[CoachKandSportsguy]

So here is the the scenario from the insurance company point of view.:

How do insurance companies invest the money to give you an annuity stream, over that length of time?

Answer, the invest the remaining money after the commission, into the SP500 and in additionally buy put options to cover any downside risk to the investment. There are tables and financial formulas to determine the amount of money which can be withdrawn assuming a market return of X%, with a protective put option. .

Lets look at a hypothetical example:

$1,000,000 used to purchase an annuity:
5% commission = $50K

$950,000 to be invested
$ 900,000 to go into the market,
$ 50K to be used for protective put options, use for cash flow first year if the market doesn't go up. .

Their investment assumptions:
8% index growth average per year,
2% dividends
10% taken from principal per year equals $7,500 per month income,$90,000 per year in the first year.
Zero loss of principal after 30 years, after the good years and the bad years of the market. .

At 4% inflation after thirty years, its equivalent to $2,312 per month today, or $27,750 per year today.
Social security goes up with inflation, annuities do not. Your investments will go up with inflation,

Assuming that $27,750 won't be enough to live on today, and its your only income, then you might want to invest the money yourself
into the SP500, reinvest dividends and take withdrawals only when you need it. . . and save the commissions and hedging activities

Annuities are sold as comfort and safety, just like insurance is for homes.

Lump sum of 124*$7,500 = $930,000

Invest that and don't touch it for 5 years, and at the same assumptions, 8% growth + 2% dividends you will have $1.5 M, 50% more than the original annuity, and then start taking the $7,500 annuity amount out, and you will much more after 30 years. . with the option to take more when needed

My parent's lived within 1 social security check, and continually reinvested their distributions from their IRA distribution, and never touched their taxable investments in high quality SP500 stocks, and never took an annuity, My mom is 97 and still has enough money to live in assisted living at currently $13K per month, for another 5+ years from the investments they never used, after 3 1/2 years already paid out to assisted living

its all about wealth creation and living within means. and the older you get, the less you spend, as your activity level continues to slowly decline'

Good luck. .

[Altavia]

Originally Posted by retiredguy123

Take the lump sum payment.

Agree, life is full of twists and turns.

Take it before the end of the year and interest rates drop.

[Rainger99]

Originally Posted by Altavia

Agree, life is full of twists and turns.

Take it before the end of the year and interest rates drop.

This is interesting. I called my employer today and they told me that all of my options will go DOWN if I don’t take it by December 1. I assumed that the lump sum and all of the other options were invested and paying some interest on a daily or monthly basis.

So I get more money if I cash out now rather than waiting until end of year!

The woman in HR couldn’t explain why it would go down but said it would go down!

[retiredguy123]

Originally Posted by Rainger99

This is interesting. I called my employer today and they told me that all of my options will go DOWN if I don’t take it by December 1. I assumed that the lump sum and all of the other options were invested and paying some interest on a daily or monthly basis.

So I get more money if I cash out now rather than waiting until end of year!

The woman in HR couldn’t explain why it would go down but said it would go down!

I think the comment in Post 32 was directed to the fact that, the earlier you take the lump sum, the sooner you can invest the money in a high paying CD or other fixed income investment.

My advice to take the lump sum was based on the fact that your employer does not want you to take a lump sum. That is why they are offering you annuities instead. You can always buy your own private annuity, but I don't recommend it. Invest the money yourself.

[virtue51]

I worked in the Benefits Department at my company. We offered our employees the lump sum option; for married employees the monthly pension options were: 50% Joint & Survivor; 10 Year Certain; 75% Joint & Survivor; 100% Joint & Survivor. I am surprised that you have the single life option as a married employee -- this means that if you pre-decease your spouse, she receives none of the pension benefit.

This is one of the most important decisions because you cannot go back in a few years and change your mind. You mentioned if you and your spouse should pass shortly after retirement then the pension is not paid to anyone. This is the wrong mindset.

When thinking of your pension, you need to consider that you may be collecting a pension for 20 to 30 years depending on your age, health, etc. There are lots of factors to consider -- your age at time of retirement; other investments; whether or not your spouse has a pension or other assets; your tolerance for risk, if electing the lump sum option; you also need to be very honest about how you view money and handle money.

I had employees tell me that they will have no expenses when they retire because the house is paid for -- really, does the hot water heater last 30 years? will you be climbing a ladder at age 80? etc. In the last few years, the cost of food, housing and other everyday items has increased. My point is you need to carefully consider the options.

Also, you and your spouse will be collecting Social Security benefits -- when one person dies then there is only on Social Security benefit.

Does your pension have a cost-of-living benefit?

Did your employer offer a 401(k) benefit? If yes, you may want to reach out to the adminstrator of the 401(k) benefit because they may offer employees access to a financial planner at no cost to you. The financial planner does not receive commissions -- this was true with 401(k) administrator of our plan. You can check with your Benefits Department.

I would suggest that you consult with a certified financial planner to review your situation. Based on your questions, this will be money well spent so that you have sufficient funds to provide for your expenses now and in the future.

[jimmy o]

Originally Posted by Rainger99

I have to make a decision on my pension.

I have the following options.

Please note that x changes below.

Single life annuity. I get x every month until I die.

10 year certain amount and life annuity. Pays out for my lifetime and fixed amount for 10 years. X here is about 94% of single live annuity.

50% joint and survivor annuity. I get x for my lifetime and wife gets .5x for her life. X here is 87% of single live annuity.

75% joint and survivor annuity. I get x for my lifetime and wife gets .75x for her life.
X is 81% of single live annuity.

100% joint and survivor annuity. I get x and my wife gets x for her life. X is 76% of single live annuity amount.

Lumpsum. A lumpsum payment. This would amount to 124 months of the single live annuity.

I am thinking the best choice is a lumpsum payment.

On all of the other choices (except for the 10 year certain amount and life annuity), if my wife and I die in a car crash a month after taking the pension, I am leaving a lot of money with the company. On the other hand, if we live 30 more years, we would do pretty well with the 100% joint and survivor annuity.

Any recommendations or suggestions? Thanks.

Be careful not to lose sight of the fact that a pension purpose is to provide security for you and spouse. Choose the option that gives you the best retirement life style possible. Do not take any consideration to leaving money on the table. That type of thinking will sabotage a good plan.

[Altavia]

Originally Posted by Rainger99

This is interesting. I called my employer today and they told me that all of my options will go DOWN if I don’t take it by December 1. I assumed that the lump sum and all of the other options were invested and paying some interest on a daily or monthly basis.

So I get more money if I cash out now rather than waiting until end of year!

The woman in HR couldn’t explain why it would go down but said it would go down!

How do Interest Rates Affect Pensions? | Miramontes Capital

If interest rates are low, a lump sum pay out looks rewarding, even better than an annuity from a big company. In short, when interest rates are high, lump sums shrink. If they are low, lump sums grow.

Because of this, some choose to retire early when they see the interest rates begin to creep up. This may not be a bad idea if one is close to retirement age with a low chance of being able to see interest rates lower again.

In the current interest rate environment, generally, every one percentage point rise in interest rate reduces a lump sum’s value by 10% to 15%. For example, if your lump sum payout is $500,000, a one percentage point rise in interest rates could lower the amount by $75,000. Also, typically every $1 of pension income translates to about $140 of lump sum payment. If your monthly pension payout is about $1,500 a month, your lump-sum would be about $210,000.


Inflation And Pension Lump Sums: Timing Is Everything

[Rwirish]

Great place to get a recommendation, a social media site. Contact several financial professions and then make your decision.

[Rainger99]

Originally Posted by Rwirish

Great place to get a recommendation, a social media site. Contact several financial professions and then make your decision.

Just because the information is posted on a social media site doesn’t make the information bad. In fact,
some of the threads are very helpful. There are some very smart people on TOTV.
After reading the posts, I am in a much better position to discuss my options with a financial advisor.

[Villagesgal]

For you and your wife's best financial future see a certified financial planner, or possibly 2 or 3 each with a different company and have them give you several options, then discuss it with your wife and make a decision. This is the rest of your lives, doesn't that warrant seeing an expert?

[rsmurano]

There is no such thing as a high paying CD or money market. Both of these will always give you a return less than the inflation rate. A 5.25% money market return 2 years ago was 1/2 the inflation rate.
I cashed out of 2 pensions when I left each company because I knew I could make more off that money investing it myself and I quadrupled the value of those payouts easily.

I know the average rate of return is around 8% over the life of investing, but why shoot for average? Average is boring! There are so many low risk index funds out there that you can make over 30% so why would anybody put money in a cd or in a savings account or bonds? I’ve used these same funds for decades bringing me similar returns when I’m invested in the market. I looked at these funds a couple weeks ago and even over a 10 year period, they had a return of 15% which is very good when markets have had 2 big downturns in 2020 and 2022. Some of us bought Apple, meta, nvidia, tesla, and other stocks in late 2022 and those have returns that have doubled to quadrupled since their lows of 2 years ago.

[Caymus]

Originally Posted by Rainger99

Just because the information is posted on a social media site doesn’t make the information bad. In fact,
some of the threads are very helpful. There are some very smart people on TOTV.
After reading the posts, I am in a much better position to discuss my options with a financial advisor.

I agree. There are many financially knowledgeable people in TV. At worse it gives you a list of questions to have the paid "experts" answer or catch in lies.

[CoachKandSportsguy]

Originally Posted by Rwirish

Great place to get a recommendation, a social media site. Contact several financial professions and then make your decision.

The most interesting point of asking TOTV is that most of us "have had to make the decision" and are seeing the results of the decision. In other words, we have had skin in the game. Go to a sales rep at a financial institution, and you will be talking to a sales rep. Only a fee only CFP will answer the questions as a fiduciary, in your best interests..

Getting the voice of experience is what you get here. So if you think that we are all idiots after making informed decisions, then I think you have the wrong opinion of the retirees of the Villages. . . So why are you here?

[retiredguy123]

Call me skeptical, but why is the employer offering all of these complicated options? You are leaving the company forever, so why does the employer care what you do with the money that you have earned? If you give all employees the maximum amount of money as a lump sum, they can make their own choices. If they want an annuity, they can buy one from an insurance company, or they can invest it themselves. What am I missing? To me, it sounds like the employer is trying to reduce or delay their pension costs at the expense of their employees.

[Caymus]

Originally Posted by retiredguy123

Call me skeptical, but why is the employer offering all of these complicated options? You are leaving the company forever, so why does the employer care what you do with the money that you have earned? If you give all employees the maximum amount of money as a lump sum, they can make their own choicevs. If they want an annuity, they can buy one from an insurance company, or they can invest it themselves. What am I missing? To me, it sounds like the employer is trying to reduce or delay their pension costs at the expense of their employees.

At least in my case the pension(annunity) offered was much better than what I could find on the open market. Maybe they had some sort of volume cost advantage.

The employer isn't really doing that much additional work in offering options. A third party is handling most of the "paperwork".