Author Topic: Pension ending - which option should I choose?  (Read 5330 times)

zippy

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Pension ending - which option should I choose?
« on: April 10, 2015, 11:49:28 AM »
Hello! My husband had a pension at his work, but they recently decided to transfer the pension to an insurance company as an annuity. They are giving us three options:
1) Take a lump sum of $56,060
2) Immediate Life Annuity $119.79/month (75% to surviving spouse) starting now
3) Annuity of $1,581/month starting when he turns 65

He is 35 right now. We don't think option 2 sounds good, but are not sure if we should do 1 or 3. Annuity sounds good because it would diversify our income at retirement, instead of having everything rely on the market. However, the insurance company it will be with could go under. If we do lump sum we have about 30 years to let it sit in the market so that could be great for it. Just not sure what to do! What would you do?

WhatIsFrugalAfterAll

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Re: Pension ending - which option should I choose?
« Reply #1 on: April 10, 2015, 11:56:11 AM »
Make sure to also price annuities on the internet.. i.e.  if you can find a company offering you $1700 a month at age 65 for a current payment of 56,060.. you would be better off to take option 1 + buy that annuity on the market compared to option 3.

I would generally do 1 and roll it into a 401k or such. That lets you retire before age 65, or at 65, or at whatever age you want...  Gives you ultimate flexibility.

cautiouspessimist

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Re: Pension ending - which option should I choose?
« Reply #2 on: April 10, 2015, 11:57:41 AM »
Quick thoughts:

1) Taking this and sticking it in the market for 30 years would potentially yield the most.

2) Between now and 65 this would come out to about 43k. By 85 this is around 72k. This just seems terrible.

3) Between ages 65 and 85 this would give you about 380k. That's a goodly amount, but it has an awful lot of variables; inflation, insurance company going out of business, your husband could pass away before then, etc.

Looking at these options, I would personally take the lump sum. I would stick 5500 into a tIRA and put the rest into VTSAX. Obviously you should go with whatever allocation you feel comfortable with, but this would be my recommendation. Option 3 seems like the clear winner.

velocistar237

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Re: Pension ending - which option should I choose?
« Reply #3 on: April 10, 2015, 12:04:05 PM »
Can you just take the lump sum and roll it into a Traditional IRA? You could use it to buy an annuity later if you still want to.

ShoulderThingThatGoesUp

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Re: Pension ending - which option should I choose?
« Reply #4 on: April 10, 2015, 12:07:01 PM »
3 seems highly likely to evaporate.

cautiouspessimist

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Re: Pension ending - which option should I choose?
« Reply #5 on: April 10, 2015, 12:11:19 PM »
Can you just take the lump sum and roll it into a Traditional IRA? You could use it to buy an annuity later if you still want to.

Yes, finding out if you can roll it over is probably the smartest bet. Even if you can't, opening tIRAs for both of you would actually let you stash away even more tax free (I keep forgetting you can do that when there's two of you...).

MDM

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Re: Pension ending - which option should I choose?
« Reply #6 on: April 10, 2015, 12:12:34 PM »
One way to look at this: what investment return would you need on the $56,060 such that in 30 years it would generate $1,581/mo?

In other words, solve [$56,060 * (1 + i/12)^(30*12)] * i/12 = $1,581 for i.

Comes out to 5.86%.   If you think you can do better, take the lump sum.  If you are satisfied with that return, take the age 65 annuity.

Similarly, you could ask what investment return you would need on the $119.79/mo so that in 30 years the interest would be ($1,581 - $119.79 = $1,461.21/mo)?

In other words, solve $119.79 * [(1 + i/12)^(30*12) - 1] / (i/12) * i/12 = $1,461.21 for i.  Comes out to 8.63%.  As you surmised, option 2 seems the worst of the 3.

Risk evaluation (e.g., will the insurance company still exist?  Which spouse will outlive the other?) is a separate but of course related issue.
« Last Edit: April 10, 2015, 09:00:30 PM by MDM »

James

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Re: Pension ending - which option should I choose?
« Reply #7 on: April 10, 2015, 12:17:02 PM »
I had that option as well, to stick with a pension system or take a lump sum. I went with the lump sum, and almost without fail the lump sum is better financially unless you have a better idea of what will happen in the future than the company providing the annuity. They are not going to make a bet they think they will lose money on. Obviously there is the chance that the annuity will provide better returns than the market, but that is a very very small chance. I would go with your odds and take the lump sum. (I did put mine in a rollover IRA which was pretty easy)

There are so many variables that it's really hard to know for sure, MDM had the best math for the answer, and the rest is speculation. Who knows the exact returns of the market, inflation, the strength of that company, your ability to not touch that money, etc, etc. So it's a personal decision, but I believe the mustachian leaning would be toward the lump sum.

curler

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Re: Pension ending - which option should I choose?
« Reply #8 on: April 10, 2015, 12:27:21 PM »
If you do take the lump sum, I imagine you can and/or must put all of it into an IRA, rather than be limited to $5500.

James

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Re: Pension ending - which option should I choose?
« Reply #9 on: April 10, 2015, 12:32:15 PM »

Capsu78

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Re: Pension ending - which option should I choose?
« Reply #10 on: April 10, 2015, 12:41:45 PM »
Contraian here:  I see many companies, including mine in a past life, wanting to get as many people off the pension books as possible.  I declined the lump sum mostly because I like the 3 legged stool concept of SS/pension being "low risk" known quantities, backed up by our retirement  accounts. 
Now, my timeline is much shorter and the lump sum offered wasn't a significant enough percentage of our nest egg to rock our worlds...but between 2 pensions (met my wife at work) and 2 significant SS's, I see an income stream that allows a little more risk taking in the equity based vehicles.

Contraian because I think that maybe the reason companies are wanting to get out from under them is that the actuarial calculations were all based on a shorter lifespan.  If they want me to lump sum badly enough they can always sweeten the pot.
http://www.bizjournals.com/washington/blog/fedbiz_daily/2015/02/if-you-took-a-lump-sum-pension-payout-you-might.html?page=all

As for "insurance company health"  my former employer purchased the annuities from 3 different companies so the risk is spread around. 
« Last Edit: April 10, 2015, 12:50:06 PM by Capsu78 »

frugaldrummer

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Re: Pension ending - which option should I choose?
« Reply #11 on: April 10, 2015, 03:51:17 PM »
Quote
1) Take a lump sum of $56,060
2) Immediate Life Annuity $119.79/month (75% to surviving spouse) starting now
3) Annuity of $1,581/month starting when he turns 65

I would take the lump sum (assuming you can roll it over into an IRA, which I suspect you can).

For the sake of calculations, imagine you invest the $56,000 and use a 4% safe withdrawal rate on it - that would yield $2,240 per year or $186 a month, already higher than #2.    So #2 is a no. 

AS for #1 - when I punch that amount into the financial mentor calculator (http://financialmentor.com/calculator/best-retirement-calculator)  using a life expectancy of 90 years and with the money earning 4% over inflation, I get an estimated withdrawal amount of $2225/mo at age 65 (granted, this will be worth a lot less in 30 years than it is now, but so will the $1581 they are offering you in #3).

Assuming that the $1581/mo pension payout in #3 does not get adjusted upwards with inflation, you are still better off taking the lump sum and investing it yourself.  PLUS you retain the flexibility to access that money earlier in the event of drastic life events, PLUS the amount does not get reduced to 75% if he dies before you.

(Now, if that annuity is worth $1581 in today's dollars and is adjusted for inflation over the next 30 years, that's an entirely different scenarion and one might want to consider the annuity if you can trust the company to still be in business in 30 years.)





zippy

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Re: Pension ending - which option should I choose?
« Reply #12 on: April 10, 2015, 08:41:55 PM »
Thanks for the responses! Yes, he must roll it over into his 401K or IRA. Otherwise there's taxes as well as a penalty taken on it.

Looking through the information they sent I don't see anything about whether the delayed annuity will increase with inflation. I'm going to call on Monday to find that out, since that is clearly a huge thing that I overlooked. They also haven't chosen the insurance company they are handing everything over to yet, so I don't have any info on that. Although, I can't predict the future so I doubt it would help much to know the name of the company.

Thanks for that math, MDM. Looking at the options from that view was really helpful and made a lot of sense to me.

firedup

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Re: Pension ending - which option should I choose?
« Reply #13 on: April 10, 2015, 08:46:16 PM »
I am in the exact situation and have not decided yet myself.

I have had a lot of the same thoughts as others, plus a few more.

Option 3 seems like the most secure in case I invest poorly. The timing gods hate me.

On the flip side, the cash option enables it to be part of my estate where an annuity goes to myself or my spouse, no residual for our estate. And I can take it when I want to, and how I choose to spend it after 59 1/2.

I also tried to think about all the situations that may require either means testing or income testing that may make me wish I had chosen differently. Like if one of us went into a home for a bit (or terminal) we may have to forfeit the cash or not get help till it is gone, but the annuity would keep going as long as one of us is alive and may be a big help to the other going forward.

With the cash you can better control income till you have to worry about RMDs, where the annuity will be an unchangeable constant. Positives and negatives with both.

Good luck deciding.  Thanks for asking the question and to all those who replied. I enjoyed all the insight.