- April 22, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Considering Your Options: Annuity vs. Lump Sum
When it comes to retiring from a company with a defined benefit pension, one of the key decisions you’ll likely face is choosing between receiving an annuity or a lump sum payment. This decision can have significant implications for your financial future, so it’s important to carefully weigh the pros and cons of each option.
### The Benefits of Taking a Lump Sum
Opting for a lump sum payment can give you greater control over your retirement funds. With a lump sum, you have the flexibility to invest the money as you see fit, potentially allowing it to grow over time. This can be especially advantageous if you have a solid investment strategy in place. Additionally, a lump sum payment brings all of the money into your estate, ensuring that it will be available for your heirs in the event of your untimely passing. This added security can provide peace of mind knowing that your loved ones will be taken care of.
### The Advantages of Choosing an Annuity
On the other hand, selecting an annuity removes the uncertainty of market fluctuations, providing a consistent and reliable source of income throughout your retirement. This can be particularly beneficial if you’re concerned about outliving your savings or if you prefer the peace of mind that comes with a guaranteed income stream. An annuity also eliminates the risk of a sudden tax hit, giving you more predictability in your financial planning. Additionally, an annuity can be supplemented with other investments, offering you the flexibility to tailor your income to meet your specific needs.
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I have a defined benefit plan with this option. I modeled my plan with and without the lump sum and was better off at the end (as determined by the actuary and some voodoo) without the lump sum. Of course, this does little for legacy gifts or the prospect of a hot stock market, but I was surprised. At the end, our estate value using pessimistic assumptions was higher without the lump sum. Additionally, with this assumption in place, I chose 100% survivor benefits for my wife – she’ll get my full annuity if I die before her.
Another thing to consider is the timing of the lump sum. If you decide to receive the lump sum during a period of higher interest rates, the lump sum will be lower. Conversely, if interest rates are low, the commuted value of the lump sum goes up. Ideally, a lump sum payout is better during low interest periods. You get all the benefits of self-control and estate planning while receiving a higher payout.
Another consideration is what value of annuity you could purchase with the lump sum in the open market. Sometimes, terms of a purchased annuity can be better for your circumstances and pay a better return. Also, life expectancy comes into play. If you think you will live a long time the lump sum may be preferred, but if your health is failing then lump sum let’s you pass that money you won’t need to your heirs. Basically, I think it’s an individual decision based on your specific circumstances and needs.
I think the right answer is circumstantial. Are you 68 and light on savings and want to make sure you have monthly income? Or are you 59 1/2, in a good position, and would rather control the investments for the next 20-30 years?
For the reasons you laid out, I would take the lump sum as a roll over into another retirement vehicle.
Totally depends on your vibe with money—do you wanna be the boss of your cash pile, taking that lump sum and investing or splurging as you see fit? Or would you rather chill knowing you’ve got a steady stream of bucks coming in every month without sweating the stock market? Both have perks, depends on your financial goals and risk appetite.
Find out what the lump sum is and calculate the break even point if you take the payments, that will help you make the decision. For me it was three and a half years so taking the pension was a no-brainer since I should live 15-20 years past the break even point. It’s nice to have some guaranteed return in the portfolio too!
I don’t know the right answer but I’ll tell you two stories. I have a friend who was in the same situation. She had a decent portfolio, around $1 million, aside from her defined benefit pension with a lump sum option. We crunched the numbers and I advised her to take the pension as an annuity. No spouse to consider so she got 100%. Having the guaranteed income along with her portfolio was a good combination. I don’t know how she’s fared with the current inflation though.
My Dad was also in this situation. We discussed his pension options at length before he retired. He was worried that he would die and Mom wouldn’t have enough to live on. His pension as an annuity was ok at no survivor’s benefit but not so hot at 100% survivor’s benefit. He had a modest portfolio, about $400k, and a paid off house. He elected to take the lump sum because he was good with money and it would be there for Mom. Then he outlived her by 10 years and pretty much lived on his social security.
So, unless you have a crystal ball you can’t know the right answer. I think it lies in looking at your family genes. The longer you expect to live, the more valuable that lump sum is.
Not sure why you are so concerned about estate taxes. You are millions away from just one of your life time exemption (you and your spouse).
Do you ever have to be worried about the company or pension fund going defunct if you choose the annuity?
Personally, I’d take the lump sum and maybe roll it into a ROTH. No need to worry about IRMA, social security tax or minimum distributions.
It all depends on your total assets.
I would just use a calculator and see if it makes sense. This ain’t rocket science. If you are smart enough to be here reading and learning, you already know how to find the answer.
Same theory with investing lump-sum or DCA. It’s basic math.