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This topic could belong to the personal finance forum but since this is the common question for retirees and expected longevity is a big factor in the calculations, I decided to post it in the retirement forum.
I had previously played with the numbers of my expected pension payout in the form of annuity when I turn 65. The discussion about payout percentage, guarantee payout rate etc in the TIIA thread started by GoodforNothin prompted me to redo my spreadsheet for annuity payments.
In this new version, besides the obvious fact that the pension amount invested in annuity reduces each month, I take into account the investment earning or interest on the monthly balance.
Here are the numbers which go into my annuity payment spreadsheet:
The math for the 1st annuity monthly payment showed a payout rate of 7.57% (=$12,941.64/$171,038).
For the second month, I subtracted the monthly payment of $1078.47 from the starting balance of $171,038 to get $169,959.53 then added the monthly interest of $236.06 (=$169,959.53 * 1.67%/12) to have a balance of $169,352.02. So for the 2nd month, the payout rate comes out to be 7.6%.
The monthly payout rates of the fixed annuity payment over the remaining 'principal' continue to grow with time:
At 5 years (60 months) : 10.85%
At 10 years (120 months): 20.84%
At beginning 15 years (179 months): 1220.71%
Note that I stopped at 179 months because the 'principal' went down to almost zero (actual -$18.32) and all the numbers became negative.
Attached is the screen capture of the top portion of my spreadsheet up to the 28th month.
Bottom line is that the 'break even' age for me is 80. If I live longer than 80, I continue to earn almost $13K a month. Since my mom is still quite healthy at 90, my paternal grandmother lived to be 94 and one of my great maternal grandmother lived to be 100, I expect to at least match my mother's longevity.
It would be a simple math to show how much that the lump sum will grow for the two cases: 1) invest the lump sum and just let the entire amount grow and 2) take the same monthly amount as the annuity payout and invest the balance. I think that with the current low interest and the expectation of low market return (5% or less?), the balances will be lower than the annuity case.
For my case, it's clear that it is much more advantageous for me to take annuity instead of lump sum. For GoodforNothin's case, his initial payout rate of 6.18% is lower than mine at 7.57% but I think the maths will work out that his actual payout rates will continue to increase.
Using the same interest of 1.67% and his pension amount of $111K and $572 monthly annuity, I get 6.18% initial payout rate, 8.05% at 5 years, 12.06% at 10 years, 26.36% at 15 years and 1215% at 226 months (18 years and 10 months) when he is 84 and 10 months old (break even age).
I agree 100%. We have always lived beneath our means so we will be just fine with our upcoming SS payments and will neither need the lump sum nor the annuity payments for living.
There are other advantages for me to take annuities instead of lump sum. First is the tax issue and RMDs. I can delay paying taxes if I rollover the lump sum to IRA. However, when I turn 70 1/2, I will have to take larger RMDs, and our combined RMDs on top of SS payments/investment income etc will put us in pretty high tax brackets. If I take annuity, I pay taxes every year but only on this 13K amount.
The second advantage is that the annuity payment will add to our annual income. This will help in the case we buy a new home and want to get a mortgage. Most if not all lenders make their lending decision based on income and not net worth.
The third advantage is that the annuity payment will help with our living expenses and reducing our cash drawing rate until SS payments start coming in. My husband will not collect his SS until 70. I plan to only collect spousal SS and let my own grows until I am 70.
The big unknown is -- how long do you plan to live ?? Of course nobody can answer that with any degree of certainty.
There is a website that will convert that Lump Sum amount they are offering into a monthly payment from an annuity. The Lump is being skewed in their favor and we know that, but at least this gives you a benchmark as to where the "break even" point will be. That's about the only way to check their offering vs what you would receive each and every month.
Plug your numbers in here to get a rough estimate. There's some mathematical gymnastics known as Present Value, and Net Future Value, but you can essentially ignore that for now. If you need the Lump Sum......take it.
My spreadsheet is more detailed and accurate than the simple calculations provided by that type of of website. It is not complicated to start a spreadsheet, and you can plug different numbers to check out different scenarios to find out the 'break even' age. Those websites are helpful for people who are shopping for annuities.
Regarding the decision whether to get a lump sum or an annuity, from what I have seen, the annuity offered by pension plans are usually more generous than the general commercial offerings.
The present value and net future value are mainly to take into accounts inflation. With today's low inflation and low interest payout, it can be simple to ignore both.
This topic could belong to the personal finance forum but since this is the common question for retirees and expected longevity is a big factor in the calculations, I decided to post it in the retirement forum.
I had previously played with the numbers of my expected pension payout in the form of annuity when I turn 65. The discussion about payout percentage, guarantee payout rate etc in the TIIA thread started by GoodforNothin prompted me to redo my spreadsheet for annuity payments.
In this new version, besides the obvious fact that the pension amount invested in annuity reduces each month, I take into account the investment earning or interest on the monthly balance.
Here are the numbers which go into my annuity payment spreadsheet:
The math for the 1st annuity monthly payment showed a payout rate of 7.57% (=$12,941.64/$171,038).
For the second month, I subtracted the monthly payment of $1078.47 from the starting balance of $171,038 to get $169,959.53 then added the monthly interest of $236.06 (=$169,959.53 * 1.67%/12) to have a balance of $169,352.02. So for the 2nd month, the payout rate comes out to be 7.6%.
The monthly payout rates of the fixed annuity payment over the remaining 'principal' continue to grow with time:
At 5 years (60 months) : 10.85%
At 10 years (120 months): 20.84%
At beginning 15 years (179 months): 1220.71%
Note that I stopped at 179 months because the 'principal' went down to almost zero (actual -$18.32) and all the numbers became negative.
Attached is the screen capture of the top portion of my spreadsheet up to the 28th month.
Bottom line is that the 'break even' age for me is 80. If I live longer than 80, I continue to earn almost $13K a month. Since my mom is still quite healthy at 90, my paternal grandmother lived to be 94 and one of my great maternal grandmother lived to be 100, I expect to at least match my mother's longevity.
It would be a simple math to show how much that the lump sum will grow for the two cases: 1) invest the lump sum and just let the entire amount grow and 2) take the same monthly amount as the annuity payout and invest the balance. I think that with the current low interest and the expectation of low market return (5% or less?), the balances will be lower than the annuity case.
For my case, it's clear that it is much more advantageous for me to take annuity instead of lump sum. For GoodforNothin's case, his initial payout rate of 6.18% is lower than mine at 7.57% but I think the maths will work out that his actual payout rates will continue to increase.
Using the same interest of 1.67% and his pension amount of $111K and $572 monthly annuity, I get 6.18% initial payout rate, 8.05% at 5 years, 12.06% at 10 years, 26.36% at 15 years and 1215% at 226 months (18 years and 10 months) when he is 84 and 10 months old (break even age).
You answered your own question and it is the correct choice. Take 15 years off that and put you at 50 instead then those numbers are reversed. The lump sum dropped into an IRA or Roth (if you could get away with it) would be the solution. Of course you would need to have another source of income because you would need to eat and pay bills.
Take 15 years off that and put you at 50 instead then those numbers are reversed. The lump sum dropped into an IRA or Roth (if you could get away with it) would be the solution.
golfingduo,
I don't know whether taking a lump sum then drop into an IRA at 50 would be better than taking annuity at an early age.
For my scenario, if I am to take annuity at 50 instead of 65 with the same numbers, the break even number of years is still ~ 15 or at 65 years old. It's pure free gravy from 65 to my expected longevity of say 90 ($325,541 in present value).
In addition, receiving annuity will help you to delay collecting SS. If you take SS at 62 vs FRA (66), your benefit is reduced by 25%, and if you delay SS to 70, you will collect 32% more than at FRA. Also keep in mind that SS is COLA adjusted.
I tried to upload the spreadsheet so that others may want to play with their own numbers but could not do it (invalid file). The link to annuity calculator provided by FiveLoaves can help to find your 'break even' age.
Here are the life expectancy numbers for 50 and 65 years:
50 years old:
Life Expectancy (Female): 33.1 years
Life Expectancy (Male): 29.5 years
65 years old
Life Expectancy (Female): 20.2 years
Life Expectancy (Male): 17.6 years
I think the only thing I didn't see you mention is:
what happens to the annuity if you die and your husband lives?
Has that been factored in?
I have the option of selecting different types of annuity (50%, 75%, 100% etc with respect to percentage of the pension and survivor benefit).
My husband is 5 years older than I so I had considered putting my daughter as the beneficiary. On the other hand, she is doing quite well and if something happens to us, she will have a very nice inheritance so I may not need to ensure her having $400/month years from now.
NEVER EVER take a lump sum/annuity. If you start getting the checks at age 65 you come out ahead after about 4-5 years based on the 3 pensions I will get (each year the companies send me a letter begging me to do that too).
Of course the companies WANT you to see the big numbers when they show you what you can get NOW, because getting you off their books saves them money in the LONG TERM.
THINK LONG TERM, NOT JUST TODAY!
Last edited by JohnCurtisEstes; 07-22-2016 at 01:00 PM..
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