Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

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MisterBill
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Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 12:04 am

I've been holding off creating a new thread because there are many others but none seem to be for my exact scenario and I need to make a decision. Sorry for the long post, but I figured the more info the better.

I am retiring and have the option of a partial lump sum that would continue to pay me a reduced annuity, or take the full annuity.

My wife and I are both going to be 62 this year. Both in very good health. My father is still alive at 92. His mother lived to 99. My wife's mother lived to 85 and only died after breaking her hip and went downhill after that. Her father died at 80. So we figure to have decent longevity, of course nothing is guaranteed. Pension will start by 10/1.

My options are

1) a normal annuity -- $3,346/mo with no survivor benefit, $2,835/mo with 100% survivor benefit, $3,070/mo with 50% survivor benefit (and various other options).
2) a $232,469 partial lump sum plus a reduced annuity -- $1,918/mo with no survivor benefit or $1,760/mo with 50% survivor benefit, $1,625/mo with 100% survivor benefit. Update: the lump sum can (and will) be rolled into an IRA (also added the 100% option here that I did not have originally).

Update: pension is not COLA adjusted.

I used the Baldwin spreadsheet on the Forbes website https://www.forbes.com/sites/baldwin/20 ... 05f97e48d5 and the best "fair value" is with the 100% survivor benefit. When I figure the value of the reduced annuity and add the lump sum, I end up $60k short. Checking how much of an annuity I can get with the lump sum from ImmediateAnnuities.com shows me coming up a few hundred dollars a month short with the lump sum, so it's clearly not as valuable as the full annuity.

The catch here (which I haven't seen discussed in other threads) is that I have enough between taxable and tax-advantaged accounts and don't really need the full pension amount to live comfortably at this time. So I could live on my taxable accounts until we hit 70 and have to start taking RMD's (including from the rollover account if I took the distribution). And taking the lump sum and lower annuity amount would allow me to reduce my income taxes, at least until we hit 70. On the other hand, I don't really need the lump sum and taking the larger monthly guaranteed payment would allow us to reduce the amount we withdraw from the taxable accounts until we hit 70. And there is no 100% survivor option. And it would probably allow me to wait longer to start taking Social Security.

I've spoken to two advisors about this. One suggested taking the partial lump sum for the reason stated above, that I don't need the full pension amount now, and I'd be able to reduce income taxes. The other advisor (from Fidelity) told me that Fidelity's position is that you want to fill as much of your required monthly income from a guaranteed stream so she recommended the full annuity amount. However once I pointed out that the lump sum still gave me an annuity (she thought it was either/or), she agreed (unofficially) that it wouldn't necessarily be a bad choice and when she plugged it into my retirement plan, she confirmed that I'd be OK either way.

The monthly amount on either option is low enough that I don't have to worry about being above the PBGC max should my company default (unlikely).

Anyway, I am looking for advice, maybe point out something I haven't considered. On the one hand, I like the idea of paying less taxes. On the other hand, the straight annuity would be a different type of income and simplify things a bit. My kids won't get anything from it if we die early, but in that case there would still be plenty left for them in the accounts.
Last edited by MisterBill on Wed Jul 12, 2017 10:43 am, edited 3 times in total.

Carl53
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by Carl53 » Mon Jul 10, 2017 3:55 am

You don't say whether the lump sum is coming out as funds that will be rolled over to an IRA or taken as taxable. If taxable, then definitely not. Even if pretax, I'd still say no, take the 100% survivor option. As I recently noted in another pension thread, we had a friend that took his pension without any survivor option and dropped dead two years later leaving his spouse somewhat short on funds. If your spouse predeceases you, there may be a bump up to the no survivor option at that time. That is how my pension is supposed to work.

annielouise
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by annielouise » Mon Jul 10, 2017 6:56 am

My experience with lump sums is that the company is trying to woo people who don't do the math so that they can reduce their pension expenses.

A few thoughts:

Do you have to start the pension right away? My husband's goes up the longer we wait just like SS.

Will the lump sum increase your RMDS too much? I'm assuming it would rollover.

carolinaman
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by carolinaman » Mon Jul 10, 2017 6:58 am

You did not mention if the pension was COLA based or not. If not COLA based, the purchasing power of your pension will decline dramatically over a long retirement. Also, you may be able to use tax strategies to reduce taxes on the lump sum by taking it as income when your income is low, especially between 62 and 70.5 when RMDs kick in. That tax flexibility does not exist with your pension.

Delaying SS until 70 gives you a far better SS pension because it is COLA based.

In any event, once these factors are considered, you may find the lump sum is more valuable than you first considered. Did the advisers you talked to consider this?

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 7:46 am

Carl53 wrote:You don't say whether the lump sum is coming out as funds that will be rolled over to an IRA or taken as taxable. If taxable, then definitely not. Even if pretax, I'd still say no, take the 100% survivor option. As I recently noted in another pension thread, we had a friend that took his pension without any survivor option and dropped dead two years later leaving his spouse somewhat short on funds. If your spouse predeceases you, there may be a bump up to the no survivor option at that time. That is how my pension is supposed to work.
Thanks to everyone for the responses.

The lump sum is not taxable if rolled into an IRA.

I did read your post about your friend. I do have the bump up option (they call it "restore annuity") but I have to pay for it in terms of lower monthly annuity. So the 100% survivor amount is reduced from $2,835 to $2,773. The 50% survivor with lump sum goes from $1,760 to $1,738.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 7:55 am

annielouise wrote:My experience with lump sums is that the company is trying to woo people who don't do the math so that they can reduce their pension expenses.

A few thoughts:

Do you have to start the pension right away? My husband's goes up the longer we wait just like SS.

Will the lump sum increase your RMDS too much? I'm assuming it would rollover.
Agreed, lump sums are typically not a good deal. But the fact that a) this one is only partial and b) my personal situation makes this a bit different.

There is not a lot of benefit to delaying the pension. I ran 3 scenarios 2 months apart. On the normal plan, it goes up less than $3 every 2 months. On the split plan, the lump sum goes up a couple of thousand, but the monthly annuity goes DOWN around $6 a month (some strange actuarial stuff).

Haven't considered the effect on RMDS. I assume it would just increase it proportional to the amount already in the accounts. Yes, it rolls into an IRA.
Last edited by MisterBill on Mon Jul 10, 2017 7:10 pm, edited 1 time in total.

jebmke
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by jebmke » Mon Jul 10, 2017 8:04 am

It is easy enough to price a comparable annuity and compare it to the lump sum offered. When I did this for my pension options the lump sum was not a good financial option.
When you discover that you are riding a dead horse, the best strategy is to dismount.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 8:08 am

carolinaman wrote:You did not mention if the pension was COLA based or not. If not COLA based, the purchasing power of your pension will decline dramatically over a long retirement. Also, you may be able to use tax strategies to reduce taxes on the lump sum by taking it as income when your income is low, especially between 62 and 70.5 when RMDs kick in. That tax flexibility does not exist with your pension.

Delaying SS until 70 gives you a far better SS pension because it is COLA based.

In any event, once these factors are considered, you may find the lump sum is more valuable than you first considered. Did the advisers you talked to consider this?
Pension is not COLA based. Agreed that waiting until 70 for SS is a good deal that I should be able to handle.

The advisor who suggested taking the lump sum was doing so based on tax advantage and that I could live on my taxable assets and did not need the additional monthly pension. Then I started looking at the actual value of the two options and also the comments at the end of the Forbes article (which suggests taking the annuity) and began to waver on my decision, which is why I posted here. Plus, the full annuity is a simple solution.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 8:18 am

jebmke wrote:It is easy enough to price a comparable annuity and compare it to the lump sum offered. When I did this for my pension options the lump sum was not a good financial option.
It's tough to compare because Immediate Annuities doesn't show a 50% spouse benefit (only 100%) and my pension doesn't show a 100% spouse benefit (only 50%). But I'm pretty sure it's not a good option when I price what I can get with the lump sum and add it to the reduced annuity. But there are other things to consider, which is why I posted here.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by neilpilot » Mon Jul 10, 2017 9:55 am

MisterBill wrote:
The advisor who suggested taking the lump sum was doing so based on tax advantage and that I could live on my taxable assets and did not need the additional monthly pension.
Was the adviser who suggested taking the lump sum also expecting to earn a commission from your lump sum investments? If so, than his advice might not be solely in your best interests.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 10:06 am

neilpilot wrote:Was the adviser who suggested taking the lump sum also expecting to earn a commission from your lump sum investments? If so, than his advice might not be solely in your best interests.
He acts in a fiduciary capacity so it should not be based on that. A couple of co-workers also brought up that point. I asked the advisor about that and he said:

"You are correct that we are incentivized to have more assets under management, but we are also fiduciaries. In your case, the lump sum makes more sense simply because you are not reliant on the pension income on an on-going basis and you can afford to have those assets work for a longer period of time and potentially on someone else’s time horizon if they are legacy assets. Others might not have that luxury and the decision would likely lean toward the annuity income. "

jebmke
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by jebmke » Mon Jul 10, 2017 10:11 am

MisterBill wrote:
jebmke wrote:It is easy enough to price a comparable annuity and compare it to the lump sum offered. When I did this for my pension options the lump sum was not a good financial option.
It's tough to compare because Immediate Annuities doesn't show a 50% spouse benefit (only 100%) and my pension doesn't show a 100% spouse benefit (only 50%). But I'm pretty sure it's not a good option when I price what I can get with the lump sum and add it to the reduced annuity. But there are other things to consider, which is why I posted here.
I was able to price annuities through the VG site with various spousal benefits. In fact, it demonstrated that my 100% J&S was better than other options with less than 100%
When you discover that you are riding a dead horse, the best strategy is to dismount.

JW-Retired
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by JW-Retired » Mon Jul 10, 2017 10:30 am

MisterBill,
Take the annuity with the 100% survivor benefit to delay your SS until 70 so as to make your SS maximum for your widow if you pass first. Social security is by far the best annuity because it is taxed much less than pensions, so making that income bigger is tax friendly. Trading more SS income for less tax deferred income likely can't help but reduce your taxes in retirement. Double that if you live in a high tax state like CA...... I think few or none of the high tax ones tax SS ...... but check your own.

Anyway, be sure you fully understand how SS taxation gets phased in before you make this pension decision. My quick scan indicates the article you referred to ignore it. :oops:

See wiki on it https://www.bogleheads.org/wiki/Social_ ... calculator

And attempt at a one-chart-tells-all graphic here....... viewtopic.php?f=2&t=177441#p2686058
JW
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MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 11:25 am

I went back to the pension site and was able to get it to generate an estimate for the lump sum + annuity with 100% survivor benefit and it's $1,625/mo vs $1,918 with no survivor or $1,760 with 50%. That's compared to $2,835/mo with no lump sum.

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BL
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by BL » Mon Jul 10, 2017 12:17 pm

If your wife has SS on her income, she could begin as early as 62 while you wait for age 70 and do 100% survivor on 100% annuity.

100% annuity means a guaranteed income rather than possibility of market crash, bad choices, scams and other negative influences in your or your survivor's later years of poorer decision-making abilities. Granted, everything could also go very well.

Here is a summary of recent changes to SS claiming:
https://www.ssa.gov/planners/retire/claiming.html

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 12:57 pm

BL wrote:If your wife has SS on her income, she could begin as early as 62 while you wait for age 70 and do 100% survivor on 100% annuity.

100% annuity means a guaranteed income rather than possibility of market crash, bad choices, scams and other negative influences in your or your survivor's later years of poorer decision-making abilities. Granted, everything could also go very well.

Here is a summary of recent changes to SS claiming:
https://www.ssa.gov/planners/retire/claiming.html
My wife didn't work as long or make nearly as much as me, so her SS will be less than the 50% spousal benefit. I actually asked my Fidelity rep whether she could start taking now and then get the full spousal benefit when I apply. She said that if she takes early distribution, the penalty will be applied to her spousal benefit when I start taking mine. I haven't run the numbers to see if it would still work out to our benefit.

I checked the SSA page and it confirmed what the Fidelity person said. My wife would have to collect based on the spousal benefit, since it's higher than her own, and it would get reduced because she is not FRA. Then when I am FRA (or wait until 70) I would get my full benefit (or more if I wait) but her benefit would not increase.
Last edited by MisterBill on Mon Jul 10, 2017 1:51 pm, edited 1 time in total.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by BL » Mon Jul 10, 2017 1:00 pm

MisterBill wrote:
neilpilot wrote:Was the adviser who suggested taking the lump sum also expecting to earn a commission from your lump sum investments? If so, than his advice might not be solely in your best interests.
He acts in a fiduciary capacity so it should not be based on that. A couple of co-workers also brought up that point. I asked the advisor about that and he said:

"You are correct that we are incentivized to have more assets under management, but we are also fiduciaries. In your case, the lump sum makes more sense simply because you are not reliant on the pension income on an on-going basis and you can afford to have those assets work for a longer period of time and potentially on someone else’s time horizon if they are legacy assets. Others might not have that luxury and the decision would likely lean toward the annuity income. "
This sounds like possible conflict of interest to me. Would he sign a statement stating that he is acting as your fiduciary? Sorry to be so suspicious.

Yes, your spouse would get reduced spousal (somewhat complicated, so maybe not as greatly reduced as you would think). But she would get full survivor's benefit (what you get) if at least FRA. Your/her choice.
Last edited by BL on Mon Jul 10, 2017 1:04 pm, edited 1 time in total.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by JW-Retired » Mon Jul 10, 2017 1:00 pm

MisterBill wrote:I went back to the pension site and was able to get it to generate an estimate for the lump sum + annuity with 100% survivor benefit and it's $1,625/mo vs $1,918 with no survivor or $1,760 with 50%. That's compared to $2,835/mo with no lump sum.
So with 100% survivor benefits for both, pension is $2,835/mo with no lump sum or $1625/mo with a lump sum of $232,469. Correct?

Neglecting inflation, if we assume drawing the 4% rule safe withdrawal amount from a $232,469 lump sum investment, it would initially generate $9299/year or $775/mo. So you might view 1625+775 = $2400/mo is the total equivalent annuity value with the lump sum. That's $435/mo less value than the $2835/mo pension with no lump sum.

If my numbers are right that seems like an easy call to me?
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MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 1:45 pm

JW-Retired wrote:
MisterBill wrote:I went back to the pension site and was able to get it to generate an estimate for the lump sum + annuity with 100% survivor benefit and it's $1,625/mo vs $1,918 with no survivor or $1,760 with 50%. That's compared to $2,835/mo with no lump sum.
So with 100% survivor benefits for both, pension is $2,835/mo with no lump sum or $1625/mo with a lump sum of $232,469. Correct?

Neglecting inflation, if we assume drawing the 4% rule safe withdrawal amount from a $232,469 lump sum investment, it would initially generate $9299/year or $775/mo. So you might view 1625+775 = $2400/mo is the total equivalent annuity value with the lump sum. That's $435/mo less value than the $2835/mo pension with no lump sum.

If my numbers are right that seems like an easy call to me?
JW
Yes, the numbers are correct. The only real question is whether the ability to have less taxable income now and being able to invest the lump sum for 8 years tax-free before I need to withdraw it somehow adds enough value to make it worth taking the lower payout. It sounds like the general consensus is that there isn't.
Last edited by MisterBill on Mon Jul 10, 2017 2:30 pm, edited 1 time in total.

infotrader
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by infotrader » Mon Jul 10, 2017 2:10 pm

dup removed.
Last edited by infotrader on Mon Jul 10, 2017 2:56 pm, edited 1 time in total.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by infotrader » Mon Jul 10, 2017 2:55 pm

infotrader wrote:From the BH postings, I understand that there is a consensus that lump sum is not a good deal.
I think the consensus is based the assumption that people need a have stable income during retirement.
If you have sizable tIRA, lump sum may make your income from 62 to 70 lower, so that you can make more Roth conversion in between. Also, you can leave something tax-free for your kids.
I would take lump sum if I were you.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Mon Jul 10, 2017 3:06 pm

infotrader wrote:From the BH postings, I understand that there is a consensus that lump sum is not a good deal.
I think the consensus is based the assumption that people need a have stable income during retirement.
If you have sizable tIRA, lump sum may make your income from 62 to 70 lower, so that you can make more Roth conversion in between. Also, you can leave something tax-free for your kids.
I would take lump sum if I were you.
So thanks to your post I got to learn what tIRA stands for :) (Traditional IRA, for anyone else who didn't know).

And yes, I have a bunch in 401k/403b/tIRA.

PS you should have deleted the unquoted post.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by infotrader » Mon Jul 10, 2017 3:44 pm

Sorry for deleting the wrong one.
Here again: Not taking lump sum is a common wisdom, but individual situations are usually not common. Most of the discussions regarding lump sum do not take pre-RMD into consideration.
At the end of the day, what really matters is how much money you will have after taxes, etc.
It is no brainer for me to take lump sum in your case.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by infotrader » Mon Jul 10, 2017 3:49 pm

In a way, people may consider pension as a worse form of RMD:
It comes much earlier, and you cannot even manipulate the amount distributed.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by #Cruncher » Mon Jul 10, 2017 8:41 pm

MisterBill in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3443090#p3443090]this post[/url] wrote:The only real question is whether the ability to have less taxable income now and being able to invest the lump sum for 8 years tax-free before I need to withdraw it somehow adds enough value to make it worth taking the lower payout.
To help with this decision I calculated the age at which taking the additional $1,210 monthly pension from the full 100% survivor ($2,835) versus the partial 100% survivor ($1,625 mentioned in this post) would overtake the lump sum one gets when choosing the partial pension. It assumes that all money is invested at a fixed growth rate.

Code: Select all

          ----- Tax Rate ------  
Growth     0%   15%   25%   33%
------    ---   ---   ---   ---
  3%       84    85    86    87
  4%       88    91    93    95
  5%       95   102   107   111
For example assuming 4% growth and a 25% tax rate, by age 93 the accumulated value of the $14,520 annual pension (12 X $1,210) would overtake the accumulated value of the $232,500 lump sum. See the "Diff" column on the far right of the following table:

Code: Select all

    Col A    Col B     Col C   Col D   Col E   Col F      Col G      Col H     Col I
            Pension   ----------------  L u m p   S u m  ------------------
            Taxable     IRA                              Taxable     Total
Row  Age    Balance   Balance  Divisor   RMD     Tax     Balance    Balance     Diff

Code: Select all

  8   62         -    232,500      -       -       -          -     174,375   174,375 
  9   63     10,890   241,800      -       -       -          -     181,350   170,460 
 10   64     22,107   251,472      -       -       -          -     188,604   166,497 
 11   65     33,660   261,531      -       -       -          -     196,148   162,488
 12   66     45,560   271,992      -       -       -          -     203,994   158,434 
 13   67     57,816   282,872      -       -       -          -     212,154   154,337 
 14   68     70,441   294,187      -       -       -          -     220,640   150,199 
 15   69     83,444   305,954      -       -       -          -     229,466   146,021 
 16   70     96,838   318,192      -       -       -          -     238,644   141,807 
 17   71    110,633   319,307    27.4  11,613   2,903      8,710    248,190   137,557 
 18   72    124,842   320,030    26.5  12,049   3,012     18,008    258,031   133,189 
 19   73    139,477   320,330    25.6  12,501   3,125     27,924    268,172   128,695 
 20   74    154,551   320,175    24.7  12,969   3,242     38,488    278,619   124,068 
 21   75    170,078   319,529    23.8  13,453   3,363     49,733    289,379   119,301 
 22   76    186,070   318,357    22.9  13,953   3,488     61,689    300,457   114,387 
 23   77    202,542   316,620    22.0  14,471   3,618     74,393    311,858   109,316 
 24   78    219,508   314,350    21.2  14,935   3,734     87,826    323,589   104,080 
 25   79    236,984   311,439    20.3  15,485   3,871    102,075    335,654    98,670 
 26   80    254,983   307,925    19.5  15,971   3,993    117,116    348,059    93,076 
 27   81    273,523   303,776    18.7  16,467   4,117    132,979    360,811    87,288 
 28   82    292,618   298,956    17.9  16,971   4,243    149,696    373,913    81,295 
 29   83    312,287   293,431    17.1  17,483   4,371    167,299    387,373    75,086 
 30   84    332,546   287,167    16.3  18,002   4,500    185,820    401,195    68,649 
 31   85    353,412   280,126    15.5  18,527   4,632    205,290    415,384    61,973 
 32   86    374,904   272,404    14.8  18,927   4,732    225,644    429,947    55,043 
 33   87    397,041   263,981    14.1  19,319   4,830    246,903    444,888    47,847 
 34   88    419,843   254,840    13.4  19,700   4,925    269,085    460,215    40,372 
 35   89    443,328   244,967    12.7  20,066   5,017    292,207    475,933    32,605 
 36   90    467,518   234,352    12.0  20,414   5,103    316,284    492,048    24,530 
 37   91    492,433   223,169    11.4  20,557   5,139    341,190    508,567    16,134 
 38   92    518,096   211,432    10.8  20,664   5,166    366,924    525,498     7,401 
 39   93    544,529   199,161    10.2  20,729   5,182    393,478    542,848    (1,681)
 40   94    571,755   186,381     9.6  20,746   5,186    420,842    560,628   (11,128)
 41   95    599,798   173,355     9.1  20,481   5,120    448,828    578,844   (20,953)
Assumptions:
  • 25% tax paid on all pensions which are invested at a 4% return also subject to 25% tax.
  • Lump sum rolled into an IRA which grows at 4%.
  • Only withdrawals from IRA are Required Minimum Distributions (RMD). Divisors are from Table III at the bottom of this IRS web page.
  • Net of 25% tax the RMDs are invested in a taxable account which also grows at 4% subject to 25% tax.
  • The Total Balance under the Lump Sum option equals the IRA Balance less 25% plus the Taxable Balance. E.g., for age 93:

    Code: Select all

    542,848 = 199161 * 75% + 393478

Beehave
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by Beehave » Mon Jul 10, 2017 9:14 pm

My advice:
Take the pension with 100% spousal g'tee.
Treat the new income within your asset allocation as a bond-like holding.
Then Invest more of your other cash/bonds into riskier assets such as stocks if that's what you want to do for growth.
The pension is worth more than the cash -- take it.
Twisting yourself into a pretzel to optimize taxes is as much of a gamble as anything else. All the rules may change. For all you can know the income tax may be altered significantly, such as by reduction together with implementation of a VAT.
The benefit of steady income in retirement cannot be overstated.
These are the reasons for which I say take the pension.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Tue Jul 11, 2017 1:04 pm

#Cruncher wrote:To help with this decision I calculated the age at which taking the additional $1,210 monthly pension from the full 100% survivor ($2,835) versus the partial 100% survivor ($1,625 mentioned in this post) would overtake the lump sum one gets when choosing the partial pension. It assumes that all money is invested at a fixed growth rate.

For example assuming 4% growth and a 25% tax rate, by age 93 the accumulated value of the $14,520 annual pension (12 X $1,210) would overtake the accumulated value of the $232,500 lump sum.
Wow, thanks for the detailed analysis! It sounds like you're saying that the lump sum is the better deal until (if) I hit age 93. Is that correct?

rgs92
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by rgs92 » Tue Jul 11, 2017 1:13 pm

Take the pension as an annuity. You can sleep at night.

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#Cruncher
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by #Cruncher » Tue Jul 11, 2017 10:52 pm

MisterBill from post before last wrote:
#Cruncher wrote:... For example assuming 4% growth and a 25% tax rate, by age 93 the accumulated value of the $14,520 annual pension (12 X $1,210) would overtake the accumulated value of the $232,500 lump sum.
... It sounds like you're saying that the lump sum is the better deal until (if) I hit age 93. Is that correct?
Not quite. Note that I said "assuming ...". As the little table in my post shows, the relative values of the pension and the lump sum depend critically on the assumed investment rate of return. For example, the default base discount rate is 1.93% on the Baldwin spreadsheet you mentioned in your original post. If you left it unchanged, that is one reason the spreadsheet showed such a high value for your pensions. I personally think 1.93% is way too low for a non-CPI-indexed annuity, and that 4% is a good assumption; but you need to decide yourself.

Also, you should be saying "until (if) one of us hits 93". I compared the lump sum against the 100% survivor option, not the single life option. According to the SSA 1960 Cohort Life Table there's a 34% chance you or your wife will live to age 93 (calculated using my longevity estimator spreadsheet).

Also, my decision to use a single tax rate for all investment income and all IRA withdrawals for all years is possibly an oversimplification. It's quite likely to vary over the years and by type of income. For example if some of the taxable investments are in common stocks, the tax impact would be less than on IRA withdrawals. And some states (like New York) partially exempt pensions and IRA withdrawals from state income tax.

Also, I'm not completely happy about the way my calculation evaluates the IRA balance when computing the total value of the lump sum option. It assumes the entire balance is withdrawn and tax paid as the same rate as for all the RMDs. But chances are this won't be the actual tax impact. Chances are it will be either more or less.
  • If the balance remaining from the lump sum were entirely withdrawn, the tax impact would likely be more as the large withdrawal pushes one into a higher tax bracket.
  • But, one the other hand, if only RMDs are taken until both you and your wife have died, the tax impact would be less. If your children or other individuals are the beneficiaries, they can themselves defer taxes for many more years. And i believe that if you name a charity as the beneficiary of a traditional IRA, it pays no tax at all.
I chose my method as a compromise between these possibilities.

I realize, MisterBill, that all these qualifications are probably making your decision harder. It's a close call. But if you want my personal suggestion, I'll say go with the lump sum and the partial annuity if your marginal tax rate is at least 25%; but go with the full pension if it is 15% or less. And in either case, the 100% survivor option looks best to me.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Wed Jul 12, 2017 10:40 am

#Cruncher wrote: Also, my decision to use a single tax rate for all investment income and all IRA withdrawals for all years is possibly an oversimplification. It's quite likely to vary over the years and by type of income. For example if some of the taxable investments are in common stocks, the tax impact would be less than on IRA withdrawals. And some states (like New York) partially exempt pensions and IRA withdrawals from state income tax.
Thanks for the follow-up. I was reading up on taxability of pensions last night. Since I live in NY, $20k would be exempt from income tax. Coincidentally, the monthly annuity on the lump sum comes out to $19,500 per year, so it would be completely tax free. If I took the full pension, I'd have to pay on excess $14k per year.

Of course, that assumes I stay in NY. No current plans to move elsewhere but you never know.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Thu Oct 05, 2017 8:28 pm

rgs92 wrote:
Tue Jul 11, 2017 1:13 pm
Take the pension as an annuity. You can sleep at night.
So, I'm the OP and figured I'd come back and report on my decision. I decided to go with the straight annuity, 100% survivor option. It just seemed like the easier way to go, and I'm comfortable with the decision.

And I liked your comment about being able to sleep at night.

Ron Scott
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by Ron Scott » Fri Oct 06, 2017 3:02 pm

MisterBill wrote:
Mon Jul 10, 2017 12:04 am
Fidelity's position is that you want to fill as much of your required monthly income from a guaranteed stream
Really?

This sounds like the position of an annuity salesman.

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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by Dottie57 » Fri Oct 06, 2017 9:17 pm

MisterBill wrote:
Thu Oct 05, 2017 8:28 pm
rgs92 wrote:
Tue Jul 11, 2017 1:13 pm
Take the pension as an annuity. You can sleep at night.
So, I'm the OP and figured I'd come back and report on my decision. I decided to go with the straight annuity, 100% survivor option. It just seemed like the easier way to go, and I'm comfortable with the decision.

And I liked your comment about being able to sleep at night.
I think you made a good decision. And you did right by your spouse. Have a great retirement!

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BL
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by BL » Fri Oct 06, 2017 9:21 pm

MisterBill wrote:
Thu Oct 05, 2017 8:28 pm
rgs92 wrote:
Tue Jul 11, 2017 1:13 pm
Take the pension as an annuity. You can sleep at night.
So, I'm the OP and figured I'd come back and report on my decision. I decided to go with the straight annuity, 100% survivor option. It just seemed like the easier way to go, and I'm comfortable with the decision.

And I liked your comment about being able to sleep at night.
Congratulations! I think you made a good safe choice leaving you or survivor with guaranteed income for life with no possibility of messing that part up: scams, poor thinking in old age, markets not doing well, etc.

MisterBill
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Re: Yet another pension thread -- take partial lump sum w/reduced annuity or normal annuity?

Post by MisterBill » Sun Oct 08, 2017 6:11 pm

BL wrote:
Fri Oct 06, 2017 9:21 pm
Congratulations! I think you made a good safe choice leaving you or survivor with guaranteed income for life with no possibility of messing that part up: scams, poor thinking in old age, markets not doing well, etc.
So I wasn't going to post this, but here goes.

I realized that if I picked the lump sum+reduced annuity and my wife or I lived long enough for it to be the wrong decision, one (or both of us) would be a bitter old man/woman.

If I chose the full annuity and it was the wrong decision, we'd both be dead (sorry for the morbid tone of that one).

Also, the annuity includes a kicker because of a lawsuit that was filed against the company when they phased out the pension plan many years ago that I was apparently covered by. That kicker was not included if I took the partial lump sum (likely part of the reason why the pension value was much less as compared to the full annuity).

BTW I ran into someone who retired from my company 16 years ago (I think he was 70 at the time) and took a complete lump sum (which was obviously being offered at the time). He said that he did so because he was concerned about his health and wanted to take care of his wife (we did not discuss why he did not consider the annuity w/spouse benefit). Well, it turns out his wife passed away, and he's still going strong, and feels that he made the wrong decision taking the lump sum, which kind of confirmed my "bitter old man" thought.

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