Decision time...to lump sum or not to lump sum

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daacrusher2001
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Decision time...to lump sum or not to lump sum

Post by daacrusher2001 »

Hi All...I hope there is enough detail here:

I'm struggling with deciding on whether to take a lump sum or not. I asked about this a long while back, but many things have changed since then. I was leaning towards taking an annuity payout - but now I'm not sure. I've read a ton of material on this topic, but would just like some opinions from the BH community.

I'll be 62 in March, my wife will be 59 in April. Both in good health. Both still working full time. Also, we have two grown and on their own children.

I want to retire next year, she would retire about a year later...so both retired by ages 63/60. I'm now planning to defer my SS until 66, so I need to cover about 4 years from 62 to 66, which I can do. I had done all my pre-retirement planning assuming I'd take SS at 62.5. Now I'm reworking it for 66 (and 10 months).

When we are both collecting SS and Pension(s) - assuming mine is an annuity, our income will be between $93K and $104K (approximately) depending on when and how we take pensions and SS.

If we stay here, our expenses are around $116K/year. So a lot of our expenses are covered by Pension and Social. And, frankly, if we leave North Jersey, our bills could be a lot lower (e.g.; Property Tax here is $13.5K...ugh!). Also, we live pretty well on $116K.

We have accumulated a decent amount of assets over the years. In round numbers We have about $2.3M split roughly 50/50 in tax deferred/taxable. We have no debt worth mentioning and it's covered in that $116K/year. I have retiree medical that will cover us until Medicare - it's also built into the $116K/year.

My Pension is either $41K/yr annuity with 100% survivor option, or a lump sum of $797K. Her pension has no lump sum option.

Originally I was thinking I'd take the annuity of $41K. I was planning to retire sooner, when I didn't have as much retirement money, so the annuity seemed like a better idea to mitigate longevity risk. Plus, I like the "foundation" of ~$100K income.

Lately, I'm thinking I'd rather take the lump sum. I'm retiring a lot later than I planned. I like the idea of having control of the money and leaving more to my kids if longevity doesn't go our way. Plus with a very modest rate of return I'll be fine for long time.

My planning goes to age 92. Optimistic, but who knows. :happy

The models I've built factor in taxes, RMDs, and some inflation. I also used a very conservative investment growth rate...and the $116K in expenses has a lot of fat in it.

What do you guys think? Am I missing something obvious (to you, not to me)?

Would you do the lump sum in my case?
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gwe67
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Re: Decision time...to lump sum or not to lump sum

Post by gwe67 »

I would be pretty nervous about dumping $797K into the market at once. Lots of potential regret there. Although this is typically the preferred choice over buying-in over time.
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Nicolas
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Re: Decision time...to lump sum or not to lump sum

Post by Nicolas »

One thing to consider is that by taking the annuity you are protecting the money from yourself, from bad or foolish decisions, and from possible scammers later in life when you’re not thinking straight anymore. That advice is often given to lottery winners too.

On the other hand if your pension isn’t indexed to inflation it will erode away, a lump sum may protect you from that.

Check immediateAnnuities.com to see what $797K will buy you. That could be a rough guide as to whether it makes sense. https://www.immediateannuities.com/info ... tep-1.html
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vineviz
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Re: Decision time...to lump sum or not to lump sum

Post by vineviz »

daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm
I want to retire next year, she would retire about a year later...so both retired by ages 63/60. I'm now planning to defer my SS until 66, so I need to cover about 4 years from 62 to 66, which I can do. I had done all my pre-retirement planning assuming I'd take SS at 62.5. Now I'm reworking it for 66 (and 10 months).
I'd strongly encourage you to model a scenario in you which delay claiming Social Security until age 70. For most Americans, this is the optimal strategy since it maximizes the amount of inflation-adjusted retirement income.

If you take the lump sump at retirement and use that amount to fully fund your retirement until age 70, I suspect you'll find that be a fairly attractive approach. With some good luck in the markets over the next 5-10 years, you may find that you can undertake your own annuitization with part of your retirement savings at age 70 or 75.
Last edited by vineviz on Thu Sep 17, 2020 2:21 pm, edited 1 time in total.
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dogagility
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Re: Decision time...to lump sum or not to lump sum

Post by dogagility »

I took the lump sum rather than the pension when I had the choice. I liked the idea of controlling the funds in my own investment portfolio, thought i would have more money in the end via a lump sum, and didn't want to worry about the chance for insolvency of the pension fund.
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Buy_N_Hold
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Re: Decision time...to lump sum or not to lump sum

Post by Buy_N_Hold »

daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm Hi All...I hope there is enough detail here:

I'm struggling with deciding on whether to take a lump sum or not. I asked about this a long while back, but many things have changed since then. I was leaning towards taking an annuity payout - but now I'm not sure. I've read a ton of material on this topic, but would just like some opinions from the BH community.

I'll be 62 in March, my wife will be 59 in April. Both in good health. Both still working full time. Also, we have two grown and on their own children.

I want to retire next year, she would retire about a year later...so both retired by ages 63/60. I'm now planning to defer my SS until 66, so I need to cover about 4 years from 62 to 66, which I can do. I had done all my pre-retirement planning assuming I'd take SS at 62.5. Now I'm reworking it for 66 (and 10 months).

When we are both collecting SS and Pension(s) - assuming mine is an annuity, our income will be between $93K and $104K (approximately) depending on when and how we take pensions and SS.

If we stay here, our expenses are around $116K/year. So a lot of our expenses are covered by Pension and Social. And, frankly, if we leave North Jersey, our bills could be a lot lower (e.g.; Property Tax here is $13.5K...ugh!). Also, we live pretty well on $116K.

We have accumulated a decent amount of assets over the years. In round numbers We have about $2.3M split roughly 50/50 in tax deferred/taxable. We have no debt worth mentioning and it's covered in that $116K/year. I have retiree medical that will cover us until Medicare - it's also built into the $116K/year.

My Pension is either $41K/yr annuity with 100% survivor option, or a lump sum of $797K. Her pension has no lump sum option.

Originally I was thinking I'd take the annuity of $41K. I was planning to retire sooner, when I didn't have as much retirement money, so the annuity seemed like a better idea to mitigate longevity risk. Plus, I like the "foundation" of ~$100K income.

Lately, I'm thinking I'd rather take the lump sum. I'm retiring a lot later than I planned. I like the idea of having control of the money and leaving more to my kids if longevity doesn't go our way. Plus with a very modest rate of return I'll be fine for long time.

My planning goes to age 92. Optimistic, but who knows. :happy

The models I've built factor in taxes, RMDs, and some inflation. I also used a very conservative investment growth rate...and the $116K in expenses has a lot of fat in it.

What do you guys think? Am I missing something obvious (to you, not to me)?

Would you do the lump sum in my case?
Well done all the way around! Seems like you have certainly done your due diligence in making a well-thought out plan and sticking to it. I hope your retirement years are a joy with your family.

One strategy to consider that I learned about recently is to take the lump sum settlement, and then take a portion of that money and purchase a immediate single premium annuity to cover the gap between your projected retirement expenses and your retirement SS/pension income. Then the rest you can invest in the stock market with great confidence that you won't need to pull from it at the wrong moment, which potentially could allow you to really splurge if the market cooperates, or also to leave a much bigger legacy to your heirs and charities of choice. It can therefore give you the confidence to invest it even more aggressively than you otherwise would.

This approach was very helpfully outlined by Retirement Income specialist Wade Pfau on the Rational Reminder podcast (which I also highly recommend). You can listen to the episode here if interested: https://rationalreminder.ca/podcast/89. Essentially the annuity portion would replace the bond portion of your portfolio, which I think makes particular sense right now given the interest rate environment we find ourselves in.

Cheers!
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Admiral
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Re: Decision time...to lump sum or not to lump sum

Post by Admiral »

Have you used Retiree Portfolio Modeler?

It can be very helpful with these sorts of decisions (though of course it can't predict when you will die, you'll need to do that).

Does the pension have a survivor benefit? Esp since your spouse is younger this can affect your decision.

Likely you will be fine either way. I agree that deferring SS until 70 seems wise, esp if you are in good health.

EDIT: Sorry I see that you do have a survivor option. At 100%, I would probably take the pension, assuming it is secure. I am not a fan of annuities generally so my second choice would be the lump sum, a portion of which could be used to buy bonds for the bridge years before SS.
LuckyGuy
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Re: Decision time...to lump sum or not to lump sum

Post by LuckyGuy »

I always thought I was going to take the lump sum. But, as we got closer to retirement we decided to take the guaranteed for life pension. It was the right thing for us. It looks to me like your guaranteed pension and SS would align well with your expenses and then you would have a couple million to play with. That sounds good to me.
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Watty
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Re: Decision time...to lump sum or not to lump sum

Post by Watty »

daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm I hope there is enough detail here:
Two things were not clear. I would assume that the pension is not adjusted for inflation. I would also assume that it starts when you retire at 62 and you do not need to wait until you are 65 to start it.
daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm If we stay here, our expenses are around $116K/year. So a lot of our expenses are covered by Pension and Social.
You would also have dividends and interest from your investments and eventually RMDs from your retirement accounts.

If that would exceed your expenses then you would in effect just be getting your pension check, paying taxes on it, and then investing the money.

A pension(or SPIA) can be a valid part of a retirement plan so I have nothing against those in the right situation but they are basically an insurance product that helps you insure against the risk of outliving your money or getting a low investment return. That is an issue for you since I don't see a clear need for you to buy that insurance even if it is priced favorably.

You can get quick quotes at https://www.immediateannuities.com/ to see if it is a fantastic deal that is too good to pass up but you need to be very careful to make sure that the terms are exactly the same and that can sometimes be a bit tricky.
daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm I'm now planning to defer my SS until 66, so I need to cover about 4 years from 62 to 66, which I can do. I had done all my pre-retirement planning assuming I'd take SS at 62.5. Now I'm reworking it for 66 (and 10 months).
Use this website to try to figure out the optimal Social Security claiming schedule.

https://opensocialsecurity.com/

Delaying Social Security to get a larger benefit amount also has the additional benefit of being taxed less. Many states do not tax Social Security and at most 85 percent of your Social Security will be taxed by the feds. It is really important to understand how Social Security is taxed since it is not intuitive.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

A dollar in Social Security can be worth a lot more than a dollar in other income.

Your decision about taking the lump sum or not should be made in conjunction with your decision about when to start Social Security.
daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm Am I missing something obvious (to you, not to me)?
Roth conversions.

Right now you are filing tax returns in the lower joint tax brackets but when one of you dies the survivor will be filing in possibly much the higher single tax brackets so it may make sense to do as many Roth conversions as you can now when you are in a lower tax bracket and you have not both started Social Security. Tax rates are also scheduled to revert back to the old higher tax brackets in 2026 if there are not any future tax law changes.

I don't recall the detail but as I recall NJ has some odd laws about how the state taxes are handled for IRAs and 401ks so that might impact any decision about doing Roth conversions or not. Be sure to look into that.

One problem with taking the pension option would be that the pension income would count as income so you would not be able to do as many Roth conversions in a low tax bracket.

Anyway I did not try to crunch the numbers so I cannot say that this would be the best option but I would set up a spreadsheet to see how this would work out for you.

1) Take the lump sum.
2) Plan on starting Social Security based on what that website suggests. Most likely it will suggest that one of you delay starting Social Security until you are close to 70.
3) Set the mutual funds in your taxable account to not automatically reinvest any dividends, interest, or capital gains distributions.
4) Live on that that income and make withdrawals to from your taxable account to pay for your living expenses.
5) Each December you should pretty well know your tax numbers for the year and you can also get estimates of what dividends your mutual funds will pay. You can then figure out how large a Roth conversion you could do and stay in the 12% federal tax bracket.

If you would not be paying state taxes on the Roth conversions because of NJs laws or if you move to a state with no income tax then I would even look at doing Roth conversions up to the top of the 22% or even into 24% federal tax bracket. It would not be an easy choice but when you look at how the money might be taxed later in the single tax bracket, or with the taxacation of Social Security then it might make sense even in those tax brackets. That could also help you avoid future tax rate increases.
daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm My planning goes to age 92. Optimistic, but who knows.
That may actually be a bit pessimistic. For a couple that odds of at least one of them living to be that old are likely pretty good.

https://www.longevityillustrator.org/
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Re: Decision time...to lump sum or not to lump sum

Post by BigJohn »

I took my pension as a lump sum when I retired six years ago at age 58. Two comments in support of what others have said.

I didn’t go all in with the lump sum. Yes, probability is on your side that this is better but the implications of the two outcomes are not even (see Pascal’s wager). Others can correct if I’m wrong but I think going all in comes out ahead about 70% of the tIme. However, I’ve won the game and don’t need the higher return that might come from that approach. The problem is if the 30% probability turns up, the loss could hurt so why take the risk for a slightly higher return I don’t need. I invested everything in a short term, high quality bond index and DCA’ed up to my stock allocation target over about 3 years.

I’m planning to defer SS to age 70. For me it’s a no brainer as the 8%/year increase is far better than the return I expect from my portfolio. This also allows me to do annual Roth conversions until then to reduce the large tax torpedo hit from RMDs. Plus, since we both plan to live into our 90’s, it’s good longevity insurance
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gwe67
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Re: Decision time...to lump sum or not to lump sum

Post by gwe67 »

BigJohn wrote: Thu Sep 17, 2020 5:38 pm I took my pension as a lump sum when I retired six years ago at age 58. Two comments in support of what others have said.

I didn’t go all in with the lump sum. Yes, probability is on your side that this is better but the implications of the two outcomes are not even (see Pascal’s wager). Others can correct if I’m wrong but I think going all in comes out ahead about 70% of the tIme. However, I’ve won the game and don’t need the higher return that might come from that approach. The problem is if the 30% probability turns up, the loss could hurt so why take the risk for a slightly higher return I don’t need. I invested everything in a short term, high quality bond index and DCA’ed up to my stock allocation target over about 3 years.

I’m planning to defer SS to age 70. For me it’s a no brainer as the 8%/year increase is far better than the return I expect from my portfolio. This also allows me to do annual Roth conversions until then to reduce the large tax torpedo hit from RMDs. Plus, since we both plan to live into our 90’s, it’s good longevity insurance
:sharebeer
Was the entire lump sum taxable? That could be a big hit.
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Watty
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Re: Decision time...to lump sum or not to lump sum

Post by Watty »

gwe67 wrote: Thu Sep 17, 2020 5:43 pm Was the entire lump sum taxable? That could be a big hit.
The lumps sum would have been rolled out to an IRA so it would not be taxed until it is eventually withdrawn from the IRA, possibly decades in the future.
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Re: Decision time...to lump sum or not to lump sum

Post by BigJohn »

Watty wrote: Thu Sep 17, 2020 5:49 pm
gwe67 wrote: Thu Sep 17, 2020 5:43 pm Was the entire lump sum taxable? That could be a big hit.
The lumps sum would have been rolled out to an IRA so it would not be taxed until it is eventually withdrawn from the IRA, possibly decades in the future.
This!!

In fact, the lump sum rolled into an IRA facilitates Roth conversions since my pension would have been ordinary income.
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Stinky
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Re: Decision time...to lump sum or not to lump sum

Post by Stinky »

I'm with the majority on this one. Since it sounds like your wife will have a pension (you said she can't lump sum), and since you'll get Social Security, and since you've accumulated a pretty good sized nest egg, I'd feel comfortable taking the lump sum from your pension plan.

Roll it into an IRA, invest it according to your investment policy statement, and call it a day.

And get out of New Jersey! In the South, taxes are lower and weather is better. :D
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Re: Decision time...to lump sum or not to lump sum

Post by backpacker61 »

I've been offered a lump sum in exchange for my pension from a former employer a couple times, but I am still signed up to eventually receive it as an annuity.

Your pension is effectively an annuity acquired at "wholesale"; buying an immediate annuity from an insurance company is acquiring one at "retail". If you ever want/need an annuity; you and and your wife's pensions (plus Social Securty benefits) are probably the ones you want (not buying an immediate annuity on the open market later).

Like you, I've been an assiduous saver over many decades, so I have ample assets under my own purview, to allocate as I see "fit", and eventually I expect much of it to go into a bequest.

My pension I view as insurance against the possibility of me doing something ill-considered as I grow older, or become a victim of elder fraud.

My current plan is to file for Social Security at 70, my pension at 72 (an option now because of the SECURE act), and IRA RMD's at 72 (also delayed now owing to the SECURE ACT). Current age is 59; still working full time.

I have an example from my parents. My dad retired in 1986, and they received a consistent check each month from my Dad's county government pension for slightly over 34 years.
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Re: Decision time...to lump sum or not to lump sum

Post by Ready3Retire »

I have very similar ratios as you - $70K/yr vs $1.4M lump sum. I'm planning to take the annuity because I already have a big 401K/IRA/Roth lump sum to manage and I like the idea of diversification of income - i.e. some guaranteed income stream, some at the mercy of the market returns.

I'm hoping to formally make this decision next month. :sharebeer
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Re: Decision time...to lump sum or not to lump sum

Post by WoodSpinner »

OP,

It’s a tough choice, one of the hardest I had to make in my Retirement planning.

See this thread for my LumpSum Decision Analysis.

Short Version, I took the Pension as a 15 Year Certain which assured me an income floor till SS started at 70. The security of the monthly income during these unusual times has really made a difference. For us, a secure retirement was much more important than more money, we have enough.

WoodSpinner
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Re: Decision time...to lump sum or not to lump sum

Post by Sheepdog »

I wrote this several years ago here. I am copying it to add to your thoughts. These were my thoughts at that time of the past when I took my pension as a lump sum and was thinking that it might have been an error..
The lump sum idea seemed like the right thing...i would have the money in my hand to invest and could have a nice remainder for someone or some group to inherit. Actually that is working out quite well, so why was that an error? In 2008, I had nothing coming in monthly along with SS and SS is not enough for me. Everything I had was invested. If I had had that pension, I would not have had to sell anything. I would have been much less stressed having to sell as the market dropped. Sure, a major market collapse would still hurt somewhat as the nest egg drops in value, but it would not have felt like a disaster as there would be enough money coming in every month.
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daacrusher2001
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Re: Decision time...to lump sum or not to lump sum

Post by daacrusher2001 »

Thanks, everyone, for your insights. I'm going to spend some time this weekend to consider everything...I really have to rethink the Roth conversions.


Stinky wrote: Fri Sep 18, 2020 4:31 am I'm with the majority on this one. Since it sounds like your wife will have a pension (you said she can't lump sum), and since you'll get Social Security, and since you've accumulated a pretty good sized nest egg, I'd feel comfortable taking the lump sum from your pension plan.

Roll it into an IRA, invest it according to your investment policy statement, and call it a day.

And get out of New Jersey! In the South, taxes are lower and weather is better. :D
and...We plan to get out of NJ!!! We are likely going south. We just haven't decided where, but leaning towards Florida's West Coast.
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calmaniac
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Re: Decision time...to lump sum or not to lump sum

Post by calmaniac »

daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm Lately, I'm thinking I'd rather take the lump sum. I'm retiring a lot later than I planned. I like the idea of having control of the money and leaving more to my kids if longevity doesn't go our way. Plus with a very modest rate of return I'll be fine for long time.

My planning goes to age 92. Optimistic, but who knows. :happy

Would you do the lump sum in my case?
I ❤️ my pension.

Congratulations, you and your wife have done a great job on preparing for retirement! I'm in a similar position, but don't have lump-sum option (military pension). My view is that a well-supported inflation-indexed pension is a retirement super-power. I would be very, very hesitant to take the lump sum without having more info.

1. Is this a gov't or company pension? How well funded is the employer?
2. Does the pension have a cost of living adjustment?
3. When are you taking SS? And why?

Cash flow is the critical issue in retirement. Pensions are a wonderful and predictable source of retirement income that hedges against longevity risk. If the 2 of you are both in good health, given that the pension has a 100% survivorship option, it is likely that one of you will live into your 90's, which favors keeping the pension.

Another great feature of a high-quality pension is that it is secure income. Thus, if you are thinking about legacy investing to kids, you can be more aggressive about asset allocation, because you won't need to pull much from your nest egg for your basic needs. I plan to do a rising equity glide path (a la Kitces) to 80/20 starting sometime in the next 5 years.

Have you ever listened to the "Retirement and IRA Show" Podcast? Jim, one of the hosts, is an acquired taste, but they think about retirement and income in a very thoughtful way.

Lastly, I want to point out the inconsistency in your logic, that 1. you note planning to age 92, but 2. are planning to take lump sum in case "longevity doesn't go our way". Best of luck.
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Re: Decision time...to lump sum or not to lump sum

Post by cashboy »

many threads on this subject (and i mean that in a nice way).

some things to consider:

if your pension is not COLA then it loses value over time depending upon inflation rates; your pension has no chance for growth.
if your pension is lump sum and invested it has the 'chance' to grow. of course no one knows the future.

if you pension is taken as payments, and you and your spouse pass on early (lets hope not), then the pension ends; that is that.
if your pension is taken as a lump sum and invested, and you and your spouse pass on early, it can be passed on (children, relatives, charities, etc.)
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2pedals
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Re: Decision time...to lump sum or not to lump sum

Post by 2pedals »

Since you have waited to retire, did your ratio of lump sum payout to pension go up? If your pension is defined by a formula, your lump sum payout might have gone up relative to your pension since the current lower interest rates have made annuities more expensive. If you pick the 100% J&S pension you have an income floor lasting your and your SO lifetime. The part relating to longevity risks and control of money hasn't changed though. You will need income to live off of. If you have less income you will need to manufacture more from savings in possibly a low interest and low equity return environment in the future.

I took the 100% joint survivor pension and and it covers most of our expenses. A major part of the decision was my concern for DW if I happen predecease her early. Would she be able to handle our saving as an elderly lady? We are able to sleep well at night.
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Watty
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Re: Decision time...to lump sum or not to lump sum

Post by Watty »

daacrusher2001 wrote: Thu Sep 17, 2020 1:57 pm I have retiree medical that will cover us until Medicare
I looked back at this thread and noticed this. One thing to check on is that in some cases you may lose the retiree medical care if you take the lump sum option instead of the pension.
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Re: Decision time...to lump sum or not to lump sum

Post by Beehave »

In similar (very similar!) circumstances I took the pension with 100% spousal coverage. No one can know what the right choice is and there are many reasonable suggestions in posts above both as to why to take the lump sum and how to optimize that choice and why to take the pension.

This is a fundamental asset allocation choice. I am very happy with the "sleep well at night" choice I made to take the pension. I have not done calculations to figure out whether picking door number 2 would have been better. I don't care, just as I personally could not care less if paying off the mortgage was not the optimal financial decision.

You may or may not feel the same way I do. If being debt-free and having your monthly bills covered is compellingly appealing, arrange your life that way if you can (probably best with the pension). If managing your money and maximizing your chances of dramatically increasing your nest egg are compelling (probably by taking the lump-sum), then do that. The financial risks and benefits of the choices are fairly evident (and there are some very nice strategy suggestions to go beyond and augment the obvious in posts above). I think that knowing yourself (and spouse!) and acting on that understanding (just as with setting an investment target allocation and strategy) is the key.

It seems to me given your circumstances that you'll be fine whichever of the choices you make - - this is a wonderful type of decision to have to make, and it is your "reward" for hanging in, possibly forgoing other opportunities.

One other comment, and it's in reference to the "get out of New Jersey" advice in one of the posts above. If you move far away for the change in taxes and the weather, you may not see family you move away from anywhere near as much as you expect. There are other factors in this kind of move as well, so think this type of thing through as there are indeed pluses, but also potentially some minuses, and some of the pluses may not be exactly what they seem.
MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Decision time...to lump sum or not to lump sum

Post by MotoTrojan »

gwe67 wrote: Thu Sep 17, 2020 2:03 pm I would be pretty nervous about dumping $797K into the market at once. Lots of potential regret there. Although this is typically the preferred choice over buying-in over time.
Would you also regret not selling your $797K 401k before a crash? They are the same.
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