Pension plan choice of annuity or cash payout

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tainted-meat
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Pension plan choice of annuity or cash payout

Post by tainted-meat » Sat Sep 29, 2018 7:56 pm

Sufficient emergency funds
No Debt
Tax Filing Status: Married Filing Jointly
Tax Rate: 12% Federal, 3.4% State
State of Residence: Indiana
Age: 63 her 65 him

Questions
1. My company(her) is closing its pension plan and giving the option of a cash buyout of $285,000 or $1700. per month for life with 66.67% Joint and Survivor Annuity with 10 year Certain and Life starting at age 65 (in 2 years). I (her) also have $187,000. in the company 401K. Which option would you recommend?

2. In addition to the amounts listed above I (she) will be receiving a cash payout of my after tax contributions of $22,000 and a pretax payment of interest on contributions $30,000. How much of this can I roll into a Roth IRA?

We expect to require $35-40,000 annually in retirement. Her social security will be approximately $1800 per month. His will be approximately $1200 per month. When would you start drawing social security?

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Steelersfan
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Re: Pension plan choice of annuity or cash payout

Post by Steelersfan » Sat Sep 29, 2018 8:32 pm

Will the cash buyout of $285,000 be given you as a taxable distribution, or can you roll it into an IRA?

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tainted-meat
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Re: Pension plan choice of annuity or cash payout

Post by tainted-meat » Sat Sep 29, 2018 8:40 pm

Thanks for your response. It can be rolled into an IRA.

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fortfun
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Re: Pension plan choice of annuity or cash payout

Post by fortfun » Sat Sep 29, 2018 9:42 pm

Do you want to leave money to someone when you pass? If not, seems like the $1,700 per month would be a bit better, especially if either one of you has the genetics to put you into your 90's. That's just based on a quick calculation of 285k*4%/12months.

delamer
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Re: Pension plan choice of annuity or cash payout

Post by delamer » Sat Sep 29, 2018 9:48 pm

Are the $187,000 plus the smaller amounts you mentioned in #2 the only liquid assets that you have?

Is there an option to take part of the pension in a lump sum and part as an annuity?

Are those Social Security amounts as of your full retirement ages?

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Re: Pension plan choice of annuity or cash payout

Post by Minty » Sat Sep 29, 2018 10:00 pm

You might take a look at this website: https://www.immediateannuities.com/ From what I could see, I don't think you could get $1700 per month, 10 years certain, with a survivor benefit, for $285K. I could not find an exact match for your offer, but it looks like a life benefit just for one with no guaranteed period would be less than $1600. That suggests to me that the $1700 might be a good deal.
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Re: Pension plan choice of annuity or cash payout

Post by bsteiner » Sat Sep 29, 2018 10:32 pm

Minty wrote:
Sat Sep 29, 2018 10:00 pm
You might take a look at this website: https://www.immediateannuities.com/ From what I could see, I don't think you could get $1700 per month, 10 years certain, with a survivor benefit, for $285K. I could not find an exact match for your offer, but it looks like a life benefit just for one with no guaranteed period would be less than $1600. That suggests to me that the $1700 might be a good deal.
Obviously the annuity from the plan is a better deal than if you were to buy one from an insurance company. But we don't know whether the original poster needs an annuity, or is just trying to compare it to the lump sum.

The annuity provides certainty of result, but gives up flexibility. It's also not diversified, though the original poster could diversify using other assets. Also, the lump sum offers the possibility of a Roth conversion, which would likely add substantial value, especially in this case where the original poster is in a low income tax bracket.

It would be helpful to know how much the original poster and her husband have in their taxable accounts, and whether they have any children.

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Watty
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Re: Pension plan choice of annuity or cash payout

Post by Watty » Sat Sep 29, 2018 11:31 pm

One thing to do when considering this choice is to get a good physical to make sure that there are not any health issues that you might not know about which might make taking the pension less favorable.
tainted-meat wrote:
Sat Sep 29, 2018 7:56 pm
We expect to require $35-40,000 annually in retirement. Her social security will be approximately $1800 per month. His will be approximately $1200 per month. When would you start drawing social security?
Combined that is $3,000 a month, $36K a year, which is enough to mostly cover your expected expenses. people do live on that but it would be good to consider if your expenses include everything like taxes, major home repairs, replacement car, travel, etc.

Typically it makes sense for the higher earner to delay starting Social Security until they are 70 to get a higher benefit but that can vary. One of the posters here who has written a book about Social Security just developed this web site to figure out the optimal claiming strategy.

https://opensocialsecurity.com/

Taking a pension or buying an annuity is sort of buying longevity insurance but with Social Security basically covering your expected expenses you would just be paying taxes on the pension and saving most of the pension money. I don't see that you have any need for the pension(AKA longevity insurance) so I would probably take the lump sum even if the pension is slightly better than an annuity you could buy today.

The way that Social Security is taxed can put people in a surprisingly high tax tax bracket so be sure to understand how that works.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

If one of you survives the other the survivor can be in higher tax bracket too. With these tax issues it can make sense to do Roth conversions in a low tax bracket before your start Social Security. If you take the pension option you may not be able to do as much Roth conversions.

The pension is basically an annuity and when one is right for someone a big question is when to get one. If you start one in your 60's there is a realistic chance that one of you could live 30+ years and by then even with moderate inflation could make it worth little by then. One strategy that people sometimes used when annuities are right for them is to wait until they are well into their 70's for buy one then every five years or so they will buy a series of smaller annuities to make up the purchasing power that has been lost to inflation.

One option to consider would be to take the lump sum then to invest it for ten years and buy an annuity then if it makes sense when you are in you 70s. In addition to getting more because you would be older interest rates could be higher then which would also make the annuity pay more.

jalbert
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Re: Pension plan choice of annuity or cash payout

Post by jalbert » Sun Sep 30, 2018 2:13 am

The small difference in payout rate between the pension and the annuity quotes likely reflect the commission for buying the annuity perhaps 2% at immediateannuities.com.

If the pension is rolled into an IRA it can be annuitized later at such a cost (about 2% of the principal with low cost annuity brokers).

Is the payout rate fixed today or will it fluctuate with interest rates until the pension payout starts? If the former, you might as well wait until it is time to start the income payout or take the lump sum, as if interest rates rise over the next two years, pension/annuity payouts rise.
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nedsaid
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Re: Pension plan choice of annuity or cash payout

Post by nedsaid » Sun Sep 30, 2018 3:15 am

My general advice is to take the annuity over the cash payout. This is general advice but each individual situation needs to be evaluated. For example, if your family tends to die early, I would lean towards the cash. But in most situations, probably 80% of the time, people in this situation should take the annuity. People often think they can do better investing the monies on their own but this isn't borne out in reality. The annuity also allows a higher effective withdrawal rate because of mortality credits, that is you get higher percentage payouts from an annuity because of the people who die early. For example, a safe withdrawal rate from a diversified portfolio is 4% a year. An annuity kicks that effective withdrawal rate to 6% to 7%, hard to beat that.
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Carl53
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Re: Pension plan choice of annuity or cash payout

Post by Carl53 » Sun Sep 30, 2018 6:20 am

Lots of good advice by others. My inlaws typically have about $26000 in SS. I try to adjust their other income so that they pay zero income tax to the feds and the state. Often additional IRA w/d or cashing of bonds has been done. Small amounts of SS are taxable, but at the zero income tax rate. I plugged your $36000 SS into the spreadsheet I maintain for them (adjusted for 2018 IRS rules). Assuming a post 65 standard deduction of $26600, you could have $22400 of other income and owe no income tax, even though $4200 of the SS would be considered taxable, but at the zero bracket. Even if you both let your SS accumulate DRC and grow to $47500 at age 70, you could still have $20400 of other income (like your potential annuity) using this years tax rates and pay no taxes.

I would seek out an online tax estimator and carefully evaluate your situation. It may be possible to make modest withdrawals from IRAs and post tax accounts drawing them down and virtually avoid SS taxes later. One caveat is that while tax brackets may be inflation adjusted the formula by which the IRS determines how much SS is taxable is not. This virtually guarantees that over time more and more of your SS will become taxable.

I believe BigFoot's retirement planning model, may address this too, but I'm not sure about how it handles SS.
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

inbox788
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Re: Pension plan choice of annuity or cash payout

Post by inbox788 » Sun Sep 30, 2018 1:19 pm

It doesn't look like you need an annuity, so the best options are taking the cash payout now. Decide later if an annuity still makes sense for you. It may or may not, but buying longevity insurance now isn't a good value IMO.

Glasser3
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Re: Pension plan choice of annuity or cash payout

Post by Glasser3 » Sun Sep 30, 2018 2:02 pm

tainted-meat; congratulations on nearing retirement. Already sounds like you have a couple of annuities (social security), and if you don't need the money right away try to hold off until 70 for collecting them. That will get you another 8% return per year...unless you have medical issues that will restrict your longevity in life - but then you wouldn't need another annuity from your pension plan.

With a payout of $285,000 to an ira it would seem that even with a modest return (obviously with some risk) of 4 to 5% you could bring in some decent income and have more control over your funds, how to take them and when to take them.

One thing I did not see in any of the responses - why is your company closing down its pension plan? Remember, an annuity is only as good as the company (insurance or otherwise) guaranteeing it. There have been some that have defaulted. Also, keep in mind that I am just a novice investor such as yourself, not a financial professional. It might well be worth the fee (do a fee only appointment) to get a second opinion from a professional.

Good luck, and good retirement.

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Re: Pension plan choice of annuity or cash payout

Post by LadyGeek » Sun Sep 30, 2018 9:47 pm

This thread is now in the Personal Finance (Not Investing) forum (pension).
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Re: Pension plan choice of annuity or cash payout

Post by Valuethinker » Mon Oct 01, 2018 7:11 am

nedsaid wrote:
Sun Sep 30, 2018 3:15 am
My general advice is to take the annuity over the cash payout. This is general advice but each individual situation needs to be evaluated. For example, if your family tends to die early, I would lean towards the cash. But in most situations, probably 80% of the time, people in this situation should take the annuity. People often think they can do better investing the monies on their own but this isn't borne out in reality. The annuity also allows a higher effective withdrawal rate because of mortality credits, that is you get higher percentage payouts from an annuity because of the people who die early. For example, a safe withdrawal rate from a diversified portfolio is 4% a year. An annuity kicks that effective withdrawal rate to 6% to 7%, hard to beat that.
Good advice. All of the SWR stuff is a bit fictional, in that historic evidence was cut at a time when interest rates were significantly higher. Both bond and equity returns are likely to be significantly lower in the next 10-20 years (unless we have a stock market crash or a repeat of something like the Great Financial Crisis).

Even if you begin retirement in full cognitive health and ready to take on the challenge of managing the portfolio, 10 or 20 (or 30) years down the road you will not be. One spouse may be much more comfortable managing the investments - if they die or become ill first, then that is lost.

All the evidence suggests that annuities (particularly defined benefit pensions) are superior to lump sums, except where:

- there is a desire/ need to leave a significant capital sum to heirs (eg in trust for a disabled child)

- there is a reason to believe life expectancy will be significantly less than average (that is not adjusted for in the price of the annuity)

- there is reason to doubt the health of the plan sponsor, and the PBGC restrictions are significant (or the plan is not insured by PBGC) - for example for high earners, or for members of PBGC "multi employer" plans -- the latter, if you check the statements PBGC has made on its website, are in serious financial trouble and the insurance fund is nearly exhausted. A related phenomenon may be state employee plans - I understand that states have in fact forced through post retirement cuts in benefits (e.g. de indexing against CPI) and there is surely more pain to be taken. Illinois always comes up top of those lists, but there are no doubt other states and municipalities at risk

It is generally better to defer US Social Security for as long as possible, because it is inflation indexed. Better to start collecting with a larger amount.

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Re: Pension plan choice of annuity or cash payout

Post by 2pedals » Mon Oct 01, 2018 8:35 am

tainted-meat wrote:
Sat Sep 29, 2018 7:56 pm
Sufficient emergency funds
No Debt
Tax Filing Status: Married Filing Jointly
Tax Rate: 12% Federal, 3.4% State
State of Residence: Indiana
Age: 63 her 65 him

Questions
1. My company(her) is closing its pension plan and giving the option of a cash buyout of $285,000 or $1700. per month for life with 66.67% Joint and Survivor Annuity with 10 year Certain and Life starting at age 65 (in 2 years). I (her) also have $187,000. in the company 401K. Which option would you recommend?

2. In addition to the amounts listed above I (she) will be receiving a cash payout of my after tax contributions of $22,000 and a pretax payment of interest on contributions $30,000. How much of this can I roll into a Roth IRA?

We expect to require $35-40,000 annually in retirement. Her social security will be approximately $1800 per month. His will be approximately $1200 per month. When would you start drawing social security?
#1. Based on what you have said here and not knowing the details, if the company plan is closing I would take the lump sum. Sounds like some corporate shenanigans are going on. Otherwise if this the plan is healthy I think I would take the pension at 50% J&S (not 10 year certain).

#2. Why are you receiving a cash payout? Don’t take the cash. Roll it over.
  • $20,000 after tax amount can be rolled over into a Roth IRA (not a taxable event)
  • Gains on the after tax of $20,000 can be rolled over into a traditional IRA (not a taxable event)
  • $30,000 pretax amount can be rolled over into a traditional IRA (not a taxable event)
  • The gains on the after tax of $20,000 and/or the $30,000 pretax can be converted to a Roth IRA but this is a taxable event.
Hopefully you can find out what the gains on the after tax is.

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nedsaid
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Re: Pension plan choice of annuity or cash payout

Post by nedsaid » Mon Oct 01, 2018 10:20 am

Valuethinker wrote:
Mon Oct 01, 2018 7:11 am
nedsaid wrote:
Sun Sep 30, 2018 3:15 am
My general advice is to take the annuity over the cash payout. This is general advice but each individual situation needs to be evaluated. For example, if your family tends to die early, I would lean towards the cash. But in most situations, probably 80% of the time, people in this situation should take the annuity. People often think they can do better investing the monies on their own but this isn't borne out in reality. The annuity also allows a higher effective withdrawal rate because of mortality credits, that is you get higher percentage payouts from an annuity because of the people who die early. For example, a safe withdrawal rate from a diversified portfolio is 4% a year. An annuity kicks that effective withdrawal rate to 6% to 7%, hard to beat that.
Good advice. All of the SWR stuff is a bit fictional, in that historic evidence was cut at a time when interest rates were significantly higher. Both bond and equity returns are likely to be significantly lower in the next 10-20 years (unless we have a stock market crash or a repeat of something like the Great Financial Crisis).

Even if you begin retirement in full cognitive health and ready to take on the challenge of managing the portfolio, 10 or 20 (or 30) years down the road you will not be. One spouse may be much more comfortable managing the investments - if they die or become ill first, then that is lost.

All the evidence suggests that annuities (particularly defined benefit pensions) are superior to lump sums, except where:

- there is a desire/ need to leave a significant capital sum to heirs (eg in trust for a disabled child)

- there is a reason to believe life expectancy will be significantly less than average (that is not adjusted for in the price of the annuity)

- there is reason to doubt the health of the plan sponsor, and the PBGC restrictions are significant (or the plan is not insured by PBGC) - for example for high earners, or for members of PBGC "multi employer" plans -- the latter, if you check the statements PBGC has made on its website, are in serious financial trouble and the insurance fund is nearly exhausted. A related phenomenon may be state employee plans - I understand that states have in fact forced through post retirement cuts in benefits (e.g. de indexing against CPI) and there is surely more pain to be taken. Illinois always comes up top of those lists, but there are no doubt other states and municipalities at risk

It is generally better to defer US Social Security for as long as possible, because it is inflation indexed. Better to start collecting with a larger amount.
There has been a lot of discussion here about safe withdrawal rates, there was a Trinity study that set the rate at 4%, as I recall. Good point about low interest rates, Boglehead thinking has been that 3% might be more realistic and sustainable.

Pension funding is an overlooked issue, you want to check how well your pension is funded. I remember one thread where a public employee was planning for retirement and I pointed this out. It turned out that his government pension was something like 50% funded. I told him that this was a big problem and to factor this into his retirement planning. Pretty much told him to count on 50% of the promised payouts. Lots of folks are in denial over this and it highlights why American corporations are getting out of the pension business.
A fool and his money are good for business.

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Re: Pension plan choice of annuity or cash payout

Post by Valuethinker » Mon Oct 01, 2018 10:46 am

nedsaid wrote:
Mon Oct 01, 2018 10:20 am
Valuethinker wrote:
Mon Oct 01, 2018 7:11 am
nedsaid wrote:
Sun Sep 30, 2018 3:15 am

There has been a lot of discussion here about safe withdrawal rates, there was a Trinity study that set the rate at 4%, as I recall. Good point about low interest rates, Boglehead thinking has been that 3% might be more realistic and sustainable.
In essence you can get c. 0.8% on a long TIPS bond? And you can plan to live to, say, 100 (you or spouse). Then you can work out an SWR.

Or you can use current long US Treasuries, say 2.9%, and do the same in nominal terms. However nominal is dangerous because we spend real dollars, not nominal ones.

Annuities basically increase your SWR. I am also of the view that annuities/ pensions should almost always have a 50% survivor benefit (pensions are required here, in the UK, to do so by law). *You* (especially if you are of male gender) might not live so long, but your (female gender) spouse is quite likely to live into her 90s (+). The sorts of people who qualify for pensions tend to have longer life expectancies (that's also true of those who buy annuities).

That does mean that over 30-35 years of retirement, say, the pension's purchasing power, if not CPI indexed, will halve -- the real/ nominal problem again. Hence my suggestion to hold off on taking Social Security for as long as possible.
Pension funding is an overlooked issue, you want to check how well your pension is funded. I remember one thread where a public employee was planning for retirement and I pointed this out. It turned out that his government pension was something like 50% funded. I told him that this was a big problem and to factor this into his retirement planning. Pretty much told him to count on 50% of the promised payouts. Lots of folks are in denial over this and it highlights why American corporations are getting out of the pension business.
Push will come to shove. Some state constitutions (New York?) do not allow cuts to pensions. There has been a lot of irresponsibility on the part of state and local officials. Then a scramble to try to close that gap with unrealistic return expectations. There are no Get-Out-of-Jail-Free cards on this one - there are either benefit cuts, tax rises or both.

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Re: Pension plan choice of annuity or cash payout

Post by Watty » Mon Oct 01, 2018 10:52 am

nedsaid wrote:
Mon Oct 01, 2018 10:20 am
There has been a lot of discussion here about safe withdrawal rates, there was a Trinity study that set the rate at 4%, as I recall. Good point about low interest rates, Boglehead thinking has been that 3% might be more realistic and sustainable.
I would question that being "Boglehead thinking"

A lot of people here are ultra and overly conservative and a 3% withdrawal rate is not at all realistic for a 30 year time period. If you really thought that was the best you could do with traditional stocks and bonds then you could just put all your money into a 30 year ladder of TIPS. You need to remember that over 30 year just withdrawing your principal would allow you to spend 3.33% a year and you might also get another 0.5% or so in interest. (That assumes that the money is in a retirement account where the way TIPS are taxed is not a problem)

You could also buy a series of single premium immediate annuities if you only thought you could only spend 3% from your portfolio with traditional stocks and bonds.

A 4% safe withdrawal rate is already very conservative.
Last edited by Watty on Mon Oct 01, 2018 11:08 am, edited 1 time in total.

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Re: Pension plan choice of annuity or cash payout

Post by nedsaid » Mon Oct 01, 2018 11:04 am

Watty wrote:
Mon Oct 01, 2018 10:52 am
nedsaid wrote:
Mon Oct 01, 2018 10:20 am
There has been a lot of discussion here about safe withdrawal rates, there was a Trinity study that set the rate at 4%, as I recall. Good point about low interest rates, Boglehead thinking has been that 3% might be more realistic and sustainable.
I would question that being "Boglehead thinking"

A lot of people here are ultra and overly conservative and a 3% withdrawal rate is not at all realistic for a 30 year time period. If you really thought that was the best you could do with traditional stocks and bonds then you could just put all your money into a 30 year ladder of TIPS. You need to remember that over 30 year just withdrawing your principal would allow you to spend 3.33% a year and you might also get another 0.5% or so in interest. (That assumes that the money is in a taxable account where the way TIPS are taxed is not a problem)

You could also buy a series of single premium immediate annuities if you only thought you could only spend 3% from your portfolio with traditional stocks and bonds.

A 4% safe withdrawal rate is already very conservative.
I was thinking about various Boglehead threads on this topic. Lots of folks seemed to believe that 3% withdrawal rates were more sustainable than 4%. A sizeable minority still held to 4%. This is one reason that I tell folks to look at Single Premium Immediate Annuities, you effectively boost your sustainable withdrawal rate to 6% to 7%.

There was discussion here that 3% sustainable withdrawal rate might be too high. I joked that maybe a -1% withdrawal rate was more sustainable, that is you would actually be adding to your nest egg in retirement. Probably for most people, 4% would still be fine, that is assuming a 25 year retirement with zero portfolio growth. Low interest rates and longer lifespans have certainly complicated retirement planning. So we cross our fingers and hope for a growing stock market.
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Re: Pension plan choice of annuity or cash payout

Post by Frugal Al » Tue Oct 02, 2018 8:13 am

nedsaid wrote:
Mon Oct 01, 2018 11:04 am
I was thinking about various Boglehead threads on this topic. Lots of folks seemed to believe that 3% withdrawal rates were more sustainable than 4%. A sizeable minority still held to 4%. This is one reason that I tell folks to look at Single Premium Immediate Annuities, you effectively boost your sustainable withdrawal rate to 6% to 7%.
You are, however, comparing an inflation indexed sustainable withdrawal to a nominal 6% to 7% withdrawal.

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Re: Pension plan choice of annuity or cash payout

Post by Beehave » Tue Oct 02, 2018 10:03 am

To answer with any hope of specificity would require knowing much more - - at a minimum these three things:
(1) Is the pension-plan's funding stable?
(2) At what ages do each member of the couple plan (want or need) to retire?
(3) What is the investment risk tolerance level of the couple (do they even agree)?

Here's some advice, using these questions as a way of focusing in on the salient financial issues:

First, if the company's funding of the pension is iffy or poor, then take the cash, roll it in to an IRA and invest it either in an annuity or prudently with some in a money market and the rest in a balanced fund (for example Vanguard Moderate or Conservative Life Strategy Fund, Vanguard Wellington or Wellesley, or Vanguard Balanced Fund). Your level of risk tolerance should guide the proportions of cash-to-balance fund ratio and degree of balanced fund risk.

Assuming that the company's funding of the pension is solid, the question arises as to whether the employee can continue to work if opting for the pension, and if so, whether or not pension benefits somehow grow while the employee continues working (I'm assuming the pension payments only begin if the employee retires).

Without going too deep into the weeds here speculating on company policies and the desires of OP and spouse, my ideal scenario for the couple to optimize their financial security while maintaining quality of life would be to try to come as close as possible to this:

- Husband, who is two years older and expecting lower Soc'l Sec payments, works to 6 months beyond FRA (full retirement age), then claims and retires
- Wife, does not claim SS until age 68.
- If company funding of pension is good, wife can retire when she wishes and use the pension payments to defray expenses until claiming Social Security.
- If company funding of the pension is iffy, wife should retire when she wishes (but err on the side of staying longer), and wait until FRA plus 6 months to claim SS. If possible work until claiming SS, and better, if willing and able, work until at least age 68.
- Use any surplus monthly income to keep padding emergency funds, investing in stocks or balanced fund or REITs (or whatever) to have a growth component, and use some to travel or dine out, or whatever gives you pleasure.

Obviously, there are many unknowns here, so the above is just a suggestion of what this writer happens to feel approaches the abstract ideal strategy for maximizing future financial well-being. Among the unknowns are the wants and needs of the couple. For example, torturing themselves (or one member of the couple) to work under mental or physical duress to reach one of the retitement-timing targets I cited above would be ridiculous, so I offer this advice simply as a financial guidepost, not a specific recommendation.

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Re: Pension plan choice of annuity or cash payout

Post by nedsaid » Wed Oct 03, 2018 1:03 am

Frugal Al wrote:
Tue Oct 02, 2018 8:13 am
nedsaid wrote:
Mon Oct 01, 2018 11:04 am
I was thinking about various Boglehead threads on this topic. Lots of folks seemed to believe that 3% withdrawal rates were more sustainable than 4%. A sizeable minority still held to 4%. This is one reason that I tell folks to look at Single Premium Immediate Annuities, you effectively boost your sustainable withdrawal rate to 6% to 7%.
You are, however, comparing an inflation indexed sustainable withdrawal to a nominal 6% to 7% withdrawal.
Yes, but a 4% inflation indexed withdrawal may not always be sustainable.

Also, Dr. Wade Pfau says that the breakeven point where a real annuity starts paying more than a nominal annuity is about 15 years. Many retirements don't last 15 years. A 4% inflation indexed withdrawal is essentially equivalent to a real annuity. Your inflation adjustment essentially costs that extra 2% or 3% withdrawal rate.
A fool and his money are good for business.

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Re: Pension plan choice of annuity or cash payout

Post by denovo » Wed Oct 03, 2018 2:50 am

Is the annuity insured by the PBGC?
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Re: Pension plan choice of annuity or cash payout

Post by Frugal Al » Wed Oct 03, 2018 3:00 am

nedsaid wrote:
Wed Oct 03, 2018 1:03 am
Yes, but a 4% inflation indexed withdrawal may not always be sustainable.

Also, Dr. Wade Pfau says that the breakeven point where a real annuity starts paying more than a nominal annuity is about 15 years. Many retirements don't last 15 years. A 4% inflation indexed withdrawal is essentially equivalent to a real annuity. Your inflation adjustment essentially costs that extra 2% or 3% withdrawal rate.
Of course we don't know what inflation will do, or how long we'll live. If we're talking a single life, age 65, with no bequest motive then yes, the 6% to 7% nominal payout seems a reasonable trade-off compared to a 3 to 4%, inflation indexed SWR. However, if we're talking a married couple, age 65, we'd want a 100% jt life annuity, for which payout is currently about 5.7% nominal. Suddenly the nominal SPIA doesn't look quite as good in return for turning a chunk of one's portfolio over to the insurance company, when compared to perhaps 3.5% to 4% inflation indexed SWR (sustainable enough for me). And, for a healthy, married, 65 year old couple, we're looking at a retirement of perhaps 25 years or longer, over which time frame inflation can certainly take a toll. We all pick the risks we're comfortable with, and we can insure against those we are not.

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nedsaid
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Re: Pension plan choice of annuity or cash payout

Post by nedsaid » Wed Oct 03, 2018 2:20 pm

Frugal Al said:

"Of course we don't know what inflation will do, or how long we'll live. If we're talking a single life, age 65, with no bequest motive then yes, the 6% to 7% nominal payout seems a reasonable trade-off compared to a 3 to 4%, inflation indexed SWR. However, if we're talking a married couple, age 65, we'd want a 100% jt life annuity, for which payout is currently about 5.7% nominal. Suddenly the nominal SPIA doesn't look quite as good in return for turning a chunk of one's portfolio over to the insurance company, when compared to perhaps 3.5% to 4% inflation indexed SWR (sustainable enough for me). And, for a healthy, married, 65 year old couple, we're looking at a retirement of perhaps 25 years or longer, over which time frame inflation can certainly take a toll. We all pick the risks we're comfortable with, and we can insure against those we are not."

Nedsaid:
You obviously are well informed on these issues. Good point about survivor benefit, yes that would reduce the payout rate. I am a single guy, so I don't think about those things as much. So many trade-offs here. The research seems to say that annuitizing part of the nest egg helps solve the running out of money during retirement problem. I might annuitize maybe 20% of the nest egg but it depends upon a lot of things, for example the level of interest rates. I have also read that waiting until one is in their seventies to annuitize is a more optimal option. Lots to think about here.
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Valuethinker
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Re: Pension plan choice of annuity or cash payout

Post by Valuethinker » Wed Oct 03, 2018 4:42 pm

nedsaid wrote:
Wed Oct 03, 2018 2:20 pm
I have also read that waiting until one is in their seventies to annuitize is a more optimal option. Lots to think about here.
1. yes if you mean the mortality credit is higher. A bad side of annuitants is they live longer than the average population, thus they get worse rates.

Company pensions (Defined Benefit) are, by contrast, usually better value because of risk pooling *but* you do have sponsor risk (risk the sponsor goes broke and you wind up in the hands of the PBGC). Public sector pensions, apparently there have been retrospective changes to benefits (and certainly a city can go broke).

Unfortunately members of multi-employer schemes insured by PBGC may see very severe reductions in benefits - the PBGC itself seems to be warning of that. Ditto those like airline pilots who have very high pensions (one needs to understand the PBGC rules on this in detail).

2. no in the sense that these things are "actuarially fair". With an average life expectancy and health, it won't matter when you draw the annuity, the present value of your payout should be about the same

If you hold medium term US Treasury bonds in your portfolio, you should be fairly hedged against movements in the interest rates offered by annuities. Thus you can time taking your annuity to when it suits issues like tax bracket, taking SS, declining mental faculties etc.

There are at least 2 interactions with US Social Security of which I am aware:

1. you have to be careful vis a vis tax bracket if you take an annuity because you lose any ability to manage your taxes on that money (eg by deferring taking capital gains) and can trigger clawback of some benefits? Over to you Americans to figure out ;-)

2. US SS is in effect an inflation linked annuity, and it's worth deferring as long as possible because your starting amount (that is inflation indexed) is then greater *if* you can delay taking it. (more complexity if you are married, who takes SS when)

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tainted-meat
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Re: Pension plan choice of annuity or cash payout

Post by tainted-meat » Sun Oct 14, 2018 7:56 pm

Thank you for all your information. If I choose the deferred annuity my company will purchase an annuity from a yet to be determined insurance company. The company will not know who will purchase it until everyone in the plan has made their decision. Thus we will not know which insurance company will be issuing our annuity. We are assured that we will get the amount promised but I would rather know who is buying. The plan is fully funded. My spouse is leaning toward the deferred annuity to be paid out starting in 2 years. I am considering a rollover and investing in the simple 3 part fund described by Taylor Larimore. I will rollover the after tax amount into a Roth IRA. Thank you for your input.

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