Sep 23, 2017 9:15 pm
Iliketoridemybike wrote:
Tue Sep 19, 2017 7:32 pm
In situations like this, all else being equal, the lump sum favors the issuer. The annuity favors the individual.
123 said:
When interest rates are low the lump sum is often the better choice, depending on how you view mortality issues. In most cases the calculation of the lump-sum is based on a complex formula that includes immediate, intermediate, and long-term interest rates determined annually by the IRS. Mortality is calculated from standard table values.
These were two posts that caught my eye. The first post is generally true, most people are better off taking the pension as it guarantees lifetime income. The second post shows that while rules of thumb are generally true, you still need to do the calculations. If you have a guaranteed lifetime monthly amount from your pension, it will take more money to fund those monthly payments with low interest rates than with high interest rates. This is one reason private and public pension plans are running into trouble.
Yes, it guarantees income, but there can be a cost. If you do not have a COLA adjustment on it, inflation will erode the value over time. That said, its better than nothing especially if you manage money poorly.
Yes, inflation is a huge issue with pensions and Single Premium Immediate Annuities. A single 65 year old can get something like a 6% effective withdrawal rate with an SPIA vs. something more like 4% for an SPIA with inflation protection. My understanding is that there are fewer companies offering SPIAs with inflation adjustments, making these harder to get.
A fool and his money are good for business.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

### Re: Take The Lump Sum or The Immediate Annuity?

And I would not buy an inflation protected SPIA. Few annuity companies want to take on uncompensated inflation risk. Not even sure that a state's regulatory agency would allow such risk. And the buyer may also overprice the risk.
It's bad enough that Annuity and Insurance companies have mispriced their past products in light of current longterm falling interest rates (yippee for me )
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & \$\$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo