• Question
  • I'm being offered a lump sum of $377,000 in lieu of my non-COLA pension. Should I take it or keep

    Asked by a 69 year old woman from Plymouth, MI on 1/16/2013

    I'm being offered a lump sum of $377,000 in lieu of my non-COLA pension. Should I take it or keep the pension instead?

  • Categories: Private Pensions, Retirement Planning, Pensions and Retirement Benefits


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  • Congratulations for being in this position!

    Taking the lump sum puts you in control of your money and that is what most people prefer. It gives you flexibility and opportunities that your managed pension doesn't offer you. However, if you are an ultra conservative investor who would only consider CD's or Treasuries then leaving it in might be your best bet.
    If you decide to take control of this money then I would split it between an IRA account and an annuity with a Lifetime Guaranteed Withdrawal rider. The annuity would provide you with a set amount of income for the rest of your life and the IRA account would give you liquidity necessary for emergencies, charities, travel and etc.

    In order to properly advise you I would need to know more about your desires and financial position before directing you any further.

    I hope to hear from you!

    Tom Grossi
    One Eleven Group
    Farmington Hills, MI

  • Login to rate this answer:   Answered on 1/25/2013
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  • This is an important question and it sounds like you are well versed in some of the important considerations like cost of living adjustments.

    It can be a little complicated to find the better choice, and it’s dependent on a lot of factors. We have tried to provide some information below, but you may also wish to discuss your situation with a financial advisor. We are happy to offer a free consultation with a prescreened advisor:
    --> Free Consultation: https://www.newretirement.com/free-retirement-consultation.aspx

    If you select the pension, it may be an annuity bought by your employer’s retirement trust from an insurance company or it may be funded by the trust or even the government on a pay-as-you-go basis. There are risks with any of these sources, and you’ll have to be the judge of that. In any event, you will be able to get quotes for different conditions. To do the analysis, you will first have to determine the options for survivor benefits if you have a spouse. The largest monthly benefit will be for no survivor benefit. Of course, this is so hard on the other spouse after your death that the law requires your spouse sign a statement agreeing to this. It’s common to have choices of 0%, 50%, 75% and 100% survivor benefit. The last choice gives the smallest monthly payment.

    But most pensions and immediate annuities have fixed payments that continue until you or your spouse die. After that point, there is nothing to left for your heirs. This is basically a bet between you and the insurer. You hope you will live longer than the average person, but the insurer knows that more than half the people will die before the insurer runs out of money.

    The insurer also may have some healthy charges built into the quotes and the only choice you have is to go to an annuity calculator like https://www.newretirement.com/annuity-marketplace.aspx and compare your employer’s quote with those of other sources.

    By far, the greatest problem with a fixed pension is the fact that inflation continues to erode its value.

    Now let’s consider the lump sum. If this is coming from an employer savings plan, then you want to make sure that you roll the money over into an IRA already established for this purpose. If you get the money in your own hands, you have just bitten off a tax problem that is very hard to digest because you’ve just withdrawn an amount that is fully taxable. A mutual fund will help you with the paperwork to avoid this problem. If you are under 59 ½, you also are subject to a 10% tax penalty.

    If the lump sum is from a severance package, you will pay income tax, social security and Medicare tax on the proceeds. In this case, you will have to do an after-tax analysis of the comparison using after-tax values of the annuity (pension) payments. However, for the rest of your life, you will also be paying social security and Medicare taxes on each monthly check.

    If you take the lump sum from a severance package and then decide to buy an immediate annuity to provide pension payments on your own instead of using the company offer, the calculation is more complex than shown below, so I suggest that you use the free “Evaluating Immediate Annuities” program for this purpose on www.analyenow.com.

    If you take the lump sum—and invest it wisely—you can make withdrawals each year that will increase with inflation. In fact, the “Required Minimum Distributions” (RMD) from an IRA or 401(k) increase each year as you age to help counteract inflation. Basically, the RMD is last year’s ending balance of your savings divided by a conservative estimate of your current life-expectancy. I say conservative because the IRS adds several years to life-expectancy so that if you live longer than the average person you will not be trying to run on an empty investment tank.

    There is an underlying assumption in the IRS rules that your investments will have a return on investment that is at least equal to inflation. You should be able to achieve this with conservative investments like treasury inflation protected securities, TIPS, sold by the federal government or, with a slightly lower return, sold by mutual funds. Good investors who augment their investments with low-cost stock index funds may do better than TIPS, but there is no guarantee. In fact large numbers of investors often have a hard time beating TIPS because they buy securities when their prices have nearly topped out and sell them at lows. Of course, both of these actions are just the opposite of what the perfect investor with perfect foresight would do.

    So how do you compare a fixed pension with a payment that is inflation adjusted? First you have to line up the numbers. Since we are talking about retirement plan choices, the taxes for any choice are going to be at ordinary tax rates. (The comparison is more difficult for annuities that you purchase using funds from non-qualified accounts.)

    The first number you’ll need is the amount you can draw from your investments. You’ll need to estimate the number of years you have till death, namely your life-expectancy. You can use the IRS tables from Publication 590 that you can find on www.IRS.gov. Or you can get a more personalized number from www.livingto100.com. Divide the amount in your retirement account by this life-expectancy, and you’ll get the annual amount you can spend from the lump sum. Each year your life expectancy goes down a little, so you in future years you divide by a slightly smaller life-expectancy which increases the size of the next year’s payments and compensates for inflation.

    The second number you’ll need is the annual amount from the pension. To make a fair comparison, use the pension quote based on the 100% survivor payment option multiplied by 12 to get an annual amount. If it’s in inflation-adjusted pension, you can use the result directly, but if it’s a fixed pension quote, you’ll have to make the following simple adjustment to the annual amount. Multipl

  • Login to rate this answer:   Answered on 1/20/2013
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  • Hi 62, To make your decision easier If you invested $377,000 today and asked a AAA insurance company to pay you a lifetime monthly income, with no survivor benefit you would get around $1,850 per month for life. So compare this to what you are getting as a monthly income, if you are getting a lot more and the guarantor of the $$$ is AAA you should consider doing nothing. If less than that you have some room for improvement. Good Luck jamieheadfinancial.com

  • Login to rate this answer:   Answered on 1/29/2013
**All above answers are provided as general information only. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or CERTIFIED FINANCIAL PLANNER™ as to your unique financial situation.