Lump sum versus annuity - could use your insight.

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Canoesmith
Posts: 7
Joined: Sun May 13, 2018 10:33 am
Location: Arizona

Lump sum versus annuity - could use your insight.

Post by Canoesmith » Fri May 25, 2018 4:44 pm

I am a firm member of the 2019 club - either January or July 1st.

My info. Upon retirement I will be 58 and my DW will be 57. For this post I will use the July numbers.

I will receive either a $1.578M lump sum (today’s numbers, rising interest rates will probably lower that in 7/19) or $86,600 gross annuity (100% spouse survivorship/no cola). Will have $330k in pre tax investments. $400k in post tax dollars. At age 65 I will receive a government pension at $28,000/yr 100% spouse survivorship) with a 2-2.5% cola depending on fund performance. I have no debt at all - kids launched - $900k in real estate owned etc. Planning on SS at age 68 combined with DW at $57k/yr. I will cobra for 18 months at $1000/mo the. Go into the market place to bridge to Medicare.

I was playing with the lump sum idea, holding down my taxable income using cash and some draw to get ACA subsidies - make that healthcare cheaper. But with all of that ACA up in the air going forward, and with the strong annuity it seems foolish to play that game. My annuity will be purchased from NY Life, as my company does not want the long term liability - so it is a solid company to get checks from for 35 years.

A 4% draw on the $1578M is about $23k less than the annuity, but the annuity is non cola.

This is my first new topic post here, and I wanted to get your experienced thoughts. I keep flip-flopping....what am I missing? Thank you.

mhalley
Posts: 6014
Joined: Tue Nov 20, 2007 6:02 am

Re: Lump sum versus annuity - could use your insight.

Post by mhalley » Fri May 25, 2018 5:23 pm

Very hard decision. No guarantee that Ava subsidies will continue. Lot of money to be tied up in one insurance company. I might be tempted to consult a fee only financial planner to help make this decision.

Dottie57
Posts: 4299
Joined: Thu May 19, 2016 5:43 pm

Re: Lump sum versus annuity - could use your insight.

Post by Dottie57 » Fri May 25, 2018 5:28 pm

The annuity from your workplace is better than what I saw in www.immediateannuities.com.
And 86k is better than a 4% wr from the lump sum amount.

I would break the amount into multiple annuities. And maybe stagger them by 3-5 years.

User avatar
Watty
Posts: 13845
Joined: Wed Oct 10, 2007 3:55 pm

Re: Lump sum versus annuity - could use your insight.

Post by Watty » Fri May 25, 2018 5:37 pm

What do you expect your expenses to be?

Once you start the pension you will have about $85,000 in income so you may not really need the annuity income then.
Canoesmith wrote:
Fri May 25, 2018 4:44 pm
A 4% draw on the $1578M is about $23k less than the annuity, but the annuity is non cola.
And your estate will get what is leftover.

It you take the annuity then you will have a very limited ability to do Roth conversion in low tax brackets before you start Social Security so that is a consideration too.

Delaying starting Social Security until at least one of you is 70 is in effect buying an inflation adjusted annuity so be sure to look at that.

If you took the lump sum you could buy a series of annuities at the age of 70,75,80. etc that would help offset inflation.

It you had $1.6 million in a retirement account I doubt that you would be the least bit interested in buying an annuity with the same terms. Even if the numbers are somewhat favorable I doubt that there is much need for an annuity.

User avatar
Watty
Posts: 13845
Joined: Wed Oct 10, 2007 3:55 pm

Re: Lump sum versus annuity - could use your insight.

Post by Watty » Fri May 25, 2018 5:40 pm

Canoesmith wrote:
Fri May 25, 2018 4:44 pm
A 4% draw on the $1578M is about $23k less than the annuity, but the annuity is non cola.
One more thought, after taxes that might be more like $16K less especially since it will limit your ability to manage your taxable income.

Canoesmith
Posts: 7
Joined: Sun May 13, 2018 10:33 am
Location: Arizona

Re: Lump sum versus annuity - could use your insight.

Post by Canoesmith » Fri May 25, 2018 5:48 pm

I would like to spend around $100k for several years after retired. I need around $60k to pay the bills, but want to have fun when younger so intend to spend. My plans will be diminishing expenses as we age. Another plus? Is I can roll that lump into a guaranteed 3.5% fixed fund and Firecalc seems to like that. Won’t get the most - but 0 stress.

My main concern with the annuity is that I will be annuity rich $86.6 +$28 +$57 (ss). While I’m not overly concerned about leaving a large estate, most of my eggs are in that basket.

Im not too concerned about NY Life being around. Strongest most highly rated in the world - but I do get that th laddered annuities offset inflation concerns.

See, now my head hurts. Thanks for your help!

CurlyDave
Posts: 685
Joined: Thu Jul 28, 2016 11:37 am

Re: Lump sum versus annuity - could use your insight.

Post by CurlyDave » Sat May 26, 2018 1:48 am

Canoesmith wrote:
Fri May 25, 2018 4:44 pm
...I will receive either a $1.578M lump sum (today’s numbers, rising interest rates will probably lower that in 7/19) or $86,600 gross annuity (100% spouse survivorship/no cola)... - kids launched - ...
The "kids launched" part makes me think you would want the lump sum. When you go, the annuity goes too. An invested lump sum can be passed on to your children.

DW and I both have pensions. Neither of our adult children will have the same luxury. An inheritance can help replace the pensions.

mindbogle
Posts: 130
Joined: Sun Feb 10, 2013 11:28 am

Re: Lump sum versus annuity - could use your insight.

Post by mindbogle » Sat May 26, 2018 9:10 pm

OP,

My calcs show that the annuity is close (within 5%) to actuarial equivalence of the lump sum, which is a pretty good deal... Most SPIA's cost about 10-20% more to cover profit motive and adverse selection.

Can you roll your lump sum into an IRA? One of the most significant advantages of taking the IRA lump sum over a SPIA is that you will have much more flexibility in managing taxable income, especially as it relates to working around the income steps created by your other annuity cash flows.

The annuity looks cheap as annuities go, but I think I would be more interested in the lump sum and the potential for tax mimimization, especialliy given that you already have a nice annuity cash flow with cola'd pension and SS.

Your'e in pretty good shape and creds to you for objectively analyzing your options. Most people are irresistibly drawn to lump sum by their animal spirits - google "The Annuity Puzzle". :-)

MB

bsteiner
Posts: 3440
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Lump sum versus annuity - could use your insight.

Post by bsteiner » Sat May 26, 2018 9:49 pm

Dottie57 wrote:
Fri May 25, 2018 5:28 pm
The annuity from your workplace is better than what I saw in www.immediateannuities.com.
,,,
The annuity through the plan is usually a better deal than what you could otherwise buy since the insurance company sells annuities at retail rates.

The annuity through the plan guarantees the result.

To the extent you can convert to a Roth, that adds value to the lump sum.

Dandy
Posts: 5295
Joined: Sun Apr 25, 2010 7:42 pm

Re: Lump sum versus annuity - could use your insight.

Post by Dandy » Mon May 28, 2018 6:26 am

I usually opt for the annuity or pension. You have decent assets so the lump sum is not "needed". You can have a high level of income for you and spouse that will last a life time and assets to leave to heirs. I like to off load some of the money management to pension/annuity providers rather than have a much larger nest egg to manage in my old age.

I would be willing to risk having too much income for tax/health insurance purposes for the advantages of high life time income for both of you. Obviously, the actual math of the different options should guide you but don't get all distracted by the shinny object of a large lump sum or be overly concerned about taxes etc. I have come to believe that for most retirement is more about income not assets.

Edward Joseph
Posts: 56
Joined: Fri Aug 11, 2017 9:52 am

Re: Lump sum versus annuity - could use your insight.

Post by Edward Joseph » Mon May 28, 2018 6:49 am

How's the health of you and your spouse? Does longevity run in your families? Trying to estimate lifespan is a key variable as well.

basspond
Posts: 1065
Joined: Wed Nov 27, 2013 4:01 am

Re: Lump sum versus annuity - could use your insight.

Post by basspond » Mon May 28, 2018 7:08 am

To me it would be an easier decision If the annuity will generate over 40% of your funding for living expenses (annuity) or under 30% (lump sum). Anything in between could go either way.

Chip
Posts: 2184
Joined: Wed Feb 21, 2007 4:57 am

Re: Lump sum versus annuity - could use your insight.

Post by Chip » Mon May 28, 2018 8:12 am

Would your company allow for a split between the annuity and the lump sum? The reason I ask is that the annuity looks attractive, as other posters have pointed out, but taking the full amount will eliminate your ability to get that ACA subsidy under current law. The subsidy could easily be worth 20k/year if you are able to stay under 250% of the federal poverty level (~50k) and therefore qualify for cost sharing reduction Silver plans.

You could use the time you are on COBRA to realize long term capital gains in your portfolio (resetting the cost basis on those assets). A chunk of it might be federal tax-free in 2020 if you retire on 7/1/19 and have COBRA through 1/1/21. The reason for this is you'll be in the 12% federal bracket in 2020, assuming annuity income of <40k and 8k of portfolio income (2% on 400k).

In subsequent years you could draw down your taxable portfolio at low or no tax cost to supplement your annuity and fund your 100k spending until age 65. As well as qualifying for ACA cost sharing reductions.

It is akin to threading a needle at arms length but it might be worth considering if such a lump sum/annuity split is an option.

JW-Retired
Posts: 6884
Joined: Sun Dec 16, 2007 12:25 pm

Re: Lump sum versus annuity - could use your insight.

Post by JW-Retired » Mon May 28, 2018 9:39 am

Canoesmith wrote:
Fri May 25, 2018 4:44 pm
Planning on SS at age 68 combined with DW at $57k/yr.
..........................
This is my first new topic post here, and I wanted to get your experienced thoughts. I keep flip-flopping....what am I missing? Thank you.
Make sure you understand the weird way SS income is taxed compared to your other income. Especially if you live in an income taxing state, the higher earner not delaying SS as long as possible is probably unwise. Many states give SS a total pass but tax most everything else at their maximum rate.
JW
Retired at Last

Canoesmith
Posts: 7
Joined: Sun May 13, 2018 10:33 am
Location: Arizona

Re: Lump sum versus annuity - could use your insight.

Post by Canoesmith » Mon May 28, 2018 1:20 pm

Thinks everyone. Great input.

Longevity runs in family and our health is good. One of my “fears” about taking the lump sum is that I will be cheap in my early retirement - not wanting to spend, draw, reduce this pot of money. I just know myself. While having an income to just spend, plus a cash pot - makes me believe I will be more willing to use that money - and then also use more than I would like on healthcare too. I want to be best positioned to use the first 15 years to get at the bucket list financially and mentally.

My company will not split the lump and annuity. But they will buy me that annuity, even though they have to spend up to $200k more to buy that annuity, than they would give me in the lump sum (I’m the guy who buys these as the company fiduciary). Those are the costs and commissions I would pay if I took the lump and bought my own - although then I could buy multiples,ladders etc.

The no cola on the annuity concerns me, but my smaller state pension and SS have cola’s to help a bit. I’ve earmarked my primary home currently ~ $550k for future LTC concerns - or eventual estate.

The annuity seems turnkey and low stress, while I can put all lump in fixed at 3.5% which is also low stress, it doesn’t grow much either when taking withdrawals. Although if I’m not concerned about the estate, it works out to 92 years of age.

Great comments everyone. I really appreciate them all.

Lynette
Posts: 1790
Joined: Sun Jul 27, 2014 9:47 am

Re: Lump sum versus annuity - could use your insight.

Post by Lynette » Mon May 28, 2018 1:40 pm

Are you aware of Medicare IRMAA - https://www.medicare.gov/your-medicare- ... costs.html? As you are married, the brackets are higher than for singles. This may not impact you as most of your savings are not pre-tax but it's something to keep in mind as potentially you have large pensions. Combined with SS and RMDs, this may push you into Medicare IRMAA territory. If possible, I would do tax planning into your seventies.

Canoesmith
Posts: 7
Joined: Sun May 13, 2018 10:33 am
Location: Arizona

Re: Lump sum versus annuity - could use your insight.

Post by Canoesmith » Tue May 29, 2018 6:01 pm

Lynette wrote:
Mon May 28, 2018 1:40 pm
Are you aware of Medicare IRMAA - https://www.medicare.gov/your-medicare- ... costs.html? As you are married, the brackets are higher than for singles. This may not impact you as most of your savings are not pre-tax but it's something to keep in mind as potentially you have large pensions. Combined with SS and RMDs, this may push you into Medicare IRMAA territory. If possible, I would do tax planning into your seventies.
I was not aware of IRMAA - and now that I am - I don’t like her much. So, high earners pay more before, and we pay more during. I guess that shouldn’t have surprised me. It appears to be a manageable number, but a number that needs to go into the budget it seems - I assume they take IRMAA out of my SS once I take that?

Lynette
Posts: 1790
Joined: Sun Jul 27, 2014 9:47 am

Re: Lump sum versus annuity - could use your insight.

Post by Lynette » Wed May 30, 2018 7:08 am

Canoesmith wrote:
Tue May 29, 2018 6:01 pm
Lynette wrote:
Mon May 28, 2018 1:40 pm
Are you aware of Medicare IRMAA - https://www.medicare.gov/your-medicare- ... costs.html? As you are married, the brackets are higher than for singles. This may not impact you as most of your savings are not pre-tax but it's something to keep in mind as potentially you have large pensions. Combined with SS and RMDs, this may push you into Medicare IRMAA territory. If possible, I would do tax planning into your seventies.
I was not aware of IRMAA - and now that I am - I don’t like her much. So, high earners pay more before, and we pay more during. I guess that shouldn’t have surprised me. It appears to be a manageable number, but a number that needs to go into the budget it seems - I assume they take IRMAA out of my SS once I take that?
Medicare IRMAA is based on MAGI not assets. This is why you will see many threads on people who retire early and gradually do Roth conversion so that there tax rate is lower in retirement and especially when RMDs hit. This is one of the reasons you will find one of the long-going threads on whether ones tax rate is lower in retirement. I think that one of the best exercises anyone who plans to retire early can do is to have a spreadsheet of income and expenses until at least 70 when many take SS and RMDs hit as well. If you have large pensions and SS (and large RMDs) it is almost impossible to avoid. I did not know about IRMAA but could likely not have done much about it as I have pensions and SS. I may have decided to put more money into taxable as my megacorp did not have Roth 401Ks until I was close to retirement.

Canoesmith
Posts: 7
Joined: Sun May 13, 2018 10:33 am
Location: Arizona

Re: Lump sum versus annuity - could use your insight.

Post by Canoesmith » Fri Jun 01, 2018 7:45 pm

My company recently allowed for Roth in my 403b. But I still go mostly pre-tax as my salary is relatively high, so trying to stop the bleeding now. Which I will most likely regret in the future. Sigh. One way or the other, Uncle Sam will get his $$.

Post Reply