Need help in evaluating lump sum/pension options for couple friend

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bestplans
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Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 9:17 am

Him: age 59, retiring next month from long time megacorp, primary breadwinner, boglehead investing philosophy
Her: age 58, retiring later this year, no interest in managing money
Both in good health, assumed lifespan 80-85 for him, 90-95 for her

His options are a $940K lump sum or $48K/year pension if he takes them now. If he defers until age 65 according to the company modeling tool (and current assumptions), lump sum is $1.2M, pension is $67K per year. Pension (annuity) options are both 100% joint survivor (the only option they would consider) and are NOT inflation protected.

They have grown children that they want to leave as much as they can to. Assume risk of dementia for them rises at age 83 (for the sake of this analysis).

I'm no expert but in running an NPV calc using a 3 or 4% hurdle rate the annuity seems to come out ahead before age 90. Also when plugging in the lump sum options into "immediate-annuities" the pension options they are being offered (in both the current and future modeling case) come out ahead of what they could get on the open market. Also they have significant $$ in pretax IRAs so deferring to 65 in either case would seem to make sense to be able to do some more Roth conversions until then AND take advantage of what looks to be a pretty good annual return for deferring the benefits to 65 (as they have enough in other assets to live on until then).

Given the above, I'm thinking what makes the most sense for them is to defer the benefit for now and lean towards the annuity at 65, assuming the numbers are what they are projected to be. At first I was tempted to recommend deferring and then taking the lump sum given the uncertainties about future pension payouts and the risk of future inflation/interest rate increases, but would like them to have more peace of mind with regard to managing longevity (and dementia) risk.

Am I missing anything? These people trust me over going to some random financial planner (not sure if that's good or bad) and I don't want to steer them wrong. Thank you.

PVW
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by PVW » Fri Feb 14, 2020 9:35 am

bestplans wrote:
Fri Feb 14, 2020 9:17 am
take advantage of what looks to be a pretty good annual return for deferring the benefits to 65
Not much advice from me. These decisions come down to unknown risk. Higher than expected inflation or early death usually means they should have taken the lump sum. Lower inflation or long life means the annuity.

Really, I just wanted to point out that you also have to take into account the lost money from deferring the payout at retirement: 6 x $48K, or the time value of $940K is a lot of money.

averagelonghorn
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by averagelonghorn » Fri Feb 14, 2020 9:39 am

One thing I will mention, make sure the modeling tool you are using doesn't make assumptions that are more optimistic than supported by the plan.

In my case, I have a cash-balance pension, and Fidelity NetBenefits uses an assumed return of 6% when doing the modeling on a future date of claiming, but the plan documents tell you that the interest rate is based on 1year treasuries +1%, so when doing the modeling, I always have to lower the interest rate assumption (I use 3%, and even that could turn out to be optimistic.)

In my case, it it is quite a small amount of my portfolio (New contributions ended over a decade ago.)

I did come to the same conclusions you did, however, that the annuities offered are better than I could get on the open market. I'm further from needing this money (15 years, likely) than your friends; but so far I have just left it there, consider the current lump sum available as part of my fixed income, and will decide later on the annuity vs lump sum.

lakpr
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by lakpr » Fri Feb 14, 2020 9:46 am

+1 to the response from @PVW.

$940k now becoming $1.2 Million at age 65 means approximately 5% to 6% rate of return per year.
If you treat the current lump-sum available as the bond portion of one's portfolio, that is an EXCELLENT rate of return.
If instead you treat that current lump-sum available as the stock portion of one's portfolio, it is likely, but not guaranteed, to exceed that rate of return, even with a 60:40 portfolio.

So it comes down to the question of whether this couple, if given a pot of money of $940k, is willing to invest it all in a bond fund or would go for a 60:40 or even a 50:50 allocation. Assume that those are the only three choices available.

If they would choose the first option in this hypothetical scenario, leaving the lump-sum until age 65 makes sense.
If they would choose the second or third option, they are likely to be better off taking the lump-sum now.

Note also that, if they do choose annuity at age 65, that additional income might spike their income to blow through the IRMAA thresholds. You would have to run the numbers of course, but it could be that not only they would pay a 22% tax on the additional annuity income, they would also pay additional medicare surcharge which could spike their marginal tax rate above 30% or so. In which case, you'd have wished taking the lump sum now, and use the years between now and age 63 to turn at least a portion of that into Roth, and keep your Medicare premiums under control ...

Multiple things to think about, to be sure.

1130Super
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by 1130Super » Fri Feb 14, 2020 9:54 am

This seems like a no brainer to take lump sum.

4% withdrawal rate at 38k (that increases with inflation) a year and leave heirs 1 million+
or
Essentially a 5% withdrawal rate of 48K (Doesn’t increase for inflation) and leave nothing to heirs

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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Valuethinker » Fri Feb 14, 2020 10:08 am

bestplans wrote:
Fri Feb 14, 2020 9:17 am
Him: age 59, retiring next month from long time megacorp, primary breadwinner, boglehead investing philosophy
Her: age 58, retiring later this year, no interest in managing money
Both in good health, assumed lifespan 80-85 for him, 90-95 for her

His options are a $940K lump sum or $48K/year pension if he takes them now. If he defers until age 65 according to the company modeling tool (and current assumptions), lump sum is $1.2M, pension is $67K per year. Pension (annuity) options are both 100% joint survivor (the only option they would consider) and are NOT inflation protected.

They have grown children that they want to leave as much as they can to. Assume risk of dementia for them rises at age 83 (for the sake of this analysis).
What is the condition of the Sponsor of the pension plan (the employer). Unfortunately you cannot determine that for the next 35 years (consider the decline of GE or the bankruptcy of any number of household names). But you can at least get an indication. Defined Benefit pension plans will not survive the current era of very low interest rates without significant changes (besides just closure to new accruals).

The PBGC insurance limits for pensions that high might come into play. I don't know what those are. And confirm plan is covered by PBGC.

What other savings and investments do they have?

The desire to leave money for heirs would tip me towards the lump sum (subject to the above). That, and the fact that over that time period, at 2% a, inflation would significantly reduce purchasing power. The value of the longevity insurance aspect of a pension is thus reduced.

Conversely the fact that spouse has no desire to manage investments might tip me the other way.
I'm no expert but in running an NPV calc using a 3 or 4% hurdle rate the annuity seems to come out ahead before age 90. Also when plugging in the lump sum options into "immediate-annuities" the pension options they are being offered (in both the current and future modeling case) come out ahead of what they could get on the open market.
All of which makes perfect sense.

The deferral to age 65 will be actuarially fair and thus there is no way to "beat" it except if you differ significantly from ordinary parameters re life expectancy, age of spouse etc.

Also they have significant $$ in pretax IRAs so deferring to 65 in either case would seem to make sense to be able to do some more Roth conversions until then AND take advantage of what looks to be a pretty good annual return for deferring the benefits to 65 (as they have enough in other assets to live on until then).

Given the above, I'm thinking what makes the most sense for them is to defer the benefit for now and lean towards the annuity at 65, assuming the numbers are what they are projected to be. At first I was tempted to recommend deferring and then taking the lump sum given the uncertainties about future pension payouts and the risk of future inflation/interest rate increases, but would like them to have more peace of mind with regard to managing longevity (and dementia) risk.

Am I missing anything? These people trust me over going to some random financial planner (not sure if that's good or bad) and I don't want to steer them wrong. Thank you.
Normally I always say "take the pension". Certainty over uncertainty. Longevity insurance.
The evidence from lottery winners shows that better life outcomes are achieved via annuity-like streams (pensions) than by lump sums.

This one is hard. There's a lot of money at stake.

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Stinky
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Stinky » Fri Feb 14, 2020 10:14 am

bestplans wrote:
Fri Feb 14, 2020 9:17 am

I'm thinking what makes the most sense for them is to defer the benefit for now and lean towards the annuity at 65, assuming the numbers are what they are projected to be. At first I was tempted to recommend deferring and then taking the lump sum given the uncertainties about future pension payouts and the risk of future inflation/interest rate increases, but would like them to have more peace of mind with regard to managing longevity (and dementia) risk.

Am I missing anything? These people trust me over going to some random financial planner (not sure if that's good or bad) and I don't want to steer them wrong. Thank you.
I agree with deferring for now, with one caveat. What happens under the terms of the pension if the breadwinner dies between now and age 65? If it’s anything other than a lump sum (or monthly annuity) that is somewhere between the current value and the future value, let us know. I’d hate to lose the pension, or have a significant cutback, if the breadwinner dies before 65.

They can make a decision in the future as to whether to take lump sum or monthly payments. I’m also a fan of monthly payments. You’ve done your due diligence by comparing with annuity website.

Congratulations on being in a position where you’re a trusted advisor. Best of luck to you.
It's a GREAT day to be alive - Travis Tritt

rich126
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by rich126 » Fri Feb 14, 2020 10:22 am

I'm curious if the person takes the lump sum are there tax consequences? Or is the money usually rolled into a 401K like account?
I think my GF is going to be facing a similar choice shortly.

Thanks.

Caduceus
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Caduceus » Fri Feb 14, 2020 10:23 am

Do they really need to annuitize that much? My own take is that people with high enough amounts of net worth don't really need (or don't need too much of) what is essentially longevity insurance. That comes with a cost.

Given what you've described, I would defer but lean toward taking the lump sum. They can annuitize part or none of the lump sum if they wish.

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Ramjet
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Ramjet » Fri Feb 14, 2020 10:26 am

Lump sum; then choose a Life Strategy Fund

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Stinky
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Stinky » Fri Feb 14, 2020 10:27 am

rich126 wrote:
Fri Feb 14, 2020 10:22 am
I'm curious if the person takes the lump sum are there tax consequences? Or is the money usually rolled into a 401K like account?
I think my GF is going to be facing a similar choice shortly.

Thanks.
Usually a lump sum from a pension plan is rolled into an IRA.
It's a GREAT day to be alive - Travis Tritt

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Ramjet
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Ramjet » Fri Feb 14, 2020 10:28 am

rich126 wrote:
Fri Feb 14, 2020 10:22 am
I'm curious if the person takes the lump sum are there tax consequences? Or is the money usually rolled into a 401K like account?
I think my GF is going to be facing a similar choice shortly.

Thanks.
Roll to IRA, no tax I would think

rich126
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by rich126 » Fri Feb 14, 2020 10:36 am

Stinky wrote:
Fri Feb 14, 2020 10:27 am
rich126 wrote:
Fri Feb 14, 2020 10:22 am
I'm curious if the person takes the lump sum are there tax consequences? Or is the money usually rolled into a 401K like account?
I think my GF is going to be facing a similar choice shortly.

Thanks.
Usually a lump sum from a pension plan is rolled into an IRA.
Thanks. I found an IRS post listing the various options as well.
https://www.irs.gov/taxtopics/tc412

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Re: Need help in evaluating lump sum/pension options for couple friend

Post by pkcrafter » Fri Feb 14, 2020 10:55 am

bestplans wrote:
Fri Feb 14, 2020 9:17 am
Him: age 59, retiring next month from long time megacorp, primary breadwinner, boglehead investing philosophy
Her: age 58, retiring later this year, no interest in managing money
Both in good health, assumed lifespan 80-85 for him, 90-95 for her

His options are a $940K lump sum or $48K/year pension if he takes them now.
Do friends have any other assets marked for retirement?
What do friends need for a withdrawal rate if 940k is total assets?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 11:32 am

averagelonghorn wrote:
Fri Feb 14, 2020 9:39 am
One thing I will mention, make sure the modeling tool you are using doesn't make assumptions that are more optimistic than supported by the plan.

In my case, I have a cash-balance pension, and Fidelity NetBenefits uses an assumed return of 6% when doing the modeling on a future date of claiming, but the plan documents tell you that the interest rate is based on 1year treasuries +1%, so when doing the modeling, I always have to lower the interest rate assumption (I use 3%, and even that could turn out to be optimistic.)

In my case, it it is quite a small amount of my portfolio (New contributions ended over a decade ago.)

I did come to the same conclusions you did, however, that the annuities offered are better than I could get on the open market. I'm further from needing this money (15 years, likely) than your friends; but so far I have just left it there, consider the current lump sum available as part of my fixed income, and will decide later on the annuity vs lump sum.
Good point yes they used outputs from NetBenefits as well for these scenarios

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 11:35 am

Caduceus wrote:
Fri Feb 14, 2020 10:23 am
Do they really need to annuitize that much? My own take is that people with high enough amounts of net worth don't really need (or don't need too much of) what is essentially longevity insurance. That comes with a cost.

Given what you've described, I would defer but lean toward taking the lump sum. They can annuitize part or none of the lump sum if they wish.
Given their other assets and monthly expenses they probably "need" in the neighborhood of $45-50K generated annually from this bucket, but they don't need it until around age 65

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 11:35 am

pkcrafter wrote:
Fri Feb 14, 2020 10:55 am
bestplans wrote:
Fri Feb 14, 2020 9:17 am
Him: age 59, retiring next month from long time megacorp, primary breadwinner, boglehead investing philosophy
Her: age 58, retiring later this year, no interest in managing money
Both in good health, assumed lifespan 80-85 for him, 90-95 for her

His options are a $940K lump sum or $48K/year pension if he takes them now.
Do friends have any other assets marked for retirement?
What do friends need for a withdrawal rate if 940k is total assets?

Paul
Yes. Given their other assets and monthly expenses they probably "need" in the neighborhood of $45-50K generated annually from this bucket, but they don't need it until around age 65

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 11:37 am

Stinky wrote:
Fri Feb 14, 2020 10:14 am
bestplans wrote:
Fri Feb 14, 2020 9:17 am

I'm thinking what makes the most sense for them is to defer the benefit for now and lean towards the annuity at 65, assuming the numbers are what they are projected to be. At first I was tempted to recommend deferring and then taking the lump sum given the uncertainties about future pension payouts and the risk of future inflation/interest rate increases, but would like them to have more peace of mind with regard to managing longevity (and dementia) risk.

Am I missing anything? These people trust me over going to some random financial planner (not sure if that's good or bad) and I don't want to steer them wrong. Thank you.
I agree with deferring for now, with one caveat. What happens under the terms of the pension if the breadwinner dies between now and age 65? If it’s anything other than a lump sum (or monthly annuity) that is somewhere between the current value and the future value, let us know. I’d hate to lose the pension, or have a significant cutback, if the breadwinner dies before 65.

They can make a decision in the future as to whether to take lump sum or monthly payments. I’m also a fan of monthly payments. You’ve done your due diligence by comparing with annuity website.

Congratulations on being in a position where you’re a trusted advisor. Best of luck to you.
Great question, and thanks. My understanding is that the surviving spouse in that case has the same options as if the employee were still alive; but we should recheck that.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 11:40 am

lakpr wrote:
Fri Feb 14, 2020 9:46 am
+1 to the response from @PVW.


So it comes down to the question of whether this couple, if given a pot of money of $940k, is willing to invest it all in a bond fund or would go for a 60:40 or even a 50:50 allocation. Assume that those are the only three choices available.

If they would choose the first option in this hypothetical scenario, leaving the lump-sum until age 65 makes sense.
If they would choose the second or third option, they are likely to be better off taking the lump-sum now.

In this case, I think they'd prefer the like-like comparison in terms of risk (so not exposing this pot of money to any significant equity allocation)

lakpr
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by lakpr » Fri Feb 14, 2020 11:43 am

bestplans wrote:
Fri Feb 14, 2020 11:40 am
lakpr wrote:
Fri Feb 14, 2020 9:46 am
+1 to the response from @PVW.


So it comes down to the question of whether this couple, if given a pot of money of $940k, is willing to invest it all in a bond fund or would go for a 60:40 or even a 50:50 allocation. Assume that those are the only three choices available.

If they would choose the first option in this hypothetical scenario, leaving the lump-sum until age 65 makes sense.
If they would choose the second or third option, they are likely to be better off taking the lump-sum now.

In this case, I think they'd prefer the like-like comparison in terms of risk (so not exposing this pot of money to any significant equity allocation)
But the downside is that if they choose annuity option, there will be no money left to the heirs when they pass.

If you are saying let's ride it until they reach age 65, I have no issues with that, as long as they opt for lump sum at that time. You are taking on the risk of the employer not being there at that time though. So it's a call on how stable you think the employer is.

Concentrated bet on the health of the employer? Or diversification of the risk on 3400+ companies ?

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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Caduceus » Fri Feb 14, 2020 11:46 am

bestplans wrote:
Fri Feb 14, 2020 11:35 am
pkcrafter wrote:
Fri Feb 14, 2020 10:55 am
bestplans wrote:
Fri Feb 14, 2020 9:17 am
Him: age 59, retiring next month from long time megacorp, primary breadwinner, boglehead investing philosophy
Her: age 58, retiring later this year, no interest in managing money
Both in good health, assumed lifespan 80-85 for him, 90-95 for her

His options are a $940K lump sum or $48K/year pension if he takes them now.
Do friends have any other assets marked for retirement?
What do friends need for a withdrawal rate if 940k is total assets?

Paul
Yes. Given their other assets and monthly expenses they probably "need" in the neighborhood of $45-50K generated annually from this bucket, but they don't need it until around age 65
45,000 / 1,200,000 = 3.75%

That's less than the "rule of 4%" draw-down rate. Seems like a waste, especially if they have bequest motives, to go for the annuity when they don't need this lump sum bucket to yield very much. Put it this way - if I were a potential heir, I'd happily pay for whatever the shortfall was between what their portfolio yielded in any given year and the $45,000 they needed. Would be the best yield on investment ever. Say you invest in long-term bonds yielding a piddly 2.25%. So the heirs would have to pay 1.5% on the 1.2 million as long as their parents live, in return for the entire principal as inheritance when they pass? Sounds like a f great deal.
Last edited by Caduceus on Fri Feb 14, 2020 11:47 am, edited 1 time in total.

lakpr
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by lakpr » Fri Feb 14, 2020 11:46 am

bestplans wrote:
Fri Feb 14, 2020 11:35 am
Yes. Given their other assets and monthly expenses they probably "need" in the neighborhood of $45-50K generated annually from this bucket, but they don't need it until around age 65
A $1.2million pot of money, invested in a 60:40 portfolio, can sustain a 4% safe withdrawal rate for inflation-adjusted $48k per year income.
As to how to get to that $1.2 million ... either take lump sump now and invest in the same 60:40 blend, or take the lump sum at age 65 from the employer. With regards to the second option, see my previous reply.

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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Wiggums » Fri Feb 14, 2020 11:53 am

I’m glad that I don’t have to make this decision. If it’s really a requirement to leave money to the children, the lumpsum is the way to go. That will make for bigger RMDs which they can start to deal with on retirement.

It seems like there is no reason to defer if you go the pension route.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 1:33 pm

lakpr wrote:
Fri Feb 14, 2020 11:43 am
bestplans wrote:
Fri Feb 14, 2020 11:40 am
lakpr wrote:
Fri Feb 14, 2020 9:46 am
+1 to the response from @PVW.


So it comes down to the question of whether this couple, if given a pot of money of $940k, is willing to invest it all in a bond fund or would go for a 60:40 or even a 50:50 allocation. Assume that those are the only three choices available.

If they would choose the first option in this hypothetical scenario, leaving the lump-sum until age 65 makes sense.
If they would choose the second or third option, they are likely to be better off taking the lump-sum now.

In this case, I think they'd prefer the like-like comparison in terms of risk (so not exposing this pot of money to any significant equity allocation)
But the downside is that if they choose annuity option, there will be no money left to the heirs when they pass.

If you are saying let's ride it until they reach age 65, I have no issues with that, as long as they opt for lump sum at that time. You are taking on the risk of the employer not being there at that time though. So it's a call on how stable you think the employer is.

Concentrated bet on the health of the employer? Or diversification of the risk on 3400+ companies ?
Good points thank you. But on the question of leaving money to heirs, the way I think about that (I may be wrong) is that this depends on how long the surviving spouse lives, right? Isn't the key to legacy how much overall net worth one has at end of life? With an annuity they won't have anything to leave from THAT pot of money, but if the last to die passes at age 100 and equity markets don't behave as they have done in the past, taking the annuity could result a larger overall estate (from all asset sources). And as far as deferring the pension (should they go that route), would you not prefer 67K/yr. in 6 years vs. 48K per year now? Seems like this is similar to the decisions we all make when deciding whether or not to delay SS.

Thanks again all for helping me think things through. And while the employer is a 100+ year old household name, taking the risk of the long term viability of the pension I agree (vs. a diversified portfolio) is great food for thought.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 1:35 pm

Wiggums wrote:
Fri Feb 14, 2020 11:53 am
I’m glad that I don’t have to make this decision. If it’s really a requirement to leave money to the children, the lumpsum is the way to go. That will make for bigger RMDs which they can start to deal with on retirement.

It seems like there is no reason to defer if you go the pension route.
It's a desire, but not the only one for sure. Certainly the administrative aspect (not having to manage a large pot of money in old age) is a string consideration as well.

If they defer the pension, this gives them flexibility to do Roth conversions in the meantime. It also appears to be a decent price to pay for the higher benefit later (like delaying SS)

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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Jack FFR1846 » Fri Feb 14, 2020 2:11 pm

The scaled numbers look very much like my little pension. My evaluation came up with similar findings as others in the thread have come up with. Open market annuities are not as good. So I'd evaluate whether the pension payer is likely to remain a payer. So if it were like Illinois or even a union, I'd take the lump sum before they go under. If it's a Fidelity or UBS or Chase, then it's solid as a rock. My evaluation for my pension is an even split. So I'm waiting until I'm 65 and will decide then. With mine, I could take a lump sum when I was 55 and not again until 65, then the number actually drops. Wife and I will discuss and decide. If the pension is on solid footing, I don't think either answer is wrong.

Good point made that taking payments means there will be no direct money for heirs. But if you live off of monthly payments, you have that much that can go into investments to pass on.
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by louiethelilac » Fri Feb 14, 2020 2:23 pm

bestplans wrote:
Fri Feb 14, 2020 1:35 pm
Wiggums wrote:
Fri Feb 14, 2020 11:53 am
I’m glad that I don’t have to make this decision. If it’s really a requirement to leave money to the children, the lumpsum is the way to go. That will make for bigger RMDs which they can start to deal with on retirement.

It seems like there is no reason to defer if you go the pension route.
It's a desire, but not the only one for sure. Certainly the administrative aspect (not having to manage a large pot of money in old age) is a string consideration as well.

If they defer the pension, this gives them flexibility to do Roth conversions in the meantime. It also appears to be a decent price to pay for the higher benefit later (like delaying SS)
I agree with your reasoning that deferring at this point seems to be the sensible thing to do in either case to maintain flexibility with regard to looking at both the state of the markets and doing Roth conversions; in looking at the numbers I do not see any financial "penalty" for waiting. You can offer to them that you'll help them review this every year going forward. The only event that might sway me to "take the lump sum and run" is if I thought we were in a "mother of all buying opportunities" scenario (not that I'm a market timer or anything :)

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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 2:28 pm

Jack FFR1846 wrote:
Fri Feb 14, 2020 2:11 pm
The scaled numbers look very much like my little pension. My evaluation came up with similar findings as others in the thread have come up with. Open market annuities are not as good. So I'd evaluate whether the pension payer is likely to remain a payer. So if it were like Illinois or even a union, I'd take the lump sum before they go under. If it's a Fidelity or UBS or Chase, then it's solid as a rock. My evaluation for my pension is an even split. So I'm waiting until I'm 65 and will decide then. With mine, I could take a lump sum when I was 55 and not again until 65, then the number actually drops. Wife and I will discuss and decide. If the pension is on solid footing, I don't think either answer is wrong.

Good point made that taking payments means there will be no direct money for heirs. But if you live off of monthly payments, you have that much that can go into investments to pass on.
Thanks this is through Fidelity - and yes your last point about having that much that can go into investments is exactly my thinking on why the "leaving to heirs" argument may not be as compelling for the lump sum option IF the annuitant lives long enough.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 2:31 pm

louiethelilac wrote:
Fri Feb 14, 2020 2:23 pm
bestplans wrote:
Fri Feb 14, 2020 1:35 pm
Wiggums wrote:
Fri Feb 14, 2020 11:53 am
I’m glad that I don’t have to make this decision. If it’s really a requirement to leave money to the children, the lumpsum is the way to go. That will make for bigger RMDs which they can start to deal with on retirement.

It seems like there is no reason to defer if you go the pension route.
It's a desire, but not the only one for sure. Certainly the administrative aspect (not having to manage a large pot of money in old age) is a string consideration as well.

If they defer the pension, this gives them flexibility to do Roth conversions in the meantime. It also appears to be a decent price to pay for the higher benefit later (like delaying SS)
I agree with your reasoning that deferring at this point seems to be the sensible thing to do in either case to maintain flexibility with regard to looking at both the state of the markets and doing Roth conversions; in looking at the numbers I do not see any financial "penalty" for waiting. You can offer to them that you'll help them review this every year going forward. The only event that might sway me to "take the lump sum and run" is if I thought we were in a "mother of all buying opportunities" scenario (not that I'm a market timer or anything :)
Yes thanks this is what I am thinking - an annual review to assess cost/benefit of either option (and timing) given both the numbers AND state of their physical health (which of course is a key variable).

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Watty
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by Watty » Fri Feb 14, 2020 2:44 pm

Focusing on the math of which choice is mathematically better is important but realistically there are so many unknowns with inflation, investment return, longevity, etc that there is no way to really tell which will be better until you look back on it 30 years from now.

People also tend to be biased to what they have now and not want change, this is call anchoring.

I like to turn this question around and ask, "I have $940K in an IRA now, should I buy a non-inflation adjusted annuity that pays me $48K a year?" That is really the same question but when you look at it from that perspective the choice looks a lot different.

Another big factor is if they actually need the $48K a year. Taking the pension option is sort of like buying longevity insurance but if you are just going to pay taxes on the $48K then put most of it in the bank there is no need to buy that insurance until you have a need for the income. It would be like buying car insurance when you don't drive.

There is an old saying, "Buying an elephant for a dime is only a good deal if you need an elephant, and have a dime."

They need to look at the rest of their financial situation, especially Social Security as part of this decision. They can get a suggested Social Security claiming strategy at this web site.

https://opensocialsecurity.com/

It can vary a lot depending on their details but often it will suggest that one person start fairly early and the other delays starting until they in their late 60 or all the way to 70.

Delaying starting social security to get a larger check later on is in essence buying an inflation adjusted government guaranteed annuity that is likely a lot better than any pension or annuity that they could buy.

One general strategy would be to take the lump sum and then live on that until they start Social Security then buy an annuity to make up and needed income to cover their expenses. I would suspect that they might not need a lot since if they have a million in savings that pay 2% in dividends and interest that would be $20K a year which in addition to Social Security checks would likely cover most people's expenses especially if they have a paid off house.
bestplans wrote:
Fri Feb 14, 2020 9:17 am
Am I missing anything?
1) What happens to the pension if they both die before starting it? In some cases the estate might not get anything.

2) They could take the lump sum and then use half if it to buy an annuity so they would have some of both.

3) Not taking the pension might give them more years to do Roth conversions in a low tax bracket and that could be very good for their heirs especially with the recent change to require inherited IRAs to be withdrawn in 10 years.

4) Life expectancies are only averages. There is a good chance that one of them will live to be 95 and a reasonable chance that one of them will live to be over 100. You might run their details through this life expectancy calculator.

https://www.longevityillustrator.org/

There pension will not be worth much after 30 or 40 years of inflation.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 3:10 pm

Watty wrote:
Fri Feb 14, 2020 2:44 pm

I like to turn this question around and ask, "I have $940K in an IRA now, should I buy a non-inflation adjusted annuity that pays me $48K a year?" That is really the same question but when you look at it from that perspective the choice looks a lot different.
You are right that is an interesting way to look at it. Depends on assumptions. I would probably take that deal if I assume that bond rates will remain close to where they are (as they take equity risk with other parts of their portfolio) and that I live past 90.
Watty wrote:
Fri Feb 14, 2020 2:44 pm

What happens to the pension if they both die before starting it? In some cases the estate might not get anything.
Excellent point. They are pretty cautious in their approach and should at least consider this.

tealeaves
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by tealeaves » Fri Feb 14, 2020 3:40 pm

bestplans wrote:
Fri Feb 14, 2020 9:17 am

Her: age 58, retiring later this year, no interest in managing money
The only thing the I'd add (after mulling over this type of decision myself for the future) is that I would not let the above fact alone dissuade you from recommending the lump sum IF the numbers work in favor of that option. I think there used to be a point where a monthly check from a pension was much easier to "manage" than other choices, but now the ubiquity of automatic withdrawal options from fund to bank plus "set it and forget it" fund options (TR, balanced, etc.) makes things pretty easy for a surviving spouse with minimal investment savvy. And as far as cognitive decline risks go, I think provisions for handling that need to be made regardless.

123
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by 123 » Fri Feb 14, 2020 4:09 pm

Though interest rates generally do not impact the amount of monthly pension amounts they can have an extraordinary impact on how the lump sum option is calculated. They need to carefully consider how the lump sum option is calculated. If the calculation of the lump sum is dependent on interest rates that change with economic conditions they need to exercise careful thought with regard to the lump sum option. If they want to exercise the lump sum option they need to consider the impact of interest rate changes. If interest rates rise it is possible that a future lump sum could be LESS than a lump sum taken now, even though the monthly benefits are unaffected by interest rates.
The closest helping hand is at the end of your own arm.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 4:15 pm

123 wrote:
Fri Feb 14, 2020 4:09 pm
Though interest rates generally do not impact the amount of monthly pension amounts they can have an extraordinary impact on how the lump sum option is calculated. They need to carefully consider how the lump sum option is calculated. If the calculation of the lump sum is dependent on interest rates that change with economic conditions they need to exercise careful thought with regard to the lump sum option. If they want to exercise the lump sum option they need to consider the impact of interest rate changes. If interest rates rise it is possible that a future lump sum could be LESS than a lump sum taken now, even though the monthly benefits are unaffected by interest rates.
Yes understood that if the decision is made that the lump sum would be preferable the prospect of a rise in rates (thereby discounting the annuity payments by a larger denominator) does add an additional risk to deferring. I'll make sure to convey that. Thanks.

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bestplans
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Re: Need help in evaluating lump sum/pension options for couple friend

Post by bestplans » Fri Feb 14, 2020 8:13 pm

lakpr wrote:
Fri Feb 14, 2020 9:46 am


Note also that, if they do choose annuity at age 65, that additional income might spike their income to blow through the IRMAA thresholds. You would have to run the numbers of course, but it could be that not only they would pay a 22% tax on the additional annuity income, they would also pay additional medicare surcharge which could spike their marginal tax rate above 30% or so. In which case, you'd have wished taking the lump sum now, and use the years between now and age 63 to turn at least a portion of that into Roth, and keep your Medicare premiums under control ...

Multiple things to think about, to be sure.
Right I did miss the IRMAA consideration. Another "Assets vs. Income" dilemma. Thanks.

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