Pension lump sum or annuity?

Dude, take the payout. You then control the investments, plus the entire balance becomes inheritable by your heirs at your death.

a third option is to take the lump sum, buy an annuity with $300l (kind of like a mini-pension) and invest the other $300k. That way is you would happen to die earlier than planned the $300k invested can be passed to heirs.

4.72% annualized return for 30 years on the annuity, if you live that long

7% annualized return over the next ten years at current valuations is unlikely

That survivor's benefit is terrible (3.15%). That alone is enough to favor the lump sum. There are variable annuities like PacLife has that pay survivor at least 4.5% if survivor is age 60+, while still allowing some control of the principal.

Take the lump sum. It puts you in the driver's seat.

Unless you’re planning on dying soon, you’d be crazy to pass up the income. Could you weather a 30 or 50 % loss if you took the payout and kept it invested? Could you sleep at night watching it go down?

Set for life wrote:

Unless you’re planning on dying soon, you’d be crazy to pass up the income. Could you weather a 30 or 50 % loss if you took the payout and kept it invested? Could you sleep at night watching it go down?

This resonates with me the most - I can financially withstand a 2 year drop of 30 - 50% but I'll also be relying on other assets for income (mostly index funds and low-expense mutual funds that would suffer as well with such a drop). The steady monthly stream of an annuity would help offset that.

Thanks for all the replies, I'm seriously leaning towards the monthly annuity.

This is a very complex question, but I generally advise people to take the lump sum because of the increased control and ability to pass the lump sum to heirs. However, there are many factors that might lead you to take the annuity such as your personal life expectancy, risk aversion, other assets, expected social security, et al.

Here is some food for thought:

Utilizing the weighted life expectancy of a 58 year old male and a 58 year old female the $3150 payment per month is an implied return of ~3.7%. While highly unlikely, there is some possibility that the company defaults on its pension obligation which would dramatically reduce your payment to what ever is guaranteed by the PBGC. Therefore, the risk-adjusted return is something less than 3.7%. However, if you exceed the normal life expectancy by five years the return on the annuity increases to 4.7%.

If you want a better answer you would need to provide a lot more information about your personal finances.

Likely the pension liability has shifted to an insurance carrier once the selection has been made. So just as unlikely that there is a risk of the liability falling into the hands of the PBGC. A good question to ask.

Set for life wrote: Could you weather a 30 or 50 % loss if you took the payout and kept it invested? Could you sleep at night watching it go down?

No one should be gambling with retirement savings like that when they are retired.

Op, take the payout today.

CPA wrote:

Utilizing the weighted life expectancy of a 58 year old male and a 58 year old female the $3150 payment per month is an implied return of ~3.7%.

That is a very unlikely yield in the current climate. That means a default at worse, or a renegotiated, lower, yield is the most likely outcome.

Take the lump sum today.

Wait.... There are still jobs with pension?

for me: lump sum, municipal bond portfolio and proper estate plan

oldmanstillrunning wrote:

Wait.... There are still jobs with pension?

Lots of em in Illinois

oldmanstillrunning wrote:

Wait.... There are still jobs with pension?

Not many of them...but for our company, those who started with the company 30+ years ago have them.

oldmanstillrunning wrote:

Wait.... There are still jobs with pension?

The Defined Benefit pension is a thing of the past...although fairly prevalent in public sector jobs in Canada. However, the Defined Contribution pensions are still quite prevalent

as for original question, I used to work as an Actuary for a pension consultant company so did these calculations for our clients all the time. The amounts are equal based on the mortality tables used by your company so depends on how long you think you'll live (and your wife since its a joint & survivor pension). Unless you are very active in your own investment and think you can beat the interest rate used to calculate the lump sum, it depends on how long you think you'll live on which is better.

You should have received a document showing all the assumptions used to calculate the payment or at least your company should tell you what was used if you're interested in those details

The tax consequences of the buyout lump sum need to be considered. That might tip the scales towards the pension if you do not have a lot of confidence in your ability to manage the buyout money.

Precious Roy wrote:

The tax consequences of the buyout lump sum need to be considered. That might tip the scales towards the pension if you do not have a lot of confidence in your ability to manage the buyout money.

Of course...a one-time 600k lump sum will be heavily taxed vs the lower but constant income of a pension

Roll it into an IRA or 401k to avoid getting taxed now

Gift 15k to heirs tax free

Pay no taxes