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1. Determine if the lump sum can be deposited to an IRA. If it can that is the route you should take.
No. Not without more information on the actual sum involved.
Quote:
Originally Posted by Nell Plotts
2. Keep in mind that the annuity may not have a cost of living adjustment. Inflation will erode its purchasing power, providing a survivor benefit will reduce its payout. If you are still interested in an annuity take a look at those offered through Vanguard for comparison. Annuities are not recommend in an IRA.
Assuming $500k, OP will not receive more than $2,368/mo. on an annuity without a COLA. With a COLA, OP will receive considerably less. His JPMorgan annuity pays, at the very least, $2,916 for life. Should it have a COLA - then - wowsers - that's pretty tough to beat.
Quote:
Originally Posted by Nell Plotts
3. While you are on the Vanguard site look at the following mutual funds: Wellesley Income, Vanguard Dividend Appreciation, S&P 500 Index. The first is a balanced fund, the other two stock funds that have a lot of dividend payers. When interest rates go up, as they will some day, bond values will decrease. Balanced funds such as Wellesley will go down in value but that fund has a reputation for fantastic management, even through the Great Depression. The duration of their bonds is relatively short.
Both are good funds. He can use those for his other monies ($500k++) when he sells his house and rolls over his 401k, not the cash from the annuity. He should keep the annuity.
Also, their returns are NOT consistent on an annual basis. If OP wants a steady income stream, preserving as much principal as possible, he needs to be prepared not to drawdown on those funds in a bad year.
It also depends on how much investment management he wants to be bothered with in retirement and his level of expertise. (see mathjak's posts on buckets)
Also, I doubt JPMorgan will be using a 4% return when calculating the lump sum. More likely, it will use an overall investment average of at least 6-7%, or higher, which puts the payout around $406,000-$444,000 - assuming a 24 yr life expectancy.
We don't know his final figure on that payout. If it is considerably over $500k, then maybe he needs to look at it again.
Last edited by Ariadne22; 07-07-2013 at 03:54 PM..
Ok -- another question regarding lump sum severance. I know that the tax hit on that will be huge. Any ideas on what would be left of the 150k after uncle sam takes their share? I'm thinking that maybe they would take something around 40% -- ? Thoughts?
You should go to the IRS web site and do the calculation yourself instead of relying on internet folks. this is way too big of a decision. Someone could easily assume wrong and give you incorrect info by mistake. This could cause you to make a wrong decision. This is a huge decision for you. IMO, 40% is way too high.
You need to learn if FICA tax (7.5%) will NOT be due for the severance package. This will likely save you 7.5%. Then you need to estimate what your typical deductions are for a given year (number of dependents, deductions for mortgage, taxes, etc). Figure this in your calculation(deduct from your expected income for that year) . Plug all these numbers into a calculation to see what your total tax due would be ...using the tax charts on the IRS web site (form/instructions/tax chart for Form 1040 -2012) .
2013 irs tax forms aren't ready, so use 2012 for your estimate) . Then figure out what your NJ income taxes would be and calculate for that also. Just look at last years tax resturns to get the deductions you used. They usually don't change a lot year after year unless college or adding/removing dependants or getting a different home.
Like I said on another thread, my employer is currently fighting IRS on FICA on severance. They paid it when they let me go in 2009 and now want it back.
... OP doesn't have that much available cash. Tax consequences for him are important. At this stage of the game, money lost to taxes counts.
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It appears that a prior poster gave incorrect taxes due.
If someone says taxes due would be $60k but they really are $40k, then this is very important. Yes tax consequences are big....but the OP needs to know the REAL tax consequences, not someone's blunder.
A bigger issue is to make an incorrect decision about choosing/not choosing to take a severance package because someone in the internet estimates your taxes due incorrectly and assumed you would have owed a lot more taxes than what are really due. And you chose not to take the severence package BECAUSE you assumed the taxes would be a lot higher than they really are. This is huge.
We want OP to make the proper decision using correct tax estimates, not incorrect tax estimates.
Either the lump sum is qualified to roll into an IRA or it is not, it doesn't have anything to do with the amount.
If the lump sum isn't qualified to roll into an IRA the OP should fully fund his IRA that year out of the proceeds.
Frankly I wouldn't choose the annuity. I would rather invest it in one of the funds I mentioned. Heck, if he wants steady income he could simply buy stock in Realty Income Corp (O) and receive a monthly dividend that approx. 5% annually. In all honesty I don't recommend putting all your $ in one stock which is why I suggested the mutual funds.
Many companies now require individuals that take the lump sum rather than the annuity to sign a document that they know the risk. In the past some individuals blew the lump sum and came back to the company to be saved. When they were told no they sued. Now companies have them sign that they are aware of the risk.
You should have zero debt at age 60. An annuity is costly. Take the lump sum. Eliminate debt. Put the remainder in a conservative managed fund. Hope for 5%. Pull 4% annually when you need but pull in small divided amounts, a withdraw every 3 months.
Mortpes -- I could create zero debt for myself now at age 57 if I wanted to. Just a matter of selling my current home and downsizing; and still end up with 500k after the purchase of a new home (mtg free) + severance.
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