I have a one time opportunity to select between a pension lump sum payment to me that can be rolled over, and several different types of lifetime annuities. If I roll over the lump sum it will not be taxed now. If I select an annuity it will be taxed as income each month it is paid. The annuity will not adjust for inflation. Does anyone here have thoughts to share on the pluses and minuses of either selection: lump sum to be rolled over, or monthly lifetime annuity? We've gone over the numbers and discussed this here at home. But I'd like to hear what other people think as well.
Personally I'd take the lump sum payment. Mostly to get the money into my own greedy little hands, under my control. If you opt for an annuity, then the money is under someone else's control. Plus, you're dependent upon that company staying solvent. It would suck if it went bankrupt and you are left with pennies on the dollar just when you need it most.JLC
I am in a similar position and have decided to take the lump sum option. I trust myself to look after my future much more than my soon to be former employer.
If it's a pension buyout most I've seen offer the option of a rollover to an IRA.That would be my first choice.Taking the lump sum is almost always a bad idea because of the immediate tax hit.I cannot recollect this if any client ever chose a lump sum.Most clients choose rollovers if that option is available but it some cases the annuity made sense.b
If it's a pension buyout most I've seen offer the option of a rollover to an IRA.That would be my first choice.Taking the lump sum is almost always a bad idea because of the immediate tax hit.I cannot recollect this if any client ever chose a lump sum.Most clients choose rollovers if that option is available but it some cases the annuity made sense.Did you read the OP? He/she said lump sum to be rolled over.PSU
Misread the OP. It was confusing.It's not unusual for pensions to offer lump sum distribution, rollover to an IRA or annuity payments.A lump sum distribution is always taxable unless rolled over into an IRA.http://www.irs.gov/taxtopics/tc412.html
What we think is not as relevant as the numbers you found from doing the math.Our opinions have no validity outside of such details. For example:Your ageThe age of any spouseOther sources of income (guaranteed or otherwise)Current health of you and your spouseLife expectancy of you and your spouseThe monthly payment you will receiveThe payment optionsOther life insuranceYour ability to invest the money and the assumed rate of return on suchAll of the above could have a major impact on whether to take one option or another.Some light reading and a simple calc to help you with this. Generally, I find that people are better off taking the lump sum but I have also seen many a public pension where the lump sum is significanly less that what a person would receive in discounted paymentshttp://www.bankrate.com/finance/retirement/what-to-consider-...https://www.calcxml.com/calculators/lump-sum-or-payments
Rolling stuff over to an IRA gives you the chance to invest tax-free for years. That, in itself, is a significant advantage, unless you make stupid choices for your investments.
Hi Folks,Thank you for your thoughts. Personally, my first impulse was to take the lump sum and roll it over into my IRA. Then the money will be under my control, and dependent on my investment choices. However the lump sum offer is only 85% of the current total of my pension. The issue with a single life annuity is that once I die, the payments stop. But the payments are "guaranteed", in theory, until then. Assuming we invest the payment (minus taxes) each month, we may be able to invest 100% of the pension over the years. Or even more than 100% if I'm feeling healthy. This may be a great way to invest slowly over time.Playing with excel tables, and I don't know if this is a coincidence or not, it seems like the two choices even out if I live out my life expectancy, invest the lump sum or annuity payments, and assume a 7% return on those investments for the same period. If I assume a 10% return, the lump sum choice seems better. If I assume a 4% return, the annuity seems better.Of course this all assumes we don't need the money for 30 years, and there's no way to predict that. Thanks again, we appreciate all the help we can get making this decision.bxm
Hi Hawkin,Thank you for the calculator link. That will be very helpful as we run through scenarios! bxm
The issue with a single life annuity is that once I die, the payments stop.Is that your only option? You mentioned other options so you might have the choice of Period Certain that will ensure any remaining payments are paid to your estate or a beneficiary.Playing with excel tables, and I don't know if this is a coincidence or not, it seems like the two choices even out if I live out my life expectancy, invest the lump sum or annuity payments, and assume a 7% return on those investments for the same period. If I assume a 10% return, the lump sum choice seems better. If I assume a 4% return, the annuity seems better.I take it you don't either need or want the income? Have you considered the fact that if you rollover the lump sum, that you would still have to take required distributions starting at age 70 1/2 of 3.5% and increasing every year? Those distributions (when taxes are considered) make it difficult to do a normal excel calculation - and I am not immediately aware of a calculator that will easily consider a comparison of the two with RMD added in. There is probably one out there if you search hard enough.
When faced with a similar choice a few years ago I chose the lump sum rolled over into an IRA and have not been sorry. This gives you choices of what to do with the money and may provide an opportunity to convert part of it to a Roth IRA at some time in the future.However the lump sum offer is only 85% of the current total of my pension. This provision bothers me a bit, but, I am wondering how it is calculated. This is 85% of what?One way of getting a first order of magnitude of the annuity is to calculate what its payments are as a percentage of the lump sum amount. Although this is definitely not a bond it expresses its income stream as if it were a bond. It's not a bond because if you die it completely goes away.Bob
This provision bothers me a bit, but, I am wondering how it is calculated. This is 85% of what?It is probable that the company is offering to buy out their pension at a current value of 85% of the future projected balance/value.
I agree with Hawkwin that the first thing to do is the math.A simple NPV of the income stream at various rates and periods should give insight into what the lump sum represents.i.e. 20 years at 8%, 25 years at 9% etc.That would tell you what sort of results you have to achieve in your investments to accomplish the same goal. If this is a defined-benefit pension that the company is attempting to buy out, I'm pretty sure that there were some pretty bold assumptions about returns when it originated - nothing like current interest rates. It seems unlikely that they will be offering a lump sum equivalent to 20 years at 1%... Would this pension (if taken as monthly payments) be protected by the PBGC in the event that the company pension fails?I imagine the pension itself offers different payments depending on the same choices as the annuities (i.e. spousal coverage, period certain etc.) and those are ones that everyone has to make for themselves. They are pretty much shaped by health and life expectancy of the individuals. And your personal preferences regarding future risks of accidents.Also, don't let the tax situation influence anything but short-term (year to year) decisions. This year vs. next year is a valid tax consideration. This year vs. 5 - 10 years from now - tax environment will be much different. And you will pay taxes eventually.Personally, I intend to take the payments when I become eligible next year.Regards,Les
For what it's worth I chose a lump sum payment about 11 years ago and haven't looked back. Our reasons at the time were:- Concerns about the company folding (large corporation so this was not a big concern plus PBGC).- Payments remained the same (not subject to COL).- Lump sum monies are yours and eventually your families versus annuities which can stop at your death (poor wife left with reduced payment or no payment).The lump sum resides in an IRA and is actually greater in value than when it was rolled over.Good luck with your decision.Regards,ImAGolfer (retired '03)
Are you by any chance an IBM employee? If so, you may want to go to the ibmpension board on Yahoo where many others have asked similar questions.BlueGrits
From the context of your note, it sounds as if you're leaving before what would be your "normal" retirement age (65 or over, depending on your birth date) and your company allows you to start some/all of your retirement early or just wait until "normal" retirement. I don't think you realize it, but what you've asked is a very complex and personal question which requires quite a bit of information. Having gone through the very same situation, I very strongly suggest you consult a "for fee" financial planner as there are a number of factors which come into play and you are making a really, really important decision which will affect the rest of your life. You will find that questions about your life and trust in the company to deliver on its obligations will influence your decision just as much - if not more - than the actual numbers.What I did in your shoes was this:1) Figured out what the discount rate was (they wouldn't say).2) Figured out how much each early retirement option actually hosed me.3) Sat down with DW and went through all the options.We wound up taking part of the money as an immediate annuity and the remainder as a lump sum which was rolled over into a retirement account. We also picked the option for recursion (if DW dies before me, I can go back to a single-life amount which is higher) and survivorship (the pension keeps going to her after I die).I can talk with you some more about this; PM me if you want to.BlueGrits
We wound up taking part of the money as an immediate annuity and the remainder as a lump sum which was rolled over into a retirement account. We also picked the option for recursion (if DW dies before me, I can go back to a single-life amount which is higher) and survivorship (the pension keeps going to her after I die).And this is an often overlooked feature - and an often excluded feature.I have found that in many cases, where the retiree is still relatively healthy, it can make more sense to take a life only with no survivor benefit and buy a 20-30 yr term policy so that if the retiree dies, the other spouse is provided a lump sum to replace the lost income.Many times, the term life policy is cheaper than the difference between the life only amount and the survivor option amount. This solution allows the retiree to cancel their term policy if their spouse dies first instead - effectively creating a recursion option outside of the pension if such an option is not provided (which in my experience it is a rare option).
Hawkin is right -- we looked at the term life policy for me as well, but to make a long story short it wasn't necessary for our situation given the savings we'd already accumulated and DW's job (and ability to get future jobs). What we *did* do was take out a ten-year term policy on her life ($250K, cost about $270/yr) as she became the primary breadwinner.Some people will tell you "Oh, but if you can get the money right away, you can invest it and it'll grow." That's true -- but if they've already discounted your lump sum at a rate of 10%/yr you'll have to earn that rate just to get back to what the company would have originally given you at full retirement. Some folks are confident in being able to do that, but others aren't.Make your decision carefully because, as I said before, it is truly a major life decision. Keep in mind your current and future needs for income (before and after retirement), trust in the company to make good on its promises, how good your investment skills are, etc. Good luck!
Dear bxm4fr,These are my thoughts that I considered a year ago.Lump SumPro-you have control of your lump sum moneyPro-it can grow very well (depending on your investment capabilities)Pro-no one can take it from you or reduce the amount once you have itPro-when you and your spouse pass, your children could inherit the remainderPro-taxed only when you withdraw itCon-you could waste it away (depending on your investment capabilities and spending habits)AnnuityPro-steady income for as long as you/spouse live (great if you live till 90!)Pro-less worry because it is a steady income (don’t have to worry about what the market will do)Con-when you pass, your children won’t get anything directly from the annuityCon-taxed with each paymentCon-could annuity provider change or modify the payout at a later date? (not likely I think)other recommendations:Best advice I ever got - make sure mortgage and other bills are paid off before you retire.Get advice from a Financial Adviser
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