Between rising interest rates and increased inflation I'm not sure what is getting hit harder, the lump or annuity.
7 replies (most recent on top)
If you can afford to loose it take the lump, and your advisor better have an exit strategy. I witnessed the blood bath in 2008. They still get their 1% when your down 40% and still have to live…
I took lump-sum 06/2021, invested in converted IRA, have generated >16% return as of today. My secrete - bought and sold EM stock. LOL
As a role of thumb, if your lump-sum needs to generate an average annual return of >=6% to match the annuity - taking lump-sum or annuity is a wash. Anything below 6%, it may work in your favor if you learn to invest your lump-sum. Two factors to consider - annuity is not inflation adjusted (almost certain); 2. When you hang your boots, your pension value goes to zero (although various payout schemes may cover your surviving spouse with reduced annuity amount) = your sons/daughters will never inherit anything.
Assume you take the annuity … for round numbers assume it is $5,000 month or $60,000 a year.
Let’s say inflation runs hot for 10 years at 4% which is not unreasonable considering the current situation and the long term challenges needed to bring it back down to historical 2-1/2 to 3%.
So in 10 years, the cost of $60k of goods and services will be ~$89k and in 20 years, the cost would be ~$131k so the key message is your purchasing power is severely eroded if you take annuity and inflation runs hot for longer time period, since annuity comes with absolute no cost of living increases.
Conversely, if you take lump sum, and take long term investment horizon, you should be able to keep returns a few percent above inflation. The hedge you can then consider is to delay Social Security until age 70… social security does give cost of living increases corresponding to annual inflation, so use your lump sum to responsibly invest in diversified portfolio to and fund base living until age 70 then claim maximum social security benefit.
If your house if paid off, you preserve flexibility by taking lump sum (and invested with conservative diversification in mind) and then using social security taken at age 70 as effective monthly annuity that increases annually with cola with inflation unlike the XOM annuity.
Also good point that annuity is really not a guarantee payment …. If company undergoes severe financial consequences, the Federal Pension Guaranty program caps the monthly payment and you run severe risk of not receiving the same benefits. Just google how the PBGC handled the airline financial crisis and kicked most pilots to the curb with sufficiently reduced monthly benefit … they only guaranty a minimum amount … not necessarily the monthly benefit you had earned by the employer.
Suggest anyone considering get advice from a good CFP to look at your own personal situation and outlook and retirement goals.
In any case, I would not trust the company to follow through with annuity pension over the next 10-20 years.
If you'd question the legality of that - look to SCOTUS for the answer.
You have options of taking both.
That's what I did.
Always have something come in monthly, then reinvest the rest.
I don't regret my decision.
I was reading about this over the weekend. This article breaks down the affects of rising rates and inflation on both pension options: http://www.ringneckenergy.com/markets/stocks.php?article=getnews-2022-4-23-exxonmobil-interest-rates-make-big-jump-reducing-pension-lump-sum-values
I saw someone say their lump was down 20%??? Need to think about the annuity of that is the case