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There's a lot of misunderstanding in this discussion. First, the younger you are when you begin annuity payments the lower the payments will be. Ask if you want to know why. Second, you can get immediate annuities, where you start getting your monthly as soon as you put your money in, or you can have a delayed annuity, where you get your money after a number of years. This can be helpful for avoiding running out of money in your later years.
Third, you don't give enough information regarding the annuity type to say whether your math is right. If it is a fixed annuity, then you won't have any interest accrual into the "account". In fact, there is no account. The company takes all the risk. With a variable rate annuity, you take the risk. Your payments, or your duration, or both, will vary with investment results.
Fourth, you can have an annuity that pays out for the longer of you and your spouse. Of course the payout will be lower, sometimes much lower with a younger spouse, but then you have longer potential income.
There's a lot of misunderstanding in this discussion. First, the younger you are when you begin annuity payments the lower the payments will be.
You are absolutely right. The discussion starts with lump sum vs annuity payout for a given case and not to compare payouts at different ages.
Second, you can get immediate annuities, where you start getting your monthly as soon as you put your money in, or you can have a delayed annuity, where you get your money after a number of years. This can be helpful for avoiding running out of money in your later years.
I should have stated that this is for immediate annuity with fixed monthly payment.
Third, you don't give enough information regarding the annuity type to say whether your math is right. If it is a fixed annuity, then you won't have any interest accrual into the "account". In fact, there is no account. The company takes all the risk. With a variable rate annuity, you take the risk. Your payments, or your duration, or both, will vary with investment results.
Totally agree. The only reason I do the math for the interest earns on the pension is for comparison purpose with the case where you take the lump sum and invest yourself. The fixed monthly payment is what I get. The remaining 'principal' after a payment is made each month is handled by the company (likely an insurance firm contracted by the company. Even if they don't invest this 'principal', the amount reduces each month so the effective payout rate if anything will be higher than the case where I take into account the fact that the 'principal' is invested by the financial company.
Fourth, you can have an annuity that pays out for the longer of you and your spouse. Of course the payout will be lower, sometimes much lower with a younger spouse, but then you have longer potential income.
Yes, this is the reason why I stated that it did not make sense for me to choose my older spouse as the survivor. I could choose my daughter as the survivor. I think I had posted the scenario with my daughter as the survivor before (my monthly payment will be reduce to something like $800 and her payment will be something like $400).
I was pretty much convinced that it would be better to take the annuity a long time ago but just had fun playing with the math.
P.S.
One of the reasons I started this thread is to get the discussion going with regards to taking lump sum vs annuity payment. This is very much similar to the discussion on whether to take SS early or to delay payments. The gut feeling of many people is that "A bird in hand is worth two in the bush". This is probably the reason why more people choose the lump sum option instead of annuity and to take SS early than late.
I'm glad that there are many online calculators helping people to input different scenarios to see which numbers make the most financial sense. I have seen a number of friends/relatives made bad financial decisions based mostly on their fear of the unknown future. Participating in pros and cons discussion may help some people to arrive at more sensible/logical decisions.
There is a certain peace of mind which comes from not having to worry about "What if I live longer than the acuarial tables predict?" Ditto with not having to worry about market down-turns. When it came time for me to retire eleven years ago, I didn't even consider looking into the possibility of taking a lump sum or a partial lump sum. I do not care about leaving an inheritance for anybody or any organization and that helped with my thinking. Eleven years in my decision is looking better all the time.
It seems like a no-brainer, but make sure you have all the facts before making a decision. I was all set to sign up for a lump-sum payout until I learned (and not from the advisors; they later just confirmed it) that I would lose my health insurance coverage by doing so. That made my decision pretty easy. I've also decided to take SS as soon as possible because...the way the world is lately.
It seems like a no-brainer, but make sure you have all the facts before making a decision. I was all set to sign up for a lump-sum payout until I learned (and not from the advisors; they later just confirmed it) that I would lose my health insurance coverage by doing so.
This is very strange. Why would taking a lump sum payout cancelling your health insurance coverage? What other option do you have to retain your health insurance.
Taking the payments. If you had coverage elsewhere (say, through a spouse's insurance), you could afford to lose it, but I need it, so I'm taking the monthly check although I'd prefer the lump sum. Clearly, my employer prefers that the money be left in the pot. It's just that I never hear people like Dave Ramsey mention that possible contingency when he recommends the LSPO.
There is a certain peace of mind which comes from not having to worry about "What if I live longer than the acuarial tables predict?" Ditto with not having to worry about market down-turns. When it came time for me to retire eleven years ago, I didn't even consider looking into the possibility of taking a lump sum or a partial lump sum. I do not care about leaving an inheritance for anybody or any organization and that helped with my thinking. Eleven years in my decision is looking better all the time.
Isn't getting a pension, a fixed amount, similar to getting a fixed annuity? I was planning to get fixed annuities with about 25% of my retirement money, even though it does not protect from inflation. But I figured it's like having a pension, and I can somehow deal with inflation with the other three fourths of my money.
Do you have an trouble with inflation, because of getting a pension?
Isn't getting a pension, a fixed amount, similar to getting a fixed annuity? I was planning to get fixed annuities with about 25% of my retirement money, even though it does not protect from inflation. But I figured it's like having a pension, and I can somehow deal with inflation with the other three fourths of my money.
Do you have an trouble with inflation, because of getting a pension?
No. My pension has COLA's. Not all pensions do. What mine doesn't have is health (medical) benefits, whereas some do. Fortunately I had enough part-time jobs in college and moonlighting jobs barely to qualify for minimal Social Security, and thus for Medicare also. I don't think that's a problem for the younger people because I believe they all pay Medicare tax now even if they don't pay Social Security tax. Not really sure about that. If something doesn't affect me directly I tend not to pay attention to it.
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Today, I'd take the annuity, single life and buy term life insurance for N# of years incase that you die too early.
Tomorrow, I would have no idea. Things now adays change very rapidly.
Annuities act as secured pensions with some inflation features in Market downs.
We have 8 deferred GLWB annuities ladder in time and amount beginning 2008, 1st maturing in 2018. Today they represent about 25% of expected retirement Income and will probably stay that way based on my current investments in Discretionary accounts (25%). We have also 25% in a rental and 25% in SS and small pension. 66/69, LTCI, own, $30k in son's student loan.
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
True but my thought was because if you were 50 you would have still 15 years to put away more money. Add in the possibility of a 401k employer sponsored and matched. Add in also possible empty nest maybe and being of an age where maximums for 401k savings is increased a lot. In truth though if that were not the case of getting another job that has a 401k then it would be better to take the annuity.
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