I'm a US citizen with retirement coming in the next few months and I need some advice on whether to take my pension as a lump sum or an annuitized payment. The people I?d typically ask for advice all have a vested interest in one choice or the other, so I?d like to get the collected wisdom of the net.
The annuity on my life alone is ~$70k/yr, on my and my spouse with 50% survivorship is ~$64K, and $58K with 100% survivorship. With interest rates so low, the lump sum has risen to ~$950K. Our investments are worth ~$2.5 million with just over half in retirement accounts. We?re in our mid and late 50?s, my company provides health care for retirees and we have no debts save for a manageable mortgage.
Three years ago I would have taken the lump sum without a second thought. In today?s environment, though, I have no idea what I?d do with the money. I?m mindful of what happened to tech stocks which have been flat since the bubble burst a decade ago, and financial articles run the gamut from predictions of a 14,000 point Dow next year to double dip recession with serious deflation. What are some factors and options we should be looking at?
What annuity rate do they provide? At such a young age- 50s- the interest rate is likely not much higher than the 30-year bond.
Some advisers recommend annuitizing just enough for basic living expenses and invest the rest. And no more than a third of your total retirement capital should be annuitized. Plus consider social security to be part of this annuity limit.
Thanks and answers to both posters. The lump sum is given as an IRA so there is no immediate tax consequence. It is calculated "backwards" in that the key figure of the single life annuity is calculated as a percentage of my highest three years' salary. When I take the lump sum value to an annuity company (e.g., Met Life) their single life payout is less than I get from my employer.
I would take the lump sum and move 10% of the sum and your regular IRA account into a Roth every year paying the taxes and living expenses out of your non-retirement savings.
call one of those professionals with a vested interest in the question and find out what kind of income 0,000 will buy today. If it's significantly different from what your pension offers that tells you something about the value of the pension. Also, you might be interested in other options for the income stream than what your pension offers (e.g. a period-certain).
taxes are something to look at. That life option would give you a base income of k, all ordinary income, plus whatever comes from the taxable part of your .5M and any other sources. You might ballpark out your tax return with these expected income sources and see if it tells you anything interesting. Such as:
are Roth conversions in your future? You said 50's, and .5M in other funds, of which half is retirement accounts - likely most/all pre-tax, yes? Think of the value of these retirement+pension assets as .25M + 0k lump - some unknown tax liability. Can you minimize this last figure? There could be scenarios for keeping taxable income low, living off the other .25M, and gradually converting the pretax money to never-taxed money at low/no tax cost (via partial Roth conversions over many years). This could end up paying off if tax rates rise in the future; after 70 1/2, if you took the lump, it sounds like you'd have quite a bit in retirement assets and your minimum required distributions could put you into a high bracket.
who gets the money, eventually? that could factor in, e.g. through things aimed at minimizing that tax figure.
what is the value of a known $x/year...to you? Not just the $ value.
is protection from creditors an issue that concerns you and if so how does your state treat a pension vs. other assets?
you can plug in some numbers and get an idea of what YOU can buy if you took the lump sum and bought the annuity yourself, privately. This should help you get an idea of what your options are. I will offer a bit of perspective though -
Option 1 - buy a joint and survivor annuity. This gets you less money now but it last as long as either of you live. However when your both dead the payments stop. So if you die early on the annuity company wins.
Option 2 - buy a single life annuity. This gets you the most money now, but payments stop when you die. Using $950K this could get you $16K a month or $192K a year. The max company option pays you $70K a year so you COULD use the excess ($192 - $70 = $122K) to fund a HUGH life insurance policy on BOTH of you so that when either of you die the other collects a lump sum outside of probate and exclusive of taxes (assuming you do it right). A term policy rated at Table 3 (some health conditions) for $2,000,000 would cost about $60K a year EACH. So you get the max income now ($70K) and still get $2 MILLION when one of you dies and still leave $2 MILLION to a beneficiary.
Option 3 - buy a single life annuity with a period certain option. This gets you decent money now and it guarantees payments for a minimum number of years. Using your $950K, and assuming you live in MD (because that's where I am and you didn't say where you are), you could $5130 a month for the rest of YOUR life or for 25 years, whichever is longer. For the 25 year period your payments would total $1,539,000 - just a hair over 4% for the rate of return. This gets you about the same as your business option - 5130x12 $61K - with payments for the rest of your life or 25 years, whichever is longer. Using the period certain as an add on cuts the payment amount BUT helps make sure the annuity company pays something to someone even if you both die early - this can be a good way to make sure all your money comes back from the annuity to your heirs, or your favorite charity or wherever.
I am not suggesting that an annuity is the best option for you. But if your being offered an annuity option from work this should help you compare what you can do on your own in the private market.
That sounds more like a 5-year period certain annuity, not a single life annuity. There's no way an insurance company can pay out $192k/year for life to someone in their mid-50's, in exchange for a $950k lump sum.
I was in a similar situation some years back, and I left the money with my employer. It turned out that the income stream over the years was considerably better that what it would have been with an insurance company. Besides, these days I would worry about the stability of private insurance companies. A few years back nobody thought banks would get into big trouble, and who knows what is next to come. With $950K involved, I would be searching for some way to spread a lot of it around into different investment products if at all possible.
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