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Location: Miami (prev. NY, Atlanta, SF, OC and San Diego)
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Greetings:
I am fortunate that my company, an old school bellwether tech company, has a pension program in place that is fully funded. With 30 years under my belt with the same firm and having reached 55 a few years back, I have accrued a considerable amount that will continue to grow until I retire.
I did meet with a Fidelity advisor, company that administers my firm's 401K program. He is advising that I opt for monthly payouts for the rest of my life (I am a SINK, no remaining immediate family) which would cover roughly 1/2 of my anticipated annual expenditures going forward rather than taking the lump sum.....I have heard the argument for taking the lump sum so that I have full possession of these monies in the event something bad happens but the Fidelity agent said the odds are fairly slim that would happen and the % payout under my current plan is about a percentage point higher than I could get on the open market with a lump sum by going with an annuity through a NY Life or something similar.
Curious as to what decision others have made--lump sum or monthly payout. I am in very good shape at this time. What questions should I ask, what factors should I be considering??...thanks
Are there options attached to your pension? (ie; often higher income for SINK than extended to cover spouse lifetime). Does the pension have a COLA or are you locked-into a fixed lifetime amount?
Do you have a death benefit that guarantees your estate/heirs a fixed percentage of the remaining payout in the event of your early death?
Does the pension or your company offer related health benefits at a reduced cost? (at 55, you will need about 10-years to fill the gap until Medicare kicks-in). (How about LTC benefits associated with the pension?)
What is the comparative value of an IRA roll-over and what type of ROI would you need on that to equal the pension amount? Is that a reasonably expectation?
Is it possible to convert to a roll-over at a future date or are you permanently locked-in based on your initial decision?
If you don't need the money now, could you grow the amount of your income annuity payout by leaving it in the account until you do need it? -- Is there a guaranteed growth rate?
-- Is the Fidelity pension adviser recommending monthly Lifetime payouts because that is best for you or for them? You might want to check with an independent financial adviser who doesn't have a 'dog in the fight' or a product to sell. (This is a lifetime decision -- don't make it by the seat-of-your-pants).
Is SS in addition to this annuity? How much of your projected living expenses will these two income streams provide?
For me, short answer is it is probably always best to have an annuitized income on which you can depend no matter what. Assuming you have a decent sum in other liquid savings/cash assets, think long and hard before giving up this annuity. If, on the other hand, you are short of cash, then the annuity may not be the best choice.
jghorton lays out important considerations when you do this analysis.
A quirky thing is that if the stock market is doing well when you take a lump sum the amount you get is lower than if the stock market is doing poorly. That's related to something called the net present value. So, since the markets are doing well right now that would be one more reason to take the annuity.
Also, you can take into consideration how well your company is doing, whether they look like they will be around for the next 30 yrs (ie not go bankrupt), and how well funded their pension plan is.
Location: Miami (prev. NY, Atlanta, SF, OC and San Diego)
7,411 posts, read 6,559,570 times
Reputation: 6686
Thanks for questions:
No COLA
Not really worried about death benefits as I am single and have no benefits (only child, parents not alive)...bachelor my entire life--odds suggest I will be single rest of my life.
Permanently locked in when I make decision (monthly payouts OR lump sum)
Just reached 30 years with my employer so I have current company health plan until 65 If I work until then or retire before then).
Social security is in addition to this pension. I also have 401K, savings, and personal investments outside my 401K.
I have heard horror stories that an executive COULD, with stroke of a pen, do away with pension--doubt it, but my question is if I retire and decide to take monthly payouts, am I guaranteed that payout for life once I have retired and the first payment has already started???...others have mentioned there is or should be a pension insurance in that case....is the monthly payout a bird in the hand, as the lump sum would be??
You probably need to evaluate the anticipated 'burn rate' on your 401K and personal savings/investments to come-up with the other half of your living expenses. (While both your pension and funds drawn from your 401K are taxable, you have different considerations below 59-1/2 and in the loss of fund growth).
As you know, private pensions are often less stable than state or federal pensions ... and we've all heard horror stories about private pension funds being raided or significantly impacted by take-overs. However, numerous protections have been put in-place and the risk is not as high as it once was.
With only a one-percent advantage to your current pension, over an immediate annuity, the alternative question is still, 'What type of investment return would you have to have from the re-investment, if you rolled the lump sum over into a
self-directed IRA (or other investment account).
Is the lump-sum payout based on deferred funds and therefore, immediately taxable?
I can not tell you which is best but my bet would be that your 401k advisory is giving you good advice and I would go with the monthly payment. I am assuming your relationship with him is that of a Fiduciary. Ask. This means he has to work in your best interest. If not a fiduciary he works in his best interest that may not be yours.
Chances are your company's plan is better than what you can get due to the low interest rates now and your company could have gotten the agreement under better terms due to the size of the total 401k.
Investing on your own is a big risk and I would expect the market to go down and returns to be in the 4 to 6% range going forward.
I would go to Vanguard and the Fidelity site and price an annuity under the same terms.
Remember the annuity has value because it is insurance (not an investment). If you live to 110 you get the money from those that died young. If you take the lump sum you lose this insurance.
My brother in law thought his pension fully funded also with the federal pension insurance he felt safe. However in 2014 a federal law was passed allowing pensions that were underfunded to decrease existing pensions of people who are under 80 and not disabled. He now get 45% of his original pension. Many pension funds are in trouble as is the federal insurance funds.
I took the lump sum and found a good financial advisor as I am not stock savy. I am comfortable with my choice.
My brother in law thought his pension fully funded also with the federal pension insurance he felt safe. However in 2014 a federal law was passed allowing pensions that were underfunded to decrease existing pensions of people who are under 80 and not disabled. He now get 45% of his original pension. Many pension funds are in trouble as is the federal insurance funds.
I took the lump sum and found a good financial advisor as I am not stock savy. I am comfortable with my choice.
^^^....Good points...Also, if the company goes bankrupt....there goes the medical...
My brother in law thought his pension fully funded also with the federal pension insurance he felt safe. However in 2014 a federal law was passed allowing pensions that were underfunded to decrease existing pensions of people who are under 80 and not disabled. He now get 45% of his original pension.
He might have been a union worker whose pension was with a multi-employer fund. Those were affected in the way you describe.
OP, how much of a lump sum are you talking about?? My bil was getting $50/yr from GM. A few years ago, at age 80, they offered him a buyout of $400k - figuring he'd live another 8 years. He took the money. You are, of course, a lot younger, so the guaranteed income stream has more weight.
Last edited by Ariadne22; 08-28-2016 at 07:50 PM..
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