Lump sum or Annuity
L1: Lump sum or AnnuityLeft ATT in latest downsizing with 36 years 3 months servicewill be 54 in Oct. Lump sum offer is 440,000 or a 27,000 a year annuity without survivor benifits and not indexed to inflation. My 401k is 500,000 Trad IRA of 150,000 Roth of 41,000. I did recieve 52,000 severence pay. Will wait till next year to start 72t have read site for years and would appreciate your insight. Thankyou so much for your web site have followed it for years and now I always thought I would take the lump sum and now the decision is here.2010-08-01 15:12, By: RS, IP: [188.8.131.52]
L2: Lump sum or AnnuityTricky question and one that you will want to weigh carefully. It is more than just that you will be getting 27k on $440k. You also need to consider and longevity and health of you and your spouse. When we retired both of us were covered by Defined Benefit plans that had no cash option. We took her pension as life only – her parents are in good health at ages 88-90 and her grandparents lived to almost the same age. On the other hand, we took my pension as a Joint and 100% to Survivor – the longevity isn’t even close on my side. Cash or pension…
First question is how well is the plan funded? Defined Benefit plans now distribute reports where they stand in terms of funding on an annual basis. Is it 85%-90% or better?
Where are the underlying assets invested and are you comfortable with the underlying investments?
$27k on $440k is something less than 5.5% and if you die (life only) the day after retirement you lose all. If you die the day after retirement, what are your survivors needs?
Do you plan on doing any part time work?
Do you need the $27k now or can your reinvest and use later?
Most important, take your time making the decision.2010-08-01 20:40, By: Gfw, IP: [184.108.40.206]
L3: Lump sum or AnnuityAs Gfw indicated, your question has many facets and each decision opens up another large branch on the decision tree. Many other decisions will be dictated by what you decide on the lump sum vrs life annuity decision.The longer that you expect to live in excess of your life expectancy of around 24 years, the better the annuity becomes in relation to the lump sum. While you can always take the lump sum now, roll it over to an IRA and buy an IRA annuity in the future, the interest rates will probably have to rise quite a bit for the annual annuity to pay out more than the 27k because adverse selection in individual annuity tables vrs those used in DB plans wipes out some of the increase you would expect when rates rise. If the ATT plan is the annuity payer, your benefit is fully covered by the PBGC under current rules, whereas if the plan purchases an annuity from an insurance company, there is no PBGC coverage and your annuity is protected only by the credit quality of the company. Some large companies like Hartford had to take bailout money in 2008 and AIG still owes billions.If your 401k holds highly appreciated employer stock including ATT spinoffs, NUA tax treatment on shares you might sell over the next 5 years along with the 27k might be enough for you to avoid a 72t plan or to substantially reduce the amount you need from a 72t plan. Check that out since your tenure pre dates the baby bell spinoffs.Was your severance paid in a lump sum or a roll out? That will affect taxable income in 2010. Companies used to pay these in rollouts if they cut you just before age 55 to get you to 55 where your vested pension was higher. You missed reaching 54 by only a few months. How much is health insurance going to cost you pre Medicare, and will it even be available? Obamacare includes a reinsurance facility for age 55-64 retirees, but there are other aspects of the plan that might endanger retiree health benefits, so these costs are very difficult to estimate at this time.Hopefully, the 440k was calculated correctly. It should recognize the value of any survivor benefit if you are married, even if your spouse waives it if you elected the annuity. While current low interest rates have boosted your lump sum, some of that advantage is lost by changes that now require use of corporate bond rates rather than treasuries. Those rates are higher and therefore diminish the lump sum amount. How long to you have to make a decision? A delay may give you time to consider whether you will seek work again, and what it might pay. The days of piling up 36 years with one employer are rapidly disappearing, as are DB pensions, so you have been both wise and fortunate to have stuck it out that long. This also satisfies your max number of SS years, which is 35. You will take a 25% hit if you start SS benefits at 62.Almost all financial planners will push you to take the lump sum so they can manage the money, and this is often the best decision anyway. But be awareof their vested interest in your decision. When considering your total retirement income, remember that SS is nothing more than an annuity with a COLA, but with threats to how that COLA will be calculated in the future. Take your time in determining your decisions, because most of these cannot be reversed. 2010-08-02 00:17, By: Alan S., IP: [220.127.116.11]
L4: Lump sum or AnnuityIn all situations like yours, I would usually recommend seriously considering taking the 100% option, and buying a 20 or 25-year term-certain life insurance policy, assuming you are insurable, for $ 500,000. That way you will get the most while you are alive, and provide $ to pay the life insurance premiums, and your surviving spouse and heirs will be guaranteed $ 500,000 even if you die the day after retiring. I have not seen many, if any, situations that there were better results and safety than this approach. ( I don’t sell any products.) Another approach often offered is a 10-year certain payout, but the 100% + lifew insurance usually comes out better there too.2010-08-02 00:42, By: dlzallestaxes, IP: [18.104.22.168]
L5: Lump sum or AnnuityI was in the same situation as an ATT retiree a few years back. Like nearly everyone i was talked into taking the lump sum. Big mistake. Most all of us now if we had a redo would have taken the annuity. Take the annuity and draw a sepp on the rest of your money. This is the best advice you are going to get. Forget life insurance. Your only going to get a 20 year term and what happens when you die after that? this is a great site for setting up a 72t but the financial advice here is not always practical. Life seldom works out as we plan. Protect at least part of your future and take the annuity. ATT is not going anywhere and you always have the PBGC as a back up. There is no backup when equity and fixed income markets tank. Good luck- John2010-08-07 05:02, By: john, IP: [22.214.171.124]
L6: Lump sum or AnnuityIt depends on the type of annuity. Some will pay you for life, but may end upon death. Some are “term certain”, say for 10 years, but stop if you die after that.
You stated that the ATT annuity was $ 27,000/year with NO SURVIVOR BENEFITS. That is why I recommended that you get a 20-year term policy in case you die before then. As the previous response indicated, not all advice on this list-serve is asgood as others. It is important that you consider facts and circumstances. Apparently he missed the fact that your annuity from ATT would end with your death. Possibly he would reconsider his answer if he re-reads your original posting.
Those annuities that pay for life are usually paying less than those that are for specific periods.
Check carefully as to the provisions of any annuity, especially to see if you are able to take extra money, and if there is any penalty, or what the penalty is if you terminate the annuity before 10 years, which is the traditional restriction. Often these penalties for “early withdrawals” are steep. Some annuities allow you to take up to 10% out per year.
Do not get confused. If an annuity is an investment in a SEPP 72-T, that merely determines the cash flow from the annuityTO the SEPP 72-T. That is a separate figure from the amount of your annual distribution FROM your SEPP 72-T.2010-08-07 14:08, By: dlzallestaxes, IP: [126.96.36.199]
L7: Lump sum or AnnuityThe normal form of payout from most Defined Benefit plans is life only with reduced benefits for other annuity options.
I’m also not in favor of using a 20 year term policy because of the ultimate rates that will become effective in year 21 – typically are priced so thatyou ultimately drop the policy.I can say that after spending 35+ years in the insurance industry in bothsalesand product development. And, I have even developed software to illustrate the concept.
If you do consider the insurance option, merely look at the difference in monthly benefits between the life only annuity and a Joint & 100% (which if you are married, the plan must offer) – that’s about the maximum that you want to spend on the insurance. And, in 20 years you will only be 74 -at age 54 you have a life expectancy of about 29.5 years ad if you make it to age 74, your remaining life expectancy is still 13.2 years.
BTW…depending on the plan, the cost of the reduction from life only to Joint & 100%is typically in the range of 15% to 20% of teh life only benefit. 2010-08-07 16:18, By: Gfw, IP: [188.8.131.52]
L8: Lump sum or AnnuityHe did not indicate that he had any option other than 100% for life with no survivor benefits. If he does, then they all have to be evaluated as to their financial impact.
Also, what is the IRR ( Internal Rate of Return) that the annuity will be earning ?2010-08-07 17:41, By: dlzallestaxes, IP: [184.108.40.206]
L6: Lump or annuityWas just looking for insight on single life vs lump 440,000 or 27,216 a year. All options are 50% with POP = 2,041 surv=1,020 75% 1,927 surv = 1,445 100% 1,814 surv 1,814 . My 401K is 500,000 Trad IRA of 151,000 Roth of 41,000. My wife is 59 cancer survivor still working no pension 401K 160,000 Trad IRA 20,000 Roth 50,000. She may work 3 more years and we have no debt no mortgage. We have 300,000 in cash and another 70,000 in mutual funds. Our health benifits are covered and good till my death. Have one 27 year old son mech. engineer on his own making us proud. I left out the severance pay of 51,000 or so,2010-08-08 18:06, By: RS , IP: [220.127.116.11]
L7: Lump or annuityI moved you post back under your original post.
You may have enough assets in addition to the pension plan to merely take the cash and not worry about the annuity.
However, you also have enough assets thatindicate that you should probably talk to a financial planner rather than seekanswers on a discussion forum.2010-08-08 19:48, By: Gfw, IP: [18.104.22.168]