Annuity Lump Sum vs Deferred Pension Plan

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BiggerFishToFI
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Joined: Mon Jan 22, 2018 11:53 pm

Annuity Lump Sum vs Deferred Pension Plan

Post by BiggerFishToFI »

I've recently changed jobs and am presented with the following option for my vested defined pension plan:

1) Payout of $11,129

2) Payout of $7034 and monthly annuity of $312 at 65

3) No Payout and monthly Annuity of $850 at 65

I'm 36, have $1.8MM NW and the company is the largest health care provider in my state.

I'm leaning towards deferring until 65, since that seems like the biggest benefit and I do not need the money.

Thoughts?

Thanks!
peteyboy
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Joined: Tue Feb 07, 2023 2:26 pm

Re: Annuity Lump Sum vs Deferred Pension Plan

Post by peteyboy »

Rule of 72, inflation (CPI), and tax --> probably a wash

Questions:
COLA?
Pension plan still exists in 30 y?
Keeping track of it for 30 y?
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Stinky
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Location: Sweet Home Alabama

Re: Annuity Lump Sum vs Deferred Pension Plan

Post by Stinky »

BiggerFishToFI wrote: Tue Apr 02, 2024 11:32 am I've recently changed jobs and am presented with the following option for my vested defined pension plan:

1) Payout of $11,129

2) Payout of $7034 and monthly annuity of $312 at 65

3) No Payout and monthly Annuity of $850 at 65

I'm 36, have $1.8MM NW and the company is the largest health care provider in my state.

I'm leaning towards deferring until 65, since that seems like the biggest benefit and I do not need the money.

Thoughts?

Thanks!
At age 36, I’d definitely take the lump sum, roll it into an IRA, invest it in a stock heavy allocation, and forget it.

There will be plenty of time to decide if you want a SPIA in 30 or 40 years from now. Meanwhile, you should profit handsomely from investing in equities until 2055 or beyond.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Wiggums
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Re: Annuity Lump Sum vs Deferred Pension Plan

Post by Wiggums »

I agree with Stinky’s recommendation
"I started with nothing and I still have most of it left."
Retired in CA
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Re: Annuity Lump Sum vs Deferred Pension Plan

Post by Retired in CA »

Stinky wrote: Tue Apr 02, 2024 1:25 pm
BiggerFishToFI wrote: Tue Apr 02, 2024 11:32 am I've recently changed jobs and am presented with the following option for my vested defined pension plan:

1) Payout of $11,129

2) Payout of $7034 and monthly annuity of $312 at 65

3) No Payout and monthly Annuity of $850 at 65

I'm 36, have $1.8MM NW and the company is the largest health care provider in my state.

I'm leaning towards deferring until 65, since that seems like the biggest benefit and I do not need the money.

Thoughts?

Thanks!
At age 36, I’d definitely take the lump sum, roll it into an IRA, invest it in a stock heavy allocation, and forget it.

There will be plenty of time to decide if you want a SPIA in 30 or 40 years from now. Meanwhile, you should profit handsomely from investing in equities until 2055 or beyond.
This is exactly what I did a few years ago when a former megacorp employer merged with another megacorp. I was offered an immediate annuity, an annuity at age 65 (the original plan) or a lump sum. As far as I could figure, based on reasonable assumptions/guesses about the then current interest rates and life expectancy the three offers were essentially equivalent. I took the lump sum and rolled it into my IRA. Three reasons: this allowed me to defer taxes until age 70 (now up to age 73); it appealed to my sense of simplifying my life with one less account to deal with; and it wasn't a vast amount so if one of the other options would have been a better deal I wasn't making a catastrophic error. (IIRC, the $$ involved were similar to yours)
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#Cruncher
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Re: Annuity Lump Sum vs Deferred Pension Plan

Post by #Cruncher »

BiggerFishToFI wrote: Tue Apr 02, 2024 11:32 am
  1. Payout of $11,129
  2. Payout of $7034 and monthly annuity of $312 at 65
  3. No Payout and monthly Annuity of $850 at 65
I'm 36 ... I'm leaning towards deferring until 65 ...
I would take option 3. It has a 7.4% survival weighted return (for a man -- 7.7% for a woman) versus the lump sum. This is calculated with my Longevity Estimator Excel workbook using the SSA 1990 Cohort Life Table. Option 2 has the same rate of return since the $312 has the same ratio to the forgone lump sum as option 3.
$312 = (11129 - 7034) * (850 / 11129)

Edited 4/4/2024 9:50 PM to add following from "ToPaste" sheet of workbook referring to cells on "Alive" sheet:

Code: Select all

Man:
  Cell  Item                         Value
    F3  Table - Pers 1          Cohort1990
    H3  Sex - Pers 1                     M
    I3  Age Years - Pers 1              36
    I5  Years - Delay                   29
    N1  Amount - Pers 1             850.00
    N4  Discount Rate - Single      7.387%
    N5  Present Value - Single      11,129

Code: Select all

Woman:
  Cell  Item                         Value
    F3  Table - Pers 1          Cohort1990
    H3  Sex - Pers 1                     F
    I3  Age Years - Pers 1              36
    I5  Years - Delay                   29
    N1  Amount - Pers 1             850.00
    N4  Discount Rate - Single      7.686%
    N5  Present Value - Single      11,129
Last edited by #Cruncher on Thu Apr 04, 2024 8:52 pm, edited 1 time in total.
Josh5000
Posts: 150
Joined: Sat Mar 02, 2024 3:51 pm

Re: Annuity Lump Sum vs Deferred Pension Plan

Post by Josh5000 »

BiggerFishToFI wrote: Tue Apr 02, 2024 11:32 am I've recently changed jobs and am presented with the following option for my vested defined pension plan:

1) Payout of $11,129

2) Payout of $7034 and monthly annuity of $312 at 65

3) No Payout and monthly Annuity of $850 at 65

I'm 36, have $1.8MM NW and the company is the largest health care provider in my state.

I'm leaning towards deferring until 65, since that seems like the biggest benefit and I do not need the money.

Thoughts?

Thanks!
Congrats on substantial NW at your age.

Very good question as I'll hit 30-year pension requirement long before I meet minimum retirement age (MRA) and will be faced with the similar challenges of whether to switch career for another source of income that may be a lot more cash up front but no pension. I'll have to calculate and ask around if that would affect my annuity benefit at current company as it will pay automatcally along with my pension if I meet MRA and service years requirement.
the_wiki
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Re: Annuity Lump Sum vs Deferred Pension Plan

Post by the_wiki »

Keep in mind that $800 in 32 years is going to be worth maybe $300 in today's money.

I don't think it is worth the hassle of trying to remember to file for retirement, and manage that extra account for the equivalent of $300 a month. Especially considering your current net worth and probable future monthly withdrawals. I would just take the lump sum and add it to my savings to keep things simple.
Josh5000
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Re: Annuity Lump Sum vs Deferred Pension Plan

Post by Josh5000 »

the_wiki wrote: Wed Apr 03, 2024 1:27 pm Keep in mind that $800 in 32 years is going to be worth maybe $300 in today's money.

I don't think it is worth the hassle of trying to remember to file for retirement, and manage that extra account for the equivalent of $300 a month. Especially considering your current net worth and probable future monthly withdrawals. I would just take the lump sum and add it to my savings to keep things simple.
Probably a lot less than $300 as real inflation is about 15% in normal time if food, fuel, cars, housing, all insurances, education, and all the things one needs to live on are included.
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