0% COLA Annuity vs COLA Annuity vs Managed Payout
Posted: Mon Jan 23, 2023 9:27 am
Facts:
My wife and I have a retirement benefit available from the same company.
Me: Age 66 She: Age 67
We have defined contribution invested account balances that must be converted to an annuity no later than age 73.
We also have a new option forthcoming: a managed payout of the account balances. The investments continue, but the monthly
distributions will set annually to adapt to the account balance, inflation and life expectancy. The stock and bond
funds in the accounts are private and actively managed, with expense ratios less than 1%.
Today our account balances are: Me: $501,294 She: $424,432
We do not have the option of rolling out these funds or managing them ourselves. This is not the typical choice between receiving a pension or a lump sum. And the only tweak we can make for these accounts is a risk profile that would change the mix of stocks to a low of 0% to a high of about 40% (based on expected distribution date).
The annuity option has multiple choices regarding COLAs and survivor benefits.
For example, if I were to elect an annuity beginning 2/1/2023, a 0% COLA with 100% survivor would be $2861 monthly, with a 2% COLA $2311, and 5% COLA $1608. I would be about age 77 or 78 before the monthly payments with COLA would be greater than the 0 COLA annuity, and age 88 or 89 when the grand total of a COLA payment option would be greater than the payout of the 0% COLA option. I have used the calculator at https://www.hughcalc.org/cola.php to come up with my estimates. At the end of 25 years, 2/1/2048, age 91, the 0 COLA would have paid out $858,300, the 2% COLA would be $888,264 and the 5% COLA would be $920,942.
My wife's annuity would be similar in scale, though smaller because of her lower account balance.
Because of our other assets, benefits and social security, we do not have to make a decision now. However, as part of our tax and RMD planning, I want to have a feel for how others have decided on receiving benefits.
1) Does it make sense to choose an annuity with COLA, if the total payout does not pass the 0 COLA option till after about age 88?
It would seem that higher payments early would be worth more than higher payments later due to the effects of inflation and the ability to invest those higher early distributions. Also, any thoughts about choosing a 100% survivor vs a 70%? I can see how the 100% would help if one of us were widowed for a long time. But if both of us lived about the same lifespan, the 70% annuities would be more beneficial.
2) The managed payout option is attractive mainly because the account could possibly continue to grow due to continuing investments, and any leftover could be distributed to our heir. However, no matter what our wishes might be, the managed payout would only be distributed as a monthly benefit adjusted annually. If the account balance reaches 0 before the end of life, there would be no other benefit. Because of the opportunity for account growth and leaving any balances to our heir, is the managed payout better than the annuity option?
3) My wife and I could opt for a. annuities for both of us or, b. one annuity and one managed payout or c. two managed payouts.
I am aware that there is a benefit to having "guaranteed income" in retirement. We already have social security, plus some defined benefits (pensions) from the same company, plus our 2 Rollover IRA accounts (from personal savings done via the company), 2 Roth accounts (from conversions), and a brokerage account. Total asset balances can provide enough cash flow until we will be required to start receiving this last benefit from our employer, annuities or managed payouts.
To any who have read this far, thank you. As you can see, this is a decision involving nearly a million dollars, with the effects lasting perhaps 30 years....
My wife and I have a retirement benefit available from the same company.
Me: Age 66 She: Age 67
We have defined contribution invested account balances that must be converted to an annuity no later than age 73.
We also have a new option forthcoming: a managed payout of the account balances. The investments continue, but the monthly
distributions will set annually to adapt to the account balance, inflation and life expectancy. The stock and bond
funds in the accounts are private and actively managed, with expense ratios less than 1%.
Today our account balances are: Me: $501,294 She: $424,432
We do not have the option of rolling out these funds or managing them ourselves. This is not the typical choice between receiving a pension or a lump sum. And the only tweak we can make for these accounts is a risk profile that would change the mix of stocks to a low of 0% to a high of about 40% (based on expected distribution date).
The annuity option has multiple choices regarding COLAs and survivor benefits.
For example, if I were to elect an annuity beginning 2/1/2023, a 0% COLA with 100% survivor would be $2861 monthly, with a 2% COLA $2311, and 5% COLA $1608. I would be about age 77 or 78 before the monthly payments with COLA would be greater than the 0 COLA annuity, and age 88 or 89 when the grand total of a COLA payment option would be greater than the payout of the 0% COLA option. I have used the calculator at https://www.hughcalc.org/cola.php to come up with my estimates. At the end of 25 years, 2/1/2048, age 91, the 0 COLA would have paid out $858,300, the 2% COLA would be $888,264 and the 5% COLA would be $920,942.
My wife's annuity would be similar in scale, though smaller because of her lower account balance.
Because of our other assets, benefits and social security, we do not have to make a decision now. However, as part of our tax and RMD planning, I want to have a feel for how others have decided on receiving benefits.
1) Does it make sense to choose an annuity with COLA, if the total payout does not pass the 0 COLA option till after about age 88?
It would seem that higher payments early would be worth more than higher payments later due to the effects of inflation and the ability to invest those higher early distributions. Also, any thoughts about choosing a 100% survivor vs a 70%? I can see how the 100% would help if one of us were widowed for a long time. But if both of us lived about the same lifespan, the 70% annuities would be more beneficial.
2) The managed payout option is attractive mainly because the account could possibly continue to grow due to continuing investments, and any leftover could be distributed to our heir. However, no matter what our wishes might be, the managed payout would only be distributed as a monthly benefit adjusted annually. If the account balance reaches 0 before the end of life, there would be no other benefit. Because of the opportunity for account growth and leaving any balances to our heir, is the managed payout better than the annuity option?
3) My wife and I could opt for a. annuities for both of us or, b. one annuity and one managed payout or c. two managed payouts.
I am aware that there is a benefit to having "guaranteed income" in retirement. We already have social security, plus some defined benefits (pensions) from the same company, plus our 2 Rollover IRA accounts (from personal savings done via the company), 2 Roth accounts (from conversions), and a brokerage account. Total asset balances can provide enough cash flow until we will be required to start receiving this last benefit from our employer, annuities or managed payouts.
To any who have read this far, thank you. As you can see, this is a decision involving nearly a million dollars, with the effects lasting perhaps 30 years....