Even the pros aren’t very good at predicting the future.
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A single premium deferred annuity is a good holding vehicle. Withdraw 10% per year for inflation hedge investing (mutual fund or bond laddering).
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Yes, but CD rates have fallen markedly and we know the Fed has the scissors ready to go.
At this point, it’s pretty easy to see - the fact that CD rates are already a half point lower than a month ago without a fed cut is pretty telling.
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This is so timely for me-- am wonndering the same things.
Am anticipating retiring in a few months and have a pension that will pay me 70% of my salary, which is just a little less than my take-home pay since I put a lot into retirement. Plus a very generous spousal benefit. Or…I can take the current cash value, which is only equal to about 8 years of pension payouts (uninvested).
Am definitely leaning towards the pension – already have good 401k, IRA, etc. But it’s not a clear-cut decision.
So thanks for all the advice re: hiring a CFP (and possibly an actuary).
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We had a 50/50 option which we decided to take. Half as an annuity and half lump sum.
So some every month and some to grow in the stock market. Had 100% survivor benefit so it will last until both of us die. And some to leave to our children. Hopefully
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When facing a tough decision, going the 50/50 route can make sense. For pension survivor benefit, my husband and I both opted to specify 50%.
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This is a very simplistic way to think about this because it doesn’t take into account inflation or return of principal, but if you’re getting the equivalent of 8 years of payout, you’d have to make 12.5% annualized to withdraw the same amount per year and not erode the the principal. Unless you’re in very poor health and not expecting to live long, it seems like keeping the pension would be a good deal.
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When I received a smallish inheritance from my late dad, I put it into Vanguard where I got a personal advisor when inheritance was combined with individual IRAs I had contributed to in the late 20th century. Fees are truly minimal and all the advisers I’ve had over the years have been wonderful. Of course it’s all invested in index funds. Again, very minimal load.
I understand that Fidelity, Schwab, et al have similar setups but fees are lowest with Vanguard.
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When I was in a similar situation, the options were lump sum or an annuity with a provider the company selected. The annuity payouts would have been subject to the solvency of the annuity providers decades in the future, so the lump sum rolled into an IRA was the way to go.
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One thing you might want to investigate is whether any annuity (either through the employer or that you could purchase via lump sum) will allow you to designate your surviving beneficiary, and not just have it default to your spouse.
For example, since you have two kids, you could purchase two annuities with survivor benefits. Designate one child as the survivor on one annuity and a different child on the other. Because their ages are so much different from yours, you would get a lower monthly benefit, but it would be a gift that keeps giving throughout their lifetimes.
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One nice thing about a pension (or annuity) is that you won’t need to sweat the market conditions like you’ll do on your other assets…. the monthly deposit will just keep coming.
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understood - but I don’t think that’s our style.
Spouse to spouse and then the kids share.
Will think about that though - interesting take.
In general, I don’t like annuities - just fees. Of course, with the pension it’s an annuity, but it’s through them.
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There has been some muddling of the answers here. Some are discussing the decision to take a lump sum vs a monthly pension amount - an option offered by companies to pay out pensions at retirement.
This is not the same as taking a buyout from your employer or previous employer prior to retirement. Which typically offers an incentive (extra money) to have the company take you off their books. You can invest this buyout money however you want (as long as you continue to keep it in a retirement account). It does become a part of your RMD when you add it to your other retirement savings.
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Unless you pay tax on it and roll it into a Roth.
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Roth rolling – my favorite. Once you learn the ins and outs - amazing!
I have no idea why the feds haven’t closed that hole. But, if it’s there…
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It’s not only the best analog, it’s really the same thing in another form of payment. That is to say, the lump sum you can expect to receive should be equal to what it would cost to buy that annuity on the open market, at a given discount rate. Whether you choose the annuity or the lump sum, the effective discount rate (which has increased for obvious reasons) will be the same. If this is in a qualified plan, they will be the same unless the plan has a weird provision for choosing them differently.
So it just comes down, as you said, to whether you want to invest the lump sum yourself and take your chances, or go for the safety of an annuity. If you take the lump sum and get hit by a bus the next day, your estate has the money. If you take the annuity and you get hit by a bus (or if you take the annuity with survivorship benefits and your spouse gets hit by the same bus), it’s a windfall for the company.
I have a frozen pension and will be taking the lump sum when the time comes (the plan gives me the option). I want the principal so that if your bus hits me too, my kids will get the money. I also trust I know what to do with it and am and will be in a financial position that I don’t need to count on the annuity if my lump-sum investments don’t work out as I planned.
One other caveat: if you take the lump sum just to go buy the same annuity on your own, don’t. Sure you might change your mind after taking the lump sum and think, “damn it, I should have taken the annuity. but that’s ok because cquin85 said that my lump sum is merely the amount I’d have to pay to buy a given annuity $X at a given point in time (which includes the math of your life expectancy and discount rate). So I’ll just take that lump sum money and go buy an annuity now.”
The reason you typically would want to avoid that is that your company can buy an annuity more efficiently (cost less) than you can because of scale. You don’t have that scale and thus will not cut as good a deal with, say, Northwestern Mutual, as your company did with Pimco. So, I’d recommend trying to get some clarity over the choice at the time you make it.
That will depend entirely on whether the pension is in a qualified or supplemental plan (for income earners whose numbers are too high for the qualified plan). Qualified pension benefits can be rolled into a retirement vehicle; supplemental non-quals can’t.
My pension benefit is in both, so I’ll pay taxes on the non-qual part at payout.
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We have a financial planner. He is amazing and has saved and earned us money. He helps with all things financial, and really helped us chart our investments/retirement.
In my opinion, this is money well spent.
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Same.
We’ve had a financial advisor for many years and he’s helped us save and invest money in many positive ways that we wouldn’t have known about….and only wish we had hired him earlier in life.
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In my case, because of my current income, I’m like @kiddie advice.
No roths - conversion or otherwise.
My tax rate will be lower in retirement as much of my income will come from tax free munis.
So while people say your rate will be higher in retirement, that shouldn’t be me.
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There is absolutely NO way you can say what your tax rate will be when you retire. The tax code changes often enough. Enough said…this isn’t the political forum.
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