A quick poll--pension annuity vs. lump sum

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retire14
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A quick poll--pension annuity vs. lump sum

Post by retire14 » Fri Jan 16, 2015 4:46 pm

I am facing with this decision and I know the pros and cons. Just curious how others decided.

Did you have a choice for your pension? what did you choose? if lump sum, what did you do (investment)with the sum?

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AAA
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Re: A quick poll--pension annuity vs. lump sum

Post by AAA » Fri Jan 16, 2015 5:02 pm

We're not given a choice. I think I might prefer a lump sum, provided someone more knowledgable than me indicated that it was a good number.

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Re: A quick poll--pension annuity vs. lump sum

Post by cheese_breath » Fri Jan 16, 2015 5:09 pm

I chose the pension. Most of my wealth is in IRAs and taxable stock funds. I consider my SS and two small pensions as a safety net in case of major market crashes.
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Re: A quick poll--pension annuity vs. lump sum

Post by fred9x » Fri Jan 16, 2015 5:17 pm

I vote strongly for pension annuity. If married get the joint and several one. Where else can you get 6% or more for the rest of your life (and spouse's) guranteed (to some degree)?

I figure I have enough $$ in my 401k and ira's to "play" with.

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Re: A quick poll--pension annuity vs. lump sum

Post by BigJohn » Fri Jan 16, 2015 5:24 pm

I'm facing that choice right now. I'm taking the lump sum driven primarily by
1) The interest rate to convert my annuity to a lump sum is very favorable (getting more favorable every day since it's tied to 30 year Treasury rates)
2) Better control of taxable income to facilitate conversion to Roth over the next 10 - 11 years
3) Confidence that I am a both a disciplined spender and investor and will not "blow it". This is helped by the fact that my SWR will be around 2 - 2.5% so plenty of cushion.
4) I can always annuitize some or all at a later time if that makes sense but can never go back and get the lump sum

I'm currently deferring payment to see if interest rate for conversion will become even more favorable so have not yet had to actually make the investment decision but my plan is
1) Rollover entire lump sum to a VG IRA
2) Long term I plan to have this account at my target AA using VG index funds but the sum is pretty large and I'm more that a little hesitant to buy that much stock right now. Yes, I know what all the studies say about investing a lump sum but just can't sleep well going all in right now.
3) My transition plan is to put everything in bond funds and then DCA into stocks over a couple of years. I'm still trying to decide on exactly what bond fund to use to start. With My focus on capital preservation during DCA period it will likely be all US government debt and likely short term. As a result I'll also be doing a DCA into my ultimate bond funds as well.

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Re: A quick poll--pension annuity vs. lump sum

Post by AlwaysaQ » Fri Jan 16, 2015 6:05 pm

I had the chance to convert my pension to a lump sum about two years ago and decided to stay with the pension. I consider my pension, social security, and small annuity the base of my financial life. The personal savings and investments provide the frills.

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Re: A quick poll--pension annuity vs. lump sum

Post by DJInvestor » Fri Jan 16, 2015 6:06 pm

retire14 wrote:I am facing with this decision and I know the pros and cons. Just curious how others decided.

Did you have a choice for your pension? what did you choose? if lump sum, what did you do (investment)with the sum?


I recently faced that choice and chose the lump sum. My case is probably not typical. The pension was a small survivor pension from my late wife's employer. It wouldn't pay me anything until the age when she would have been 65, and then $13,000 annually. The buyout offer was for about 7 years worth of payments, about 80% of what it would have cost me to buy the same pension as an SPDA.

I decided to take the buyout now, at age 55, 11 years before I would have received anything via the pension, and rolled it over into an IRA at Vanguard, invested 100% in VTI.

My reasoning is as follows:

1) I view this as self-insurance: for both longevity and long term care, with estate planning benefits as well. I don't expect to ever need the money, my time horizon for possible need is quite long, and by the time I might need it, it should have appreciated well beyond the value of any pension payments I would have received.

2) My father died unexpectedly at age 72, my wife at age 53. I am not that concerned with longevity, but rather with living my life fully and providing the best foundation for my two children.

3) The pension is not indexed to inflation. At least my VTI investment has a good chance of doing better than inflation.

4) My kids stand to benefit directly from their mom's pension via the buyout, but not via the SPDA as originally configured.

I have to admit that this decision was not made lightly. At age 70, SS plus the pension would have been almost enough to live on. But the floor provided by my entire portfolio is well beyond that small sum. Otherwise I probably would have chosen differently.

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Re: A quick poll--pension annuity vs. lump sum

Post by Logan T » Fri Jan 16, 2015 6:59 pm

I still have a while, but at this point I want to take the lump sum because I want to be in total control of my money. Plus, like BigJohn said, I can always buy an annuity down the road, but I'll never be offered that lump sum again.
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Re: A quick poll--pension annuity vs. lump sum

Post by teacher » Fri Jan 16, 2015 8:23 pm

My pension and DH's Social Security meet our basic expenses at the moment. DH had a choice of a pension or a lump sum. He chose the later and invested all of it in a Stable Value fund. SV replaces the bonds allocation in our portfolio. We want the option of passing on an inheritance to our heirs. But if I had no pension, we would have taken his pension, because having an annuity is paramount to us. If need be, we will buy an immediate annuity in future, but I doubt that will be necessary.

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Re: A quick poll--pension annuity vs. lump sum

Post by Duckie » Fri Jan 16, 2015 9:10 pm

I chose the pension annuity. Within the first five years they paid me more than the original lump sum amount. And since that happened just before the recession I came out way ahead.

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Re: A quick poll--pension annuity vs. lump sum

Post by Sheepdog » Fri Jan 16, 2015 10:37 pm

I updated and revised my comment, so this is deleted. You can find it below.
Last edited by Sheepdog on Sun Jan 18, 2015 11:03 pm, edited 1 time in total.
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Re: A quick poll--pension annuity vs. lump sum

Post by john94549 » Fri Jan 16, 2015 10:58 pm

Check your tax person. See my recent thread "pension annuity".

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Leif
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Re: A quick poll--pension annuity vs. lump sum

Post by Leif » Fri Jan 16, 2015 11:37 pm

I went with the lump sum. At the time interest rates had dropped so the lump sum seemed like a good option. I invested the proceeds into my portfolio.
Last edited by Leif on Sun Jan 18, 2015 2:37 pm, edited 1 time in total.
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daytona084
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Re: A quick poll--pension annuity vs. lump sum

Post by daytona084 » Fri Jan 16, 2015 11:50 pm

A few important pieces of information to consider -

- size of the lump sum
- annuity monthly payment
- your age
- your general health i.e. do you feel you will have a longer or shorter lifespan than the average person your age?

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Re: A quick poll--pension annuity vs. lump sum

Post by HIinvestor » Sat Jan 17, 2015 1:16 am

Another important consideration is who is holding the pension and how financially secure the company is. IF the company happens to go under, the pension may be sacrificed or significantly reduced. For us, we had a choice as to how much pension I would get as a survivor if H (employee died). He could have his full monthly amount or 10% less for giving me a pension of 55% of her monthly payment. We opted for that because he's 15 years older than me and my family tends to live into the 90s and 100s and beyond.

We also had the option of taking an annuity or the lump sum of what we contributed to H's deferred comp or rolling it over into a Roth IRA. We chose for that to just take the lump sum, as the annuity terms just weren't attractive to us and had no built=in COLA. We figured that with the basic annuity, having the lump sum RothIRA would give us more flexibility.

The pension we currently receive pays for nearly all our regular expenses (including travel), so we only have to make a bit over inflation to keep our nest egg pretty secure and intact (other than the Required Minimum Distributions--RMDs).

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Re: A quick poll--pension annuity vs. lump sum

Post by GerryL » Sat Jan 17, 2015 1:26 am

I qualify for two little pensions. I have already taken the small one as an immediate annuity. I intend to take the tiny one as annuity, too. My plan is to cover my basic (and then some) living expenses with SS, the two little pensions and a SPIA by the time I am 60 or 70. My IRA, Roth IRA and taxable accounts are icing on the cake. I decided to go with the comfort of regular paychecks for regular expenses.

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Re: A quick poll--pension annuity vs. lump sum

Post by vested1 » Sat Jan 17, 2015 9:55 am

We were fortunate to have the best of both worlds. I took the lump sum because the pension with the 100% survivor benefit was only $1,500, while the lump sum was $395,000. I've also worked 6 years since and that account, along with my rolled over 401k in the IRA has grown tremendously, despite no contributions. Then again if the markets would have stayed depressed it wouldn't have worked out as well. I still have a 401k with my current employer, as does my wife with hers.

She will get a generous pension this year when she retires, so the two different strategies (lump sum and pension) tend to spread out our risk. Our AA in all of our retirement accounts is 60/40, and her pension along with combined and delayed SS make for a very wide stool to support us in retirement. In the unlikely event that her pension becomes insolvent and reverts to PBGC it won't be the end of the world.

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Re: A quick poll--pension annuity vs. lump sum

Post by Frugal Al » Sat Jan 17, 2015 11:02 am

This is really a question that is very dependent upon the specific pension payout situation (health of plan sponsor, payout rate, term until vested retirement, COLA or non-COLA, etc.), health of the prospective pensioner and survivorship, the percentage of the retirement portfolio the pension represents, the need/desire to insure retirement income, and also the tax management of retirement income. There are so many variables that a quick poll would be unable to offer much real perspective. And as we've pointed out in numerous threads, what is right for one person may not be right for another.

Over this past year we've seen some very marginal situations. In marginal situations it's easy to lean towards the safety of the pension, assuming a healthy plan sponsor and healthy pensioner or survivor. Going forward, with the lower, 4th quarter 2014, lookback rates, I suspect some situations will be less marginal, making lump sums more attractive. But even with that, ultimately all the other variables will usually weigh more heavily on the decision.

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Re: A quick poll--pension annuity vs. lump sum

Post by nodenuff2 » Sat Jan 17, 2015 2:57 pm

I had the ooprtunity to split mine. I took 40%" in an annuity that built a good floor with our SS's it covers our basic needs. Rolled the other with my 401k into Vanguard. Very happy with the decision.
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Re: A quick poll--pension annuity vs. lump sum

Post by gasdoc » Sat Jan 17, 2015 6:32 pm

fred9x wrote:I vote strongly for pension annuity. If married get the joint and several one. Where else can you get 6% or more for the rest of your life (and spouse's) guranteed (to some degree)?
.



Just noticed no one else questioned this- if this is a fairly recent annuity, it is probably NOT a guaranteed 6% return. Are you certain the 6% payout does not include return of principal?

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Re: A quick poll--pension annuity vs. lump sum

Post by MidMNtom » Sat Jan 17, 2015 6:40 pm

BigJohn wrote:I'm facing that choice right now. I'm taking the lump sum driven primarily by
1) The interest rate to convert my annuity to a lump sum is very favorable (getting more favorable every day since it's tied to 30 year Treasury rates)
2) Better control of taxable income to facilitate conversion to Roth over the next 10 - 11 years
3) Confidence that I am a both a disciplined spender and investor and will not "blow it". This is helped by the fact that my SWR will be around 2 - 2.5% so plenty of cushion.
4) I can always annuitize some or all at a later time if that makes sense but can never go back and get the lump sum

I'm currently deferring payment to see if interest rate for conversion will become even more favorable so have not yet had to actually make the investment decision but my plan is
1) Rollover entire lump sum to a VG IRA
2) Long term I plan to have this account at my target AA using VG index funds but the sum is pretty large and I'm more that a little hesitant to buy that much stock right now. Yes, I know what all the studies say about investing a lump sum but just can't sleep well going all in right now.
3) My transition plan is to put everything in bond funds and then DCA into stocks over a couple of years. I'm still trying to decide on exactly what bond fund to use to start. With My focus on capital preservation during DCA period it will likely be all US government debt and likely short term. As a result I'll also be doing a DCA into my ultimate bond funds as well.


+1. I just retired at the first of this month and am going to take the lump sum. Pretty much for the same 4 reasons listed above. I don't like the idea that if some accident happens to both my DW and I, the kids get nothing of the remaining. I will convert directly to a low cost index fund.

Best of luck on your decision!

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Re: A quick poll--pension annuity vs. lump sum

Post by RetiredinKaty » Sat Jan 17, 2015 10:05 pm

I retired 3 years ago and took the lump sum even though I believe strongly that a fixed pension can make a retirement much more secure, provided the pension provider is strong (mine was). The main "problem" was that low interest rates had made the lump sum balloon to 40% of my entire retirement. Since almost all of the rest of my money was in a traditional 401k (now IRA), RMDs in my 70's were going to be excessive. Some years back Vanguard was recommending a limit of about 30% of assets in an annuity (most all were fixed back then) just for the RMD issue. I still expect to purchase an annuity but not until my mid-70s and not quite so much as my pension would have been.

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Re: A quick poll--pension annuity vs. lump sum

Post by Dandy » Sun Jan 18, 2015 9:24 am

have 2 pensions had a partial lump sum option for the smaller one. Went with full pension with both with 50% survivor benefit for my wife. Waited till the age when both would pay the maximum pension benefit rather than taking them early.

I was fortunate to have enough savings to fund the wait to take full pensions. I like the fact that I didn't have more assets subject to my management and to have a balance between lifetime income and income from my investments. I guess that diversifying money management and income management is a kind of diversity. Also, wanted to maximize the income to my wife in case of my earlier death.

Finally, I have decent health and genes as both parents lived to late 80"s. Time will tell whether this was the best decision. I feel there is a good chance that my former employers might decide to attempt to get out the their retiree pension and health care responsibilities at some point. There seems to be a trend by companies and government to transfer all types of risk to individuals. At one time that would have raised a lot of negative publicity -- now it seems acceptable - love of shareowners and management comp trumps promises to company retirees.

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Re: A quick poll--pension annuity vs. lump sum

Post by likegarden » Sun Jan 18, 2015 10:29 am

I have a pension from my former employer which I took at age of 62.5. Since my and my wife's parents lived into the mid 80s we decided on taking the pension and not the lump sum. I continued to work part time thereafter at my former employer for several years. At age 65 I took SS, my wife at her age of 66. We can cover all our expenses from SS and pension, but have also 6 figure investments. Our health continues to be good, hope to live to 86, we are now 75 and 70.

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Re: A quick poll--pension annuity vs. lump sum

Post by Leeraar » Sun Jan 18, 2015 10:34 am

We recently wrote a Wiki article to answer exactly this question:

https://www.bogleheads.org/wiki/Lump_sum_vs_pension

L.
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Re: A quick poll--pension annuity vs. lump sum

Post by CABob » Sun Jan 18, 2015 11:14 am

I took the lump sum. I'm not sure it was the correct decision, but, I have been satisfied so far. Perhaps the significant benefit to the decision was that it brought me to the M* Diehard forum for advice and eventually to this forum. I took the advice given by several folks (including Taylor) and became a regular reader and occasional contributor. I still recall some of the advice was how to handle what was the largest portfolio value I had ever been faced with which was a bit scary to me.
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Frugal Al
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Re: A quick poll--pension annuity vs. lump sum

Post by Frugal Al » Sun Jan 18, 2015 2:04 pm

Leeraar wrote:We recently wrote a Wiki article to answer exactly this question:

https://www.bogleheads.org/wiki/Lump_sum_vs_pensionL.

The Wiki is a OK, if a bit basic. The "Fair Choice" section is misleading, poorly worded, and has some incorrect information in it. The choice is neither fair, nor unfair, just a different choice with a different methodology.

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Re: A quick poll--pension annuity vs. lump sum

Post by island » Sun Jan 18, 2015 2:58 pm

Not taking them yet, but spouse and I both have unCOLA pensions from our longstanding stable large company employers in the private sector.
65 is still about a decade away and we're not planning to take them early. Lot of factors to consider including how long we'll continue to work, and if our employer will continue to offer the pension; mine is looking to discontinue it going forward. However if were making the decision today we'd both take the pension annuity with survivorship, but who knows what the future will hold.
I appreciate this discussion as food for thought.

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Re: A quick poll--pension annuity vs. lump sum

Post by Leeraar » Sun Jan 18, 2015 3:16 pm

Frugal Al wrote:
Leeraar wrote:We recently wrote a Wiki article to answer exactly this question:

https://www.bogleheads.org/wiki/Lump_sum_vs_pension

The Wiki is a OK, if a bit basic. The "Fair Choice" section is misleading, poorly worded, and has some incorrect information in it. The choice is neither fair, nor unfair, just a different choice with a different methodology.


[Typo fixed in Al's response - L.]

Frugal Al,

The use of "fair" is clearly defined as, will the lump sum buy the annuity? It is not stated as a choice.

If you want to see the Wiki revised, please suggest alternate language. You can do that here, you can send me a PM, or you can ask LadyGeek to allow you to edit the Wiki yourself.

L.
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Re: A quick poll--pension annuity vs. lump sum

Post by LadyGeek » Sun Jan 18, 2015 3:24 pm

Update: Reference to incorrect wiki activity removed, sorry. Recent wiki activity is shown on the left-side menu: Recent changes
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Re: A quick poll--pension annuity vs. lump sum

Post by mickeyd » Sun Jan 18, 2015 3:33 pm

I considered taking it in a lump sum (thinking I could do better on my own) but I decided to take the pension on a monthly basis and I am very sure that this was the correct action for US. Can't say enough for fact that the guaranteed income stream will always be there in my checking account every single month that I am alive. The monthly income, along with my IRA accounts, is really a nice mix.

It's nice to have options.
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Re: A quick poll--pension annuity vs. lump sum

Post by DonCamillo » Sun Jan 18, 2015 3:40 pm

I took the annuity in 2000, and I am really happy that I did so. I would have invested it in equities just before the dot com bust and lost half of it by 2003. Instead, I have already received more than I would have gotten in the lump sum, and I hope to continue collecting it for another 20 years. However, the purchasing power of my fixed pension has declined dramatically. It used to be able to pay all my bills. Now it just barely covers my real estate taxes.
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Re: A quick poll--pension annuity vs. lump sum

Post by island » Sun Jan 18, 2015 4:20 pm

DonCamillo wrote:I took the annuity in 2000, and I am really happy that I did so. I would have invested it in equities just before the dot com bust and lost half of it by 2003. Instead, I have already received more than I would have gotten in the lump sum, and I hope to continue collecting it for another 20 years. However, the purchasing power of my fixed pension has declined dramatically. It used to be able to pay all my bills. Now it just barely covers my real estate taxes.


Yikes!! Declined that much in 15 years?! What's changed? Because no COLA? Or lifestyle changes, unexpected, higher bills or???
I'm curious because I will have a pension with no COLA and I'm hoping mine doesn't lose that much purchasing power in just 15 years based solely on no COLA!

Thanks

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Re: A quick poll--pension annuity vs. lump sum

Post by dognose » Sun Jan 18, 2015 4:44 pm

This was such an important decision for me that I had my CPA "run the numbers." His analysis showed conclusively that I should take the monthly annuity, which I did. Everyone's situation varies, but in this case I think it's worth consulting with a financial professional before you pull the trigger.

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Re: A quick poll--pension annuity vs. lump sum

Post by CABob » Sun Jan 18, 2015 7:15 pm

dognose wrote:This was such an important decision for me that I had my CPA "run the numbers." His analysis showed conclusively that I should take the monthly annuity, which I did. Everyone's situation varies, but in this case I think it's worth consulting with a financial professional before you pull the trigger.

At the time I retired a lot of financial advisors were "running the numbers" and found that the lump sum was the best choice. Of course the advisor was hoping that they would be selected to manage the lump sum. Coincidence? :twisted:
Bob

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Re: A quick poll--pension annuity vs. lump sum

Post by Higman » Sun Jan 18, 2015 7:57 pm

There are tax implications to lump sum distributions. See:

http://www.irs.gov/taxtopics/tc412.html

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Re: A quick poll--pension annuity vs. lump sum

Post by DonCamillo » Sun Jan 18, 2015 9:46 pm

island wrote:
DonCamillo wrote:I took the annuity in 2000, and I am really happy that I did so. I would have invested it in equities just before the dot com bust and lost half of it by 2003. Instead, I have already received more than I would have gotten in the lump sum, and I hope to continue collecting it for another 20 years. However, the purchasing power of my fixed pension has declined dramatically. It used to be able to pay all my bills. Now it just barely covers my real estate taxes.


Yikes!! Declined that much in 15 years?! What's changed? Because no COLA? Or lifestyle changes, unexpected, higher bills or???
I'm curious because I will have a pension with no COLA and I'm hoping mine doesn't lose that much purchasing power in just 15 years based solely on no COLA!

Thanks


It was mostly tax increases. I increased the withholding on my pension as I moved into a higher federal tax bracket and NJ has increased income taxes. Real Estate Taxes were about half of my expenses in 2000, and have doubled since then. My pension has no COLA. NJ living expenses have risen dramatically, as the cost of living in the state has gone from about 120% of the national average to 138%. Businesses are leaving. The Colgate plant where my my son works is moving to the Carolinas. Mercedes just announced that they are moving their national headquarters from NJ to Alabama because the people they want to hire refuse to move to NJ.
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Re: A quick poll--pension annuity vs. lump sum

Post by CABob » Sun Jan 18, 2015 9:58 pm

Higman wrote:There are tax implications to lump sum distributions. See:

http://www.irs.gov/taxtopics/tc412.html

Good point. I and I assume others were thinking that if a lump sum distribution were taken it would be rolled into and IRA without it being a taxable event at the time. Taking a lump sum as a taxable event would not be favored by many.
You may be able to defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan.

From the above IRS link
Bob

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Re: A quick poll--pension annuity vs. lump sum

Post by BigJohn » Sun Jan 18, 2015 10:40 pm

CABob wrote:I and I assume others were thinking that if a lump sum distribution were taken it would be rolled into and IRA without it being a taxable event at the time. Taking a lump sum as a taxable event would not be favored by many.

That's my plan. If rollover was not possible and you had to take it all as taxable income in one year I suspect that very few people would choose a lump sum.

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Re: A quick poll--pension annuity vs. lump sum

Post by island » Sun Jan 18, 2015 10:44 pm

DonCamillo wrote:
island wrote:
DonCamillo wrote:I took the annuity in 2000, and I am really happy that I did so. I would have invested it in equities just before the dot com bust and lost half of it by 2003. Instead, I have already received more than I would have gotten in the lump sum, and I hope to continue collecting it for another 20 years. However, the purchasing power of my fixed pension has declined dramatically. It used to be able to pay all my bills. Now it just barely covers my real estate taxes.


Yikes!! Declined that much in 15 years?! What's changed? Because no COLA? Or lifestyle changes, unexpected, higher bills or???
I'm curious because I will have a pension with no COLA and I'm hoping mine doesn't lose that much purchasing power in just 15 years based solely on no COLA!

Thanks


It was mostly tax increases. I increased the withholding on my pension as I moved into a higher federal tax bracket and NJ has increased income taxes. Real Estate Taxes were about half of my expenses in 2000, and have doubled since then. My pension has no COLA. NJ living expenses have risen dramatically, as the cost of living in the state has gone from about 120% of the national average to 138%. Businesses are leaving. The Colgate plant where my my son works is moving to the Carolinas. Mercedes just announced that they are moving their national headquarters from NJ to Alabama because the people they want to hire refuse to move to NJ.


Thanks for the info. I live in CA and can relate.

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Sheepdog
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Re: A quick poll--pension annuity vs. lump sum

Post by Sheepdog » Sun Jan 18, 2015 11:01 pm

When I retired in 1998 I chose the lump sum versus the annuity because (1) I didn't trust the company any longer, (2)I had had a heart attack 3 months before retiring so I didn't expect to live long, (3) the annuity was not inflation adjusted, and (4) I thought this would be better for my wife in the long run.
Well, I did not die early after all. I rolled it over to an IRA and started taking distributions from it at 70.5 years of age (2004) (RMD) and I have taken more from that than the RMDs, plus I moved some to my ROTH, not a lot, but some.

History of my 1998 pension lump-sum rollover to IRA (10/29/1998 to 12/31/2014---16+ years) My present age is 81.
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 of our lives.
History:
10/29/1998 $222,283 pension lump sum was invested conservatively in a Vanguard Rollover IRA
12/31/2014 total distributions from that rollover IRA to date is$206,187
12/31/2014 remaining Rollover IRA balance = $254,708.

The year end account balance of $254,708 plus the $206,187 distributions received to date totals $460,895.
If I had taken the annuity instead, I would have received $287,002 to date.
Based on that, as I thought at retirement, I believe the lump sum was the best for me. I would do it again.

I plan on coming back here in 10 years to update this. :beer
Last edited by Sheepdog on Mon Jan 19, 2015 10:26 am, edited 1 time in total.
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Bill M
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Re: A quick poll--pension annuity vs. lump sum

Post by Bill M » Mon Jan 19, 2015 6:39 am

If you had a crystal ball (or waited until the day after you died) you'd know how long you're going to live, and know the market returns; so you'd know the correct answer. Since you don't, you're really dealing with a question of risk management. Don't think of this question as choice of investment alternatives; think of it as the way to minimize risks. Take the pension annuity.

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Re: A quick poll--pension annuity vs. lump sum

Post by BigJohn » Mon Jan 19, 2015 6:54 am

Bill M wrote:Since you don't, you're really dealing with a question of risk management. Don't think of this question as choice of investment alternatives; think of it as the way to minimize risks. Take the pension annuity.

Bill M, no argument with the point that many aspects of this are a risk management decision but I don't think it's as simple as saying the annuity is the lower risk option. If your annuity does not have a COLA then you can't ignore the risk of inflation that comes with that choice. I think this is especially true, if you retire early and have more years of inflation risk to worry about. Properly managed, the lump sum has a reasonable chance at losing a lot less ground to inflation than a non-COLA annuity. Like many complex risk management decisions, decisions that minimize one risk increase others so there are no simple answers to which choice minimizes overall risk.

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Re: A quick poll--pension annuity vs. lump sum

Post by Bill M » Mon Jan 19, 2015 7:10 am

BigJohn wrote:
Bill M wrote:Since you don't, you're really dealing with a question of risk management. Don't think of this question as choice of investment alternatives; think of it as the way to minimize risks. Take the pension annuity.

Bill M, no argument with the point that many aspects of this are a risk management decision but I don't think it's as simple as saying the annuity is the lower risk option. If your annuity does not have a COLA then you can't ignore the risk of inflation that comes with that choice. I think this is especially true, if you retire early and have more years of inflation risk to worry about. Properly managed, the lump sum has a reasonable chance at losing a lot less ground to inflation than a non-COLA annuity. Like many complex risk management decisions, decisions that minimize one risk increase others so there are no simple answers to which choice minimizes overall risk.

Granted there are two separate risks - longevity and inflation. If you take the lump sum, you are assuming both risks. If you take the annuity, at least one is covered. Neither covers your house burning down, so neither is a complete risk management solution.

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Re: A quick poll--pension annuity vs. lump sum

Post by BigJohn » Mon Jan 19, 2015 7:55 am

Bill M wrote:Granted there are two separate risks - longevity and inflation. If you take the lump sum, you are assuming both risks. If you take the annuity, at least one is covered.

Not sure I agree that a non-COLA annuity covers longevity risk. After 30 years at a very modest 2.5% average inflation your purchasing power will be reduced by about 50%. Granted if you look at worst cases this is better than the potential to end up with nothing if you take a lump sum, however you also have to consider the probability of those worst cases. I think 2.5% average inflation is very probable (could be worse) so you have a high probability to lose the 50% purchasing power. Taking a lump sum at a low SWR (say 3.5% or less) has a very low probability of going to zero and does by definition keep your spending power relatively constant over the 30 years. Which of these better manages longevity risk? Certainly a very different answer if the lump sum case has a higher SWR which is why there is no one right answer.

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Re: A quick poll--pension annuity vs. lump sum

Post by bsteiner » Mon Jan 19, 2015 10:10 am

Leeraar wrote:... The use of "fair" is clearly defined as, will the lump sum buy the annuity? It is not stated as a choice. ...


At a fair price, the lump sum wouldn't buy the annuity, since the insurance company has to cover its expenses and establish reserves, and may want to make a profit.

I would view "fair" as the present value of the annuity payments being equal to the lump sum.

Of course, in order to determine the present value of the annuity payments, you have to make some assumption as to how long you think you'll live, and what interest rate you want to use to discount the annuity payments to present value.

If you want the guarantees of an annuity, and if you would likely otherwise buy an annuity, you'll probably get a better deal taking the annuity from the retirement plan, since the plan should be able to give you a fairer deal than an insurance company.

However, if you don't need or want the guarantees of an annuity, the lump sum gives you more control. In addition, the lump sum offers the possibility of converting to a Roth, which will often add substantial value.

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Re: A quick poll--pension annuity vs. lump sum

Post by Leeraar » Mon Jan 19, 2015 10:33 am

bsteiner wrote:I would view "fair" as the present value of the annuity payments being equal to the lump sum.

Yes.

However, there is a mandated formula pension providers can use to calculate a lump sum. That lump sum may be significantly less than that needed to buy an equivalent annuity.

Think about it. Under the law, a pension provider can purchase an annuity equivalent to your pension and shed the liability to an insurance company. You have no choice if they decide to do that. Why would they offer a lump sum if it were fair, or better than fair?

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Re: A quick poll--pension annuity vs. lump sum

Post by teacher » Mon Jan 19, 2015 10:36 am

BigJohn wrote:
Bill M, no argument with the point that many aspects of this are a risk management decision but I don't think it's as simple as saying the annuity is the lower risk option. If your annuity does not have a COLA then you can't ignore the risk of inflation that comes with that choice. I think this is especially true, if you retire early and have more years of inflation risk to worry about. Properly managed, the lump sum has a reasonable chance at losing a lot less ground to inflation than a non-COLA annuity. Like many complex risk management decisions, decisions that minimize one risk increase others so there are no simple answers to which choice minimizes overall risk.

It seems the risk/reward possibilities are endless. In our case, the pension did not have a COLA, so inflation was a concern, yet the lump sum would not come close to generating what the pension would provide in a conservative investment. When we took the lump sum, we decided Stable Value was the best investment because it would at least ameliorate inflation in a somewhat regular fashion. To date, it has beat inflation, but we don’t expect that to be the case indefinitely. Since we have integrated the lump sum into the portfolio asset allocation, replacing bonds, it will be difficult to assess how much better/worse off we are with the lump sum decision in future. The lump sum generates more than a third less than the pension would have provided, but the fact it can be passed to our heirs, increases in value each market day, trims inflation risk, and serves as the fixed side of our portfolio along with TIPS gives us some measure of comfort. I think if we depended heavily on the sum, our decision would have been different. To date, we have not had to touch the portfolio as we have significant savings in a money market used to delay SS withdrawal. The money market funds should last until RMD withdrawals in three years. So, the greatest risk for us is we may never realize the difference between the pension and the lump sum, but our heirs may.

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Re: A quick poll--pension annuity vs. lump sum

Post by travellight » Mon Jan 19, 2015 12:20 pm

So many factors to consider! I generally have favored the annuity but some excellent points here for lump sum as well. I found sheepdog's actual numbers fascinating.

If I was a male with no heirs, I would definitely take the annuity. Being female, I get less money due to projected longer life span. I like the fact that I could leave the lump sum money to my heirs, a lot. Is there a formula where one can calculate what that translates to in relative value? e.g. if my annuity is 190,000 per year, what would the lump sum need to be to be equal in value if you consider that you could leave money to your heirs? Is a 40, or 60% discount a fair translation? or is it closer to 25%

Another way to put it: How do you estimate NPV of the pension.... someone once said use 4% withdrawal rate to create the same income which would make it 4,750,000. If we go with such a number, what is the threshold at which lump sum is equal in relative value considering you can leave it to your heirs? It would seem to me like half or maybe even lower.

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Re: A quick poll--pension annuity vs. lump sum

Post by Leeraar » Mon Jan 19, 2015 12:41 pm

travellight wrote:So many factors to consider! I generally have favored the annuity but some excellent points here for lump sum as well. I found sheepdog's actual numbers fascinating.

If I was a male with no heirs, I would definitely take the annuity. Being female, I get less money due to projected longer life span. I like the fact that I could leave the lump sum money to my heirs, a lot. Is there a formula where one can calculate what that translates to in relative value? e.g. if my annuity is 190,000 per year, what would the lump sum need to be to be equal in value if you consider that you could leave money to your heirs? Is a 40, or 60% discount a fair translation? or is it closer to 25%

Another way to put it: How do you estimate NPV of the pension.... someone once said use 4% withdrawal rate to create the same income which would make it 4,750,000. If we go with such a number, what is the threshold at which lump sum is equal in relative value considering you can leave it to your heirs? It would seem to me like half or maybe even lower.

You can find the cost to buy your pension at www.immediateannuities.com

The cost of leaving money to your heirs is the cost of buying term life insurance in the amount you wish to leave. That cost can be buried in the annuity with words like "term certain". Adds fees for the insurance company, in my opinion.

If that's what you want to do, forget about the annuity. Buy a bond ladder and live off the income. Your heirs will get the principal.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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