Choosing Best Annuity Option

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Cincinnati Kid
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Choosing Best Annuity Option

Post by Cincinnati Kid » Sun Aug 19, 2018 6:03 pm

This is my first foray into Bogleheads.org.

I am entitled to a small annuity effective December 1, 2018 from a company I worked for from 1985-1993. I will turn 65 on November 6. I don't plan on taking Social Security until I turn 66 (projected at $2600/month). I am married (wife, 61, earns about $55,000/yr. and intends to work 8 more years), and our younger son (21) starts college this fall. Our only debt is a condo mortgage--26 more years at about $1100/month--considering doing a 15-year instead). Our investment portfolio (mostly IRA's) is valued at around $1.6MM so we're in relatively good shape in that regard. Assuming life expectancy plays into all of this--my parents lived to be 86 and 92 and I am in good overall health.

The four annuity options I can choose from are:

1) Life Annuity - A monthly benefit is paid from the annuity commencement date, if the annuitant is living, to the date of the last payment due before the annuitant’s death. Monthly benefit -- $263.78

2) Joint & Survivor Life Annuity - A monthly benefit is paid from the annuity commencement date, if the annuitant and the contingent annuitant are then living, during the lifetime of the annuitant, and, if the annuitant’s contingent annuitant survives the annuitant, 50%, 66.67%, 75% or 100% (in accordance with the annuitant’s election) of such monthly benefit is payable for the remaining lifetime of the contingent annuitant.

Percentage Your Joint Annuitant Effective Date Elected Benefit Monthly Benefit:

Annuitant + Contingent Annuitant

50% -- $234.00 + $117.00
66.67% -- $225.36 + $150.25
75% -- $221.51 + $166.14
100% -- $210.28 + $210.28

3) Term Certain & Life Annuity - Benefits are paid to you during your lifetime. In the event you die before receiving the minimum number of payments, the balance of the minimum payments will be paid to your beneficiary. If your beneficiary dies before the minimum number of payments have been made, the commuted value of the remaining payments will be paid to the beneficiary’s estate. If you should die after the minimum number of payments have been received, no further payments will be made to your beneficiary.

Effective Date Minimum Months Monthly Benefit December 1, 2018:

60 mos. $256.79
120 mos. $240.15
180 mos. $220.91
240 mos. $203.46

4) Term Certain Annuity - Monthly payments are made to you beginning on the Annuity Commencement Date and ending on the expiration date. In the event you die before the expiration of the term certain period, payments will continue to your designated beneficiary for the remainder of the certain period. If there is no named beneficiary, the commuted value will be paid to your estate. If the beneficiary dies before the expiration of the term certain period, the commuted value will be paid to the beneficiary’s estate.

Effective Date Minimum Months Monthly Benefit December 1, 2018

60 mos. $752.56
120 mos. $405.21
180 mos. $290.34
240 mos. $233.57

Given my background, what would appear to be the best option from the four choices above? The last amount in Option 2 (equal amounts paid to Annuitant and Contingent Annuitant) seems fairly attractive. Option 3 seems like a poor choice. Re: Option 4 -- Would it be best to draw out as much as possible ($752.56/month) over the shortest term (60 months) if you faithfully invested the full monthly payment or would that not be advisable for tax reasons?

I really look forward to retiring but have a lot to learn at my age and greatly appreciate any and all perspectives.

Thanks very much!

billfromct
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Re: Choosing Best Annuity Option

Post by billfromct » Sun Aug 19, 2018 10:08 pm

What about transferring the cash value of your annuity into a pre-tax rollover IRA?

I had a "cash" value pension with 2 previous employers that terminated their pension plan (one company was bought by the other) & I rolled over both pensions into my IRA a few years ago.

I could have taken annuities from each pension, but I thought I could manage the retirement money more efficiently myself & if I died prematurely, my kids would get my IRA money. Also I am waiting until age 70 to take SS which will pretty much cover my monthly living expenses.

bill

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nedsaid
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Re: Choosing Best Annuity Option

Post by nedsaid » Sun Aug 19, 2018 10:49 pm

billfromct wrote:
Sun Aug 19, 2018 10:08 pm
What about transferring the cash value of your annuity into a pre-tax rollover IRA?

I had a "cash" value pension with 2 previous employers that terminated their pension plan (one company was bought by the other) & I rolled over both pensions into my IRA a few years ago.

I could have taken annuities from each pension, but I thought I could manage the retirement money more efficiently myself & if I died prematurely, my kids would get my IRA money. Also I am waiting until age 70 to take SS which will pretty much cover my monthly living expenses.

bill
The advantage to the annuity is that depending upon your age, your effective withdrawal rate is 5, 6, or even 7 percent a year. The reason for that are the mortality credits, which means you benefit from those who die early. It is interesting that if you take an annuity with inflation protection that your effective withdrawal rate is more like 4%, pretty much what the experts say is a safe withdrawal rate from a diversified portfolio.

A lot depends upon the longevity of family members. If a lot of people die young in your family, I would take the cash. If family members are long-lived, I would take the annuity.

You also are assuming that you can invest the funds better than what the insurance company can, you may or may not be able to do this.

Most of the time, I would advise people to take the annuity rather than the lump sum.

You also raise an excellent point, by delaying Social Security by living off your investments, you are in effect buying higher monthly income from Social Security and inflation adjusted income at that. Pretty much switching a part of your investments for an inflation adjusted annuity.
A fool and his money are good for business.

stlutz
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Re: Choosing Best Annuity Option

Post by stlutz » Sun Aug 19, 2018 10:57 pm

I don't know that there is one "best" option. Given that you a) have significant assets, and b) those assets are tied to financial markets, I would probably take the 100% option on the joint/survivor. It pays a little less than than the other options, but having some additional consistent income for both you and your wife for the balance of both of your lives is valuable (recognizing that we aren't talking about tens of thousands of dollars per year here).

ralph124cf
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Re: Choosing Best Annuity Option

Post by ralph124cf » Mon Aug 20, 2018 10:03 am

The primary thing to take into account is that for the issuer, all of these are calculated to be equal payouts, for the average person.

It is up to you to figure out where you (and your wife) fit into the average lifespan.

Since this is such a small pension, I believe that it makes no practical difference to your life style which option that you choose, but it is an interesting theoretical discussion.


In our case, all of my wife's female relatives from the last generation lived into their late 90s, and she is quite healthy. Her moderate sized TIAA-CREF variable annuity is being paid out as a single life only.


My male relatives from the previous generation all died at a younger age than I am now, and I do have some health problems. My larger PBGC pension will be paid as a joint and 100% annuity.


Ralph

Cincinnati Kid
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Re: Choosing Best Annuity Option

Post by Cincinnati Kid » Mon Aug 20, 2018 2:09 pm

Thank you all for reading through my very long post and providing great perspectives. I am still mulling it over, but would add that my father and my father-in-law lived to be 92 and 90 respectively, and my mother and mother-in-law lived to be 86 and 81. For our planning purposes we assumed I will live to be 92 and my wife projects 94.

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#Cruncher
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Re: Choosing Best Annuity Option

Post by #Cruncher » Tue Aug 21, 2018 7:57 am

Cincinnati Kid wrote:
Mon Aug 20, 2018 2:09 pm
For our planning purposes we assumed I will live to be 92 and my wife projects 94.
Since you are about to turn 65 and your wife is 61, this means you're projecting you will live 27 and your wife 33 more years. If this were actually to happen, the Single annuity at $263.78 / month would be a better choice than the $210.28 / month joint life annuity. I show this as Case A below. However, it would be better in my opinion to assume 27 and 33 as your respective life expectancies and estimate the weighted cash flows of the possible life spans consistent with them. This is Case B below. For comparison Case C shows weighted cash flows consistent with average life expectancies for two people your ages.

Here are the present values (PV), discounted at 4%, of the three cases of cash flow described above.

Code: Select all

            ----- PV Discounted at 4% ----
            Single  100% Joint  Difference
            ------  ----------  ----------
Case A      52,600    46,600       6,000   [a]
Case B      49,800    48,200       1,600   [b]
Case C      37,800    40,400      (2,600)  [c]
Since this pension is small potatoes, I see no reason to consider longevity insurance in making your choice. I would simply choose the one having the higher probable present value. If you're sure 92 and 94 are good life expectancies, then case B shows the Single life option to be slightly better. But with average life expectancies case C shows the joint life option to be slightly better.
  1. Computed with Excel PV function.
    52,600 = PV(1.04 ^ (1 / 12) - 1, 12 * 27, -263.78, 0, 0) : Single
    46,600 = PV(1.04 ^ (1 / 12) - 1, 12 * 33, -210.28, 0, 0) : 100% Joint
  2. Computed using my longevity estimator with the SSA 1950 Cohort Life Table for a man and woman aged 53 and 50. (I picked these ages because, for that mortality table, they have life expectancies of 27 and 33 years respectively.)
  3. Computed the same way with the same mortality table but using your actual ages of 65 and 61.

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