## Annuity or lump sum

### Annuity or lump sum

Looking for some advice on what is smartest use of retirement funds. Wife works for health insurance company that has been around for a long time. When she retires at 58 she can choose an annuity that pays Approx $3,000/month with 1.5% yearly cost of living. Her lump sum payout is approximately $600,000. I realize the math says the $600,000 would be about 16.5 years of $3,000/month payments. But that is without investing it over those years. All the talk of pensions going under makes the lump sum a bit more attractive. This will not be our only source of income. We will have around 1.5 million in mutual funds and I will also have a pension paying about $3,000/month. We will also both be eligible for social security when we hit the right age.

### Re: Annuity or lump sum

This might give some perspective:

Firecalc. enter $600,000 with a 36k annual withdrawal. If you add that to your portfolio and withdrew the same as the payout would've been with the annuity.

https://www.firecalc.com

The annuity with the COLA would add a nice floor income stream.

Another way of looking at it.

https://www.immediateannuities.com

Enter the same $600,000 with the COLA and see what an annuity from other sources would yield.

Compare.

Firecalc. enter $600,000 with a 36k annual withdrawal. If you add that to your portfolio and withdrew the same as the payout would've been with the annuity.

https://www.firecalc.com

The annuity with the COLA would add a nice floor income stream.

Another way of looking at it.

https://www.immediateannuities.com

Enter the same $600,000 with the COLA and see what an annuity from other sources would yield.

Compare.

### Re: Annuity or lump sum

FYI,

Deferring a simple annuity (10) years gives nearly 60k per year of income. If you and wife can support yourself without the 600k for a while, seriously consider the SPDA.

Deferring a simple annuity (10) years gives nearly 60k per year of income. If you and wife can support yourself without the 600k for a while, seriously consider the SPDA.

### Re: Annuity or lump sum

$3000/month is a 6% return on the $600,000 cash amount. That plus the COL adjustment makes the annuity seem quite attractive.

Bob

### Re: Annuity or lump sum

The annuity is much better. You are getting the cost of living increase for free (and then some).

- baconavocado
**Posts:**112**Joined:**Fri Oct 13, 2017 3:03 pm

### Re: Annuity or lump sum

This is how I've looked at the value of a pension or annuity (and there may be inaccuracies in my methods, so please feel free to correct me).

You want to compare the lump sum amount to the current value of an annuity that will pay $3,000.month. So I take her life expectancy (27 years), the US treasury 30-y bond rate (2.76%), and plug it into this annuity calculator:

http://www.hughcalc.org/rdur.cgi

I keep changing the account balance amount until I get the correct monthly payment. This shows that the current value of a $3,000/month pension or annuity with a 1.5% COLA for a 58-y old is about $815,000. So the annuity is a better deal as long as you have confidence that the company will be around for the next 30 years or so to keep making the payments.

You want to compare the lump sum amount to the current value of an annuity that will pay $3,000.month. So I take her life expectancy (27 years), the US treasury 30-y bond rate (2.76%), and plug it into this annuity calculator:

http://www.hughcalc.org/rdur.cgi

I keep changing the account balance amount until I get the correct monthly payment. This shows that the current value of a $3,000/month pension or annuity with a 1.5% COLA for a 58-y old is about $815,000. So the annuity is a better deal as long as you have confidence that the company will be around for the next 30 years or so to keep making the payments.

### Re: Annuity or lump sum

The pension probably is insured through the PBGC. I wouldn't ignore the possibility of it going under, but I would not weight it too heavily.

How much of your basic expenses will be covered by just your pension and your Social Security benefits, considering while you are both alive and each of you as the sole survivor? Is your pension inflation-adjusted and will it have a survivor benefit? Is leaving an inheritance a high priority for you? Have you felt comfortable staying invested during market downturns?

Consider all of the above when making the pension versus lump sum decision.

How much of your basic expenses will be covered by just your pension and your Social Security benefits, considering while you are both alive and each of you as the sole survivor? Is your pension inflation-adjusted and will it have a survivor benefit? Is leaving an inheritance a high priority for you? Have you felt comfortable staying invested during market downturns?

Consider all of the above when making the pension versus lump sum decision.

Last edited by delamer on Thu Nov 23, 2017 2:47 pm, edited 1 time in total.

### Re: Annuity or lump sum

I went to www.immediateannuities.com and got a quote for $600,000 investment at age 58 for my state. The monthly payment is $2,665 a month with no inflation adjustment. This quote from the website was for her only. Your wife will get $3,000 a month with a 1.5% inflation adjustment from the pension. Is there a survivor's benefit on your wife's pension? If so, that makes the pension an even better deal. I think I would take the pension. No guarantee on investments.Mndiver wrote: āThu Nov 23, 2017 11:03 amLooking for some advice on what is smartest use of retirement funds. Wife works for health insurance company that has been around for a long time. When she retires at 58 she can choose an annuity that pays Approx $3,000/month with 1.5% yearly cost of living. Her lump sum payout is approximately $600,000. I realize the math says the $600,000 would be about 16.5 years of $3,000/month payments. But that is without investing it over those years. All the talk of pensions going under makes the lump sum a bit more attractive. This will not be our only source of income. We will have around 1.5 million in mutual funds and I will also have a pension paying about $3,000/month. We will also both be eligible for social security when we hit the right age.

Also check if the pension benefits are under the limits of the Pension Benefit Guaranty Corporation.

A fool and his money are good for business.

### Re: Annuity or lump sum

Yet another way to look at it, using the OP's numbers for lump sum and annuity amounts:

On top of the pure math chart (see rows 94-113 of the 'Misc. calcs' tab in the personal finance toolbox spreadsheet for details), one can overlay various assumptions, e.g.,

- longevity

- real investment returns (those assuming safer, lower yield investments might favor the annuity)

- inflation (the x-axis is nominal return: those concerned about rampant inflation might favor the lump sum)

...and take one's best guess.

On top of the pure math chart (see rows 94-113 of the 'Misc. calcs' tab in the personal finance toolbox spreadsheet for details), one can overlay various assumptions, e.g.,

- longevity

- real investment returns (those assuming safer, lower yield investments might favor the annuity)

- inflation (the x-axis is nominal return: those concerned about rampant inflation might favor the lump sum)

...and take one's best guess.