Dear financial gurus,
If one were faced with the choice of taking a regular single life
annuity pension payout or a lump sum amount what is the proper way to
Here are the numbers (dollar amounts not real, but same ratios)
Single life annuity: $12,000/year
Lump sum amount: $170,000
The SLA has a 3%/year compounded built-in increase.
Ages: late 50's
I lean towards the SLA as it begins at 7% of the lump sum amount and it
will increase over time. The lump sum is approximately 20% of current
net worth, but there are no kids so no inheritance issues.
Thanks for any input.
I believe the standard starting point is to get the PV of the payout
stream over estimated lifetime. I haven't done the math to account for
the increases you mention. Use an estimated rate of return on your
alternate investments for the PV calc.
As I understand annuities, these are hybrid investment funds. The
funds collected are maintained in an investment portfolio, expenses
are deducted, and the balance is distributed per policy. Actuarial
tables are part of it. Some annuities have an insurance policy feature
to raise the probability of continued payouts worked into the expenses
(and the insurer is also backed by investments). In basic form, you're
comparing estimated rates of return over your lifetime..With 20%, it
sounds - offhand - like a solid diversification relatively worry-free,
but the rate of return is the number to look at.
Those of us who rely on number crunching to make choices have to be
For example, you didn't say how long you would live or what major
expenses were in your future - children/family problems, your
out-of-pocket medical and long-term care, and so forth. We need those
numbers to avoid looking foolish in 20 years.
Seriously, we don't know what your future is. What we do know is that
by retirement most of us are pretty adept at living on a monthly
paycheck and budgeting accordingly. That's what has gotten you to
this point, and my experience tells me that is what will get you to
the finish line.
Semi-hypothetically, my vote is for the monthly check.
I see a man, age 59 can get
$11,520/yr from the $170K. But fixed, no inflation/ 3%.
So, your offer exceeds the number I'd call "break even." Of course, the
hypothetical one has data the insurance company issuing the Annuity
doesn't - their own potential longevity compared to averages. This
shouldn't be ignored.
"HW \"Skip\" Weldon" writes:
Nevertheless, the numbers are a good starting point.
As JoeTaxpayer noted, the annuity that was offered was quite
attractive compared to the current market alternatives (since
it includes the inflation adjust - that's very valuable!).
Comparing on a straight PV basis - it's easy to take the
numbers Dean's given us and generate a series of cashflows
($12,000 this year, $12,360 next year, etc ) and then pop
that series of cash payments into a financial calculator
to come up with a rate of return which could be compared
to other instruments, the thing that's impossible to value
easily against most other instruments (ie. a ladder of
bonds or something) is life expectancy. You might well
be able to get a higher rate of return over a fixed
period compared to the annuity - but here's the big
difference - you won't outlive that annuity. That's *huge*.
The downside, of course, is that if you die a year after
you start, your heirs get nothing, but you need to decide
how important it is to have a chance, if you die early,
of leaving a financial legacy. Or if you have other financial
resources which you'll pass on so this won't be as important.
Yeah - nobody ever tells me exactly how long they are going to live...
Without knowing much about the OP's situation, I'm inclinced
to agree with wise and experienced Skip here. But before making
a strong recommendation, I'd want to know a *lot* more about
the OP's situation. What other resourses does he have, what's
his cost of living, is he collecting SS, does he provide support
for anyone else (who may need ongoing support after his death),
That all said, the annuity looks like a pretty decent deal.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
You didn't mention...was yours a job where you didn't earn Social
Security benefits? Meaning, is this pension in addition to Social
Security, or in place of it? Does your spouse qualify for Social Security?
And is this pension enough to live on each year? (you said these were
representative amounts, not the actual ones)
It seems to me the chance of investing the lump sum to earn more than
7% year after year is rather small. I am inclined to say that it is
extremely small. And at your age it is quite possible that you have
many, many years ahead. If it were me and the other 80% of net worth
were in something stable, like a paid-for home, for example, I would
take the SLA in an instant.
Thats only true of some annuities, such as the "Single Life Income
with No Payments to Beneficiaries". You can get other types, such as
"Single Life Income with Installment Refund Paid to Beneficiaries"
which returns the remaining funds to your heirs/beneficiaries.
Many such types of annuities are described at
We're planning on living forever. ;-} Though I doubt that will happen.
:-( We're in good health. Realistically we should expect 30-some years.
No kids, no debts. Good net worth. I'll have a pension and SS, she'll
have the pension, but no SS. I understand she gets no SS (not even
spousal benefits) as she is a state of Illinois employee and has not
paid into the SS fund.
She has this choice to make between a lump sum and a monthly check.
Thanks for the feedback. I stated "annuity", but it is just a regular
pension payout. Isn't the proper term an "annuity" for a monthly payout?
SWMBO works for the State of Illinois so who knows what is backing the
retirement pension fund these days. :-( She can take the pension as a
monthly stream or the lump sum payment. Given the state of the State, I
have to wonder if the lump sum isn't the better bet. The annual payout
would be 7% of the lump sum (along with the 3% compounded annual
increase) which sounds pretty good.
Thanks for all of the analysis. I'll have to chew on it a bit to fully
grasp it. I'm an engineer, not a financial wizard.
I've stated else-thread, no kids, no debts, good health, late 50's. The
lump sum is around 20% of current net worth. I'll have a pension now,
plus SS in 7+ years. SWMBO works for the State of Ill, so she has this
pension (or the lump sum). The 2 pensions combined would cover our
reasonable projected expenses in the near term (5-10 years?).
I see a man, age 59 can get
$11,520/yr from the $170K. But fixed, no inflation/ 3%.
Note - now that you've disclosed you have a semi-hypothetical SWMBO I
can fine-tune the analysis. You see, women live loner and therefore, the
(immediate) annuity for women pays out less. The number drops to
$10,884. 6.4%, no inflation increase.
If you have any thoughts or questions as to the nature of the lump sum
vs annuity choice, or why the immediate annuity is the product I choose
to compare it to, just ask. The 6-7% we are discussing gives up
principal completely, so it's not to be compared to the 'interest' you
get on CDs for example. Think of it as your principal being returned a
bit each year.
I found the same love of numbers that prompted me to get a BSEE came in
handy when analyzing money questions, time value of money, etc.
I read the whole thread, and may have missed - is there an option for
survivor benefit? The annuity site gives quotes for this, and your
wife's plan may allow a lower payout should she predecease you. This
should be considered even if you quickly dismiss it.
One of the main objections to this type of payout is the lack of money
to leave heirs. 'No kids' is good to know.
Joe, Similarly I earned a BSME years ago. Though I never took any
finance or accounting classes in school. At one time I could have
derived the equations for structural finite element analysis--alas no
more. All this present value, future value, time value of money, etc.
is challenging, but certainly not impossible. Over the weekend I did
some reading up on information found in Wikipedia (and MS Excel).
Hopefully the info there is correct. I am coming to understand the
concepts. Now I need to get a feel for what the numbers mean and
reasonable values to use as input.
I too have an affinity for numbers and analysis and all that and
certainly understand things like compound interest. The present value
analysis is a new concept--we have real financial people to do that
stuff at work.
Both of our pensions do offer survivor options, and that is another
decision that needs to be made soon. I just figured it was too much for
Thanks all for your responses!