Question about collecting a pension or taking a lump sum

[bif]

My wife is eligible for her pension. It's not a huge amount of money. She can either collect $290 a month for the rest of her life (she's 65), or take a lump sum (around 40k). I'm thinking it would be better to get the lump sum and put it into a couple of stocks/funds that are paying 9%.

What's the best bet?

[snowybirdie]

2. You can get

A bit less than 7% with I Bonds from the Government. Absolutely safe. $10,000 per year per person can be Invested. Percentage Reset every six months based on inflation.

[bif]

7. KYN--Kayne Anderson is paying over 9%

And has for ages. Maybe mix that and an I Bond?

[progree]

11. How much of that KYN 9% includes return of principal? It doesn't look so great at Morningstar

Last edited Wed Dec 14, 2022, 12:35 AM - Edit history (2)

https://www.morningstar.com/cefs/xnys/kyn/performance

The 1 year and YTD return is great, but all the other period returns are negative, e.g. 1 month, 3 months, 3 years, 5 years, etc. except for the 15 year (+0.88% annualized average). I'm sure not seeing a steady reliable 9% return here.

Edited to add while on the performance page, click the Distributions button to the right of the word "Performance", just above the graph to see the distributions. In Feb 2019 thru September 2022, of the 1.965/share distributed, only 0.12 of that was actual income of the underlying holdings. The rest was return of capital. End Edit.

Narrow sector leveraged Closed End Funds are not my cup of tea.

On I-bonds, yes, at the moment they are wonderfully wonderful. But in periods of normal inflation, their returns are pretty weak. (remember it resets every 6 months, and that includes previously purchased ones. So I wouldn't make a long-term plan based on I-bonds.
But yeah, grab some, I did)
https://www.treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf

[MLAA]

3. I faced the same decision. My company offered an enhanced rate on the annuity, noticeably better

than I could get if I took the lump sum and put it in an annuity. Since I already had other retirement money invested, I went with the enhanced annuity to lock in a portion of my retirement in a safe, guaranteed amount each month. You might compare the monthly amount you would get putting the $40k in an annuity yourself (plenty of calculators online or ask a financial planner/broker just for comparison to see if the company is offering a really good rate like my company did. If she/you have extensive experience and a track record of getting anywhere close to 9% year in and year out, first congrats! And please tell me your secret! In all seriousness, I have not been close to getting that in my own investments. Further, if you have bad year(s) at the beginning it will be extremely difficult to recover. If, however, the $290 a month won’t have much of an impact on your life and you want to go the higher risk route, good luck 🙂

[bif]

8. She worked for a bank ages ago.

It's changed hands several times. This came up out of the blue. I don't think they'll negotiate on anything. It's either one or the other.

[multigraincracker]

4. Do you have to pay

taxes on the whole amount? I’d figure it after tax sum.
The figure how many years you’d have collect to match lump sum

[lapfog_1]

5. how is her health?

life expectancy is rising... I will assume she is getting something from SS.

I would invest 50 percent in tax free muni bond funds (doesn't have to be muni). Yields have been rising. The other 50 percent put into a slightly more aggressive stock market fund. That is the lump sum option.

OTOH, the $290 a month for life is really a better option if she is in relatively good health and expects to live past 85. over 20 years this pays out $69,600 which would be hard to beat with a conservative stock investment portfolio

[bif]

10. She's very healthy!

[Midnight Writer]

6. Is there a Cost Of Living adjustment on the pension? Is the pension fund reliable over the long term

That is, if the company she works for goes under, will her pension be safe?

Just some factors to consider.

[bif]

9. No COLA

The bank she worked for ages ago has been taken over several times. It's now PNC I believe.

[yellowdogintexas]

12. I had one of those small pensions and I cashed it in for the lump sum

when I realized I could pay off my house and have some leftover.

It was a great decision! Not having a mortgage payment has been a godsend!

[bif]

13. I cashed in mine for about 20k and...

Put it all into stocks. I'm embarrassed to say how much I turned it into.

[A HERETIC I AM]

14. I would absolutely consider an annuity.

They get a bad rap from a lot of people, especially on DU, but the fact is they can be the perfect vehicle if you are looking to have a stream of payments over a long term.

This question is frankly best answered by a financial professional you trust who knows you and your wife's situation and tolerance for risk.

You have many choices of what to do, some with a large amount of risk and others with very little, so it is of primary importance to make a wise choice that allows you and your wife to sleep at night.

It is almost always a good idea to pay off high interest debt FIRST, as this has an immediate effect on your bottom line. If you have none, and your mortgage is paid off, then choosing an investment that is safe and will GUARANTEE (as much as is possible) a stream of income that won't go away is something worth considering.

A lot of people shy away from or will recommend against annuities, but I've found that is largely because they have looked at one or two or 3 and found something they didn't like and that was it - they were convinced no annuity is any good. Nothing could be further from the truth. In her later years my mother put every investable dollar she had into one and it worked perfectly, giving her a steady check every month that increased annually and when she passed away there was a payout that went to her heirs.

There are plenty of large insurance companies that have been around for decades, if not well over a century, that offer them.
It is something worth looking into.

[bif]

16. I already have an annuity

That will pay 50k/yr. for life. Starting in a year or so.

[A HERETIC I AM]

17. Nothing stopping you from having more than one! LOL....

Fair enough. If you don't feel the need for a second one, that's fine.

You asked if you should take the annuity payments or the lump sum. It's almost always better to take the lump sum, as that gives you control over the investments.

As I said, you have numerous possible investment choices and it's important to be able to sleep at night and not worry about the risk you are taking. You mentioned the Kayne Anderson Energy Infrastructure Fund (KYN) in a post above, but as Progree pointed out, their long term performance hasn't really been all that good. The fact that it is a fund made up of Master Limited Partnerships has specific risks, and nothing requires such partnerships to continue a given payout rate into the future. There are of course hundreds of other funds you could look at that have similar and higher dividend yields.

Be careful no matter what you decide.


Best of luck and congratulations on this windfall.

[bif]

18. Thanks.

I'll err on the side of caution and if we take the lump sum, will put in in at least to or three different funds.

[PoindexterOglethorpe]

22. I am frequently astonished at the trashing of annuities here on DU.

Some years ago my financial advisor (another dirty word here) had me purchase two different annuities. Okay, so they were ones that I purchased outright, paid a relatively large sum of money for each annuity. And they started paying out about five years later.

Right now each annuity is worth less than what I originally paid, but both are still paying out a monthly income that is excellent, especially compared to my original investment.

Apparently, exactly when someone purchases an annuity makes a huge difference. My financial advisor has said that the annuities I hold are simply no longer available.

Something else I want to say. I frequently read here and elsewhere, that no one should ever go into retirement still holding a mortgage. Really? What if you get divorced, as I did, at age 60, and now want to purchase a home? I could theoretically have used every single penny I had in an investment fund to pay for the house, but then I'd have had zero money. Instead, I sensibly took out a mortgage. I often state that my mortgage payment is well within my means. Actually, I've been putting an additional $300 each month for the past two years or so, and have cut a reasonable amount of time (and interest) off the mortgage. And again, even if I weren't paying extra, I can afford my mortgage.

[progree]

23. My annuity has lost 23.3% in purchasing power in the last 6 years, due to inflation

Last edited Sat Dec 17, 2022, 04:08 PM - Edit history (3)

of which there was a 14.4% decline in just the last 2 years. So while my annual payments stay the same in nominal dollars, let's say $20,000, the purchasing power of those payments has dwindled to $15,340 in just 6 years. Ouch.

And unlike stocks, purchasing power never recovers. The only way purchasing power increases is by deflation, and a prolonged period of deflation that recovers anything like 23.3% purchasing power would be a severe long great recession that would obviously be very problematical financially in other ways.

As you often say, not all annuities are the same!!!! Mine was a charitable gift annuity that was offered as a thank you for giving Population Connection my farm. I was fully aware when I got it that its purchasing power would dwindle, and that's just a life-in-the-big-city kind of thing. It's a simple fixed dollar income annuity. It's not tied to any index or anything like that.

While it was an unusual situation, there are annuities just like that on the commercial market (though higher yielding). One could pay more for 2%/year inflation protection (whoopee) or for some residual value for heirs, but that would cut the effective yield.

In fairness, bonds have the same problem with inflation. Although at least its not a permanent thing if one buys intermediate or short term ones -- if inflation and interest rates go up, one can also replace maturing bonds with higher yielding ones. But its a slow process and only helps somewhat. And for shorter duration bonds, one generally gets lousy yields.

And there's I-bonds and individual TIPS (not TIPS bond funds!!!!) that keep up with inflation and a little bit more (if held to maturity). As for bond funds, because of all kinds of dynamics, what one paid for such a fund and what one sold it for is usually not anything near inflation -- could be better (e.g. when general interest rates are falling), could be worse (when general interest rates are rising).

Stocks at least have a history of beating inflation over the long run.

What shocks me in this thread the most so far is that anybody would invest in anything based only on yield, without questioning why the yield was so great and steady. Without looking at the composition of the distributions -- how much is actual income, and how much is return of capital (draining the fund of its seed corn and more, an unsustainable process). And not looking at total return. I hope that person's broker didn't recommend that. I thought it was common investing knowledge to always question an unusually high yield and do one's due diligence, but apparently not.

[PoindexterOglethorpe]

24. What I appreciate is the rock-solid dependability of the annuities.

And one has actually increased slightly, when its value increased.

Meanwhile, my other investments have gone down a bunch in the past year or so, affecting how much I can take out each month.

And yes, stocks absolutely beat inflation over the long and often not-so-long run.

[PoindexterOglethorpe]

25. So true, about annuities often being trashed here on DU.

I happen to have two, that my investment advisor got me into some years ago. They give me a set income, along with my small pension, SS, and what I take from my investments.

Another bit of standard advice that makes me crazy is that you absolutely must have your mortgage paid off before you retire. Well, what if like me, you get divorced at age 60, move to another part of the country, and want to buy a house? And don't have enough money to pay in cash? Rent instead? I don't think so.

I'm currently 74, and I've been paying extra on my mortgage for the past three or so years. It will be paid off somewhat early. Meanwhile, I have the security of owning my own home. It is simply not that terrible to have a mortgage in retirement.

[doc03]

15. I was offered a buyout at 62 for $104k, so far I have

received over $192,000 taking the annuities. My opinion it
is better to take the annuities. Most people I know that took the cash spent the money and blame the company for "taking" their pention.

[progree]

19. If she lives 20 more years and gets $290/month, that's a 6.148% annual average return

Last edited Sun Dec 11, 2022, 09:24 PM - Edit history (4)

on a $40,000 investment according to Excel.

=RATE(240, 290, -40000, 0.1) *12 = 6.148%

There are 240 months in 20 years.

The 0.1 is a "guess" on the interest rate (in decimal form, e.g. 0.1 = 10%). Not essential usually to have the "guess".

I've checked it out a couple of different ways -- doing it long-hand by putting all 240 months in a spreadsheet and present worthing it all at that interest rate.

Also by using the @IRR formula (internal rate of return). So all 3 ways it comes up with the same answer.

So if she thinks she can do better than 6.148% annualized average return, and expects to live exactly 20 more years, she should take the lump sum. Otherwise accept the pension. Or take the lump sum and get an annuity, insured by a long-stable insurance company that does this well or better.

In the below, Years is the number of additional years she lives. The longer she lives, the more lucrative the pension or equivalent annuity is.

Years   Rate of return
===   =========
10      -2.699% (yes, a negative rate of return because $290 for 120 months = $34,800
                           which is less than the $40,000 lump sum)
15      3.705%
20      6.148%
25      7.284%
30     7.874%

Edited to add: All of the above rates of return assume that each $290 payment is invested right away at this same rate of return. So if it sits in some very low return money market fund for months and months or longer, than these returns won't be realized. And if they are spent, then all of the above is null and void.

If we put the $290's under the mattress and let it accumulate, then after 20 years we'd have 240*$290 = $69,600

So over 20 years, the $40,000 investment accumulates to $69,600

That's just a 2.808% average annual rate of return ( 40,000 * 1.02808^20 = $69,600 )

So, from a rate of return standpoint, it matters a lot what one does with the $290's.

=================================================

How to Calculate Annuities Using Excel, By C. Taylor
https://smallbusiness.chron.com/calculate-annuities-using-excel-27850.html

[Pobeka]

20. How well is the pension fund managed? Is it underfunded?

I had the same decision to make. Turned out the pension fund "excess interest" in good years was being taken by my company, which led to an underfunded pension fund (cause, duh, bad years happen too.).

Based on that, I chose the lump sum.

If the pension fund had been well managed, I would've stuck with the annuity.

[bif]

21. After talking to our broker

We've decided to roll it over into an IRA. That way we don't pay any taxes on it. I'll probably put it into stocks.