I'm still weighing options for pension. The more I look into options, the more confused it gets. Any advice from other recent retirees that have a ~$1.5M pension, $2.5M 401k and $600k in liquid assets? I'm particularly interested in logic around converting lump sum to IRA and then investing in an Indexed annuity for increased returns and hedge on inflation.
100 replies (most recent on top)
@2sjl, better yet - why don't you call your FA and get that information yourself.
@2xlx - Just show us the calculations! It's really not that complicated. It's fine if your financial advisors didn't show you how they came up with that number, or your didn't bother to ask, but don't pretend that we should take your word for it just because you talked to 3 people. Why not call one of them and ask them to send you an explanation of how they came up with that figure and post it for us. Maybe we'll all learn something.
I think that both the butthurt loser side and the deadwood side may have some valid arguments behind the "effective" interest rate that an annuity provides. I have heard this argument before. Do all cases include inflation? It would not be a surprise if a FA would quote figures that were to his advantage and do not. And there are multiple variables for that formula, is everyone using the same assumptions? However, whatever the return is, the equivalent cannot be purchased on the open market, and that has never been argued. In any event, There is no secure or even semi-secure investment vehicle today which can give even 3%, much less 4 or 5% return. So that is still a good choice for those without heirs, or who do not want to spoil their heirs and produce useless trust-fund brats. There is that guarantee(PBGC) US govt agency outfit who supposedly backs these plans, however good that is, but it's still more than you can get in any brokerage account. If you were invested like some of us during the last couple of crashes, you know what kind of a deal that is, and why old folks always used CD's and the like.
@1ief, I prefer to consult an engineer if I'm building a bridge, but solely trust a certified financial advisor on financial matters. That's what I did after retiring. I consulted with 3 of them. Each calculated an equivalent rate of return of 6.1% on my Chevron annuity. All of usd the same word when commenting on the amount... "generous". So, do your own due diligence by going to knowledgable sources for answers. I did and I took the Chevron annuity over the lump sum pension. It works best for me, but maybe not for everyone.
@1chx - Either explain how you got that figure or keep quiet. The OP specifically asked how it was computed. You may or may not have heard something else from a financial advisor, but if he/she didn't explain how they came to that conclusion then it's not of much use. Many of the people on the board are engineers, etc. and understand how to do calculations like these better than most financial advisors.
Both of you are not calculating the Chevron annuity rate of return properly. It is between 5.8% to 6.1% for about 9 out of 10 retirees. Instead of explaining things here, I suggest you call your financial advisor of choice. Even the FA at Vanguard will calculate the equivalent rate of return for you.
@1skd - I used the Social Security mortality tables. For example, using the SS life expectancy calculator at https://www.ssa.gov/OACT/population/longevity.html a male who turns 60 years old today has a life expectancy of 23.3 years. Using that figure gives an interest rate of 3.07% for $1 mil earning $5000/month. I picked 30 after doing a quick calculation using the SS actuarial tables at https://www.ssa.gov/oact/STATS/table4c6.html to estimate the probability that in a male and female couple, both 60 years old, at least one would survive 30 years. That probability came out to be around 50%.
@1awi, I agree with everything you stated, however you missed one variable. Instead of using "30 years" as the horizon, you should be using the official IRS "mortality table" (when they say you are expected to die). You'll find when doing so, the rate of return is closer or just over 6%. You can use 30 years or more, but you cannot take the money to your grave. Surely, nobody can tell you how long you'll live, but statistically speaking, the average mortality age has been calculated.
OP. Regarding CVX annuity paying 6%, the answer is simple. It doesn't. Some posters keep making this claim but it's simply not true. At current interest rates, the CVX annuity annual payout comes to roughly 6% of the lump sum (depending on you and your spouses age, type of annuity you choose, etc.), but that doesn't mean that it has a 6% rate of return. To get a handle on the actual rate of return you can use a calculator such as http://www.bankrate.com/calculators/investing/annuity-calculator.aspx, giving it principal, monthly payout, and # years and letting it calculate the interest rate. So, for example, a $1 mil principal that pays $5000/month for 30 years is equivalent to a 4.42% rate of return. You can put your lump sum and your annuity payout and a reasonable number of years in and get an approximate equivalent rate of return for the CVX annuity of your choice.
OP here again. Thanks @ImAaevd-1agf for the feedback. Engineers are groomed to consider a worst case scenario and I latched onto 4% as that number. Just to keep the thread line accurate, at your suggested 1.5% case and break-even (16 yrs), my calcs show that buying power has declined by ~20%.
Guess I'm also consciously sensitized by historical experience in the early 80's when inflation was running 6% ( I checked on Internet) and mortgage interest rates were 18+%. I was a new hire with CVX and working out of the boom town of Evanston, WY. A kinder CVX had a program to provide $30K/ 8 yr. interest free loans to buy down my mortgage on a $97K home to a point I could afford it. Oh the times...how they change!
Who knows what to expect in this strange election year...could very well be we end up in a recession/depression long before the inflation like I theorized comes to reality.
Still waiting for a response on how the CVX annuity supposedly gets a 6% ROR.
Wow, assuming 4% inflation! It has not been that high recently, I think closer to 1.5% but many argue that point so I'd rather not open that can of worms. That's higher than anyone's estimate that I have seen on any of the ER forums. I thought 3% was standard. I know they say that 3.3 is historical but things change. Remember also that we used to apply an 8% return rate on our savings for planning and 6% was considered ultra-conservative back in the day? Now we use 4% max. SWR, expecting a market return of at least that in conservative investments. Well, There are quite a few retirees who's budget has been roughly the same for over a decade and many who's have decreased. That's hard to wrap your head around, but I think older folks just start to want less in consumer items, many have everything they need, so that component goes almost to zero.
You think it is not true, but for a saving/frugal type, that's sort of a hobby and they just have more time for it is all. Most of those guys always report that their principle is growing and also stay away from the risky types of investments that hit those high returns. So all the numbers kind of get beaten down. i.e. I don't plan on any double digit returns in the types of(set it and forget it)investment vehicles that I would be comfortable with in retirement.
OP here. Thanks for all the great replies! And not one troll interjecting nonsense....guess they must be on holiday.
Congrats to @ImAaevd-1zzo on topping me on retirement portfolio and sharing his/her wisdom regarding trust babies. I would like to think its because you were just a higher PSG than me, but probably you are also better at long-term strategizing.
About the only question I have outstanding is for @ImAaevd-znun on how a 6% rate of return on CVX annuity was calculated? By my calcs, it will take ~16 yrs for a break even payout of my lump sum equivalent. By that time and assuming 4% running inflation (probably a worst case) the purchasing power has almost dropped 50%. I'm no financial wizard,.. am I missing something?
Lastly, @ImAaevd-gri, the reason I'm using this less than perfect forum to canvas other's feedback is because every Financial Planner I've consulted to date seems to have a a greedy eye on my money and the first pot is the CVX pension. Got any recommendations on trustworthy FPs?
Wow I am impressed at the numbers, I am guessing 40+ year careers ending at PSG25+, including multiple expat assignments.
(Or high paying dual careers)
Congrat's OP, your assets are comparable to mine. I thought I was doing OK, but now maybe more like "fair to middlin", Mine is $1.7MM pension, $2.9MM 401k, approx. $1MM after tax investments and roughly $0.87MM in real estate besides my debt-free primary residence. However there is no way in creation that I wouldn't take the 100% joint and survivor annuity. I have enough in risky portfolios to not take advantage of one of the best deals available in a secure lifetime annuity left today. My children are all well off career-wise, and I would not spoil them like dependent brats and dump an unearned windfall on them. Why ruin the self-respect and honor that I have inspired in them to be independent and self-sufficient? They will most likely end up better off than me in the long run, by design. Maybe some people like to raise useless spoiled trust-fund babies, but I choose to do just the opposite and the results show. When you are obliged to succeed, you do and I am very proud of my kids and their ability to LBYM and support themselves and I don't want to ruin that.
You won't have to worry a great deal about a Chevron bankruptcy ending your annuity. Your pension annuity is backed by the PBGC (Pension Benefit Guaranty Corp), a US government agency. Check out www.PBGC.gov.
1xbs is spot on.
Other posters were polite (Chevron way), but, honestly, taking the lump sum and purchasing a replacement annuity which yields half as much is nuts. If you want an annuity, the Chevron payout is the best option unless you worry about CVX bankruptcy. And you should want an annuity. Investing the lump sum along with your 401k would be warranted only if you are looking for more upside for heirs.
An equity-indexed annuity (now commonly called "indexed annuity) is an alternative investment to a traditional fixed rate or variable rate annuity, and it may be appealing to moderately conservative investors. Equity-indexed annuities are distinguished by the interest yield return being partially based on an equities index, such as the S&P 500 index. While the indexed annuity traditionally pays out a fixed 2-3% rate, it's possible for the rate to vary and pay a bit more if the market goes up. The underlying rate however will be the fixed amount, so if the market goes down, you don't lose your money (but you end up only earning 2-3%). Chevron's pension annuity pays approx 6%.
The department of labor is accentually shutting down the sale of equity index annuities in April 2017 for retirement assets. With 5ish million in assets you should be calling a financial advisor instead of getting advice from working people on this board.
OP, first of all, congrats on amassing your impressive retirement portfolio. You've fine very well. I think you know Chevron's fixed annuity will pay more than you can get on the open retail market. That said, the subject of "Indexed" annuities is something that has popped up more and more recently in TV and radio advertisements. It sounds very attractive, but is something I've stayed away from investigating. Just as you have, I retired with a large retirement portfolio. I decided to go with Chevron's fixed Joint & Survivor annuity and leave my 401k and external savings for conservative investing and emergency cash needs. I hope someone in the forum can provide you their experience and knowledge about these indexed annuities.