Lump-Sum vs Pension

[Admin/YBB]

LUMP-SUM [LS] vs PENSION/ANNUITY [without residuals] evaluation at retirement should be done on case-by-case basis. Data needed are LS amount, monthly payout amount offered [Aoff], your life-expectancy [LE] & prevailing interest rates [US Treasury or corporate rates]. Then, use an ONLINE ANNUITY CALCULATOR [see link(s) below] to find estimated monthly payout amount Aest; typically, the offered Aoff would be less than the estimated Aest; the PAYOUT RATE will be higher than the interest rate used. Aoff will also depend on other choices made: 90-95% of Aest for single-life [not recommended]; 85-90% of Aest for beneficiary at 100% payout; 80-85% of Aest for beneficiary at 50% payout. Beware of the difference between BENEFICIARY & SURVIVOR [that could be you or your beneficiary]. Check if PARTIAL LUMP-SUM & pension/annuity from the remainder are available. Access to retiree group health & other benefits may be tied to taking full/partial pension. Annuities [not pensions] may also offer GUARANTEED PERIODS of 10, 15. 20 years.

You & your beneficiary should be in good health. If you took lump-sum & tried to draw the Aoff or Aest on your own, there is high probability that you may run out of money. This is called LONGEVITY RISK. So, pensions/annuities are offered by insurance companies or other institutions that offer these payouts from pools of funds with thousands/millions of participants. They use ACTUARIAL calculations for determining Aoff from a process called UNDERWRITING. In the pool, some individuals will die early & their payouts will then stop; others in the pool may live long. So, there are MORTALITY RISKS/CREDITS. If companies misjudge this due to poor underwriting, they have to absorb losses against their CAPITAL/RESERVES. If someone offers such a program without the backing of any capital/reserves, then that scheme is called PONZI & it is illegal.

Experienced DIY investors may take lump-sum & invest it for monthly withdrawals, but not everyone can do this. Taking lump-sum & then shopping for commercial annuity is a bad idea as that Aoff would be worse than employers’ Aoff from group pension/annuity plans. #PersonalFinance , 3/3/21.

Annuity Calculator1 www.bankrate.com/calculators/investing/annuity-calculator.aspx

Annuity Calculator2 www.calculator.net/annuity-payout-calculator.html

Lump-Sum vs Pension Calculator www.calculator.net/pension-calculator.html

[Admin/YBB]

Lump-Sum vs Annuity/Pension Payout %

In the table below, Axxx is monthly Aest based on the life-expectancies of 30 or 20 years, lump-sum of $100,000, and indicated annual interest rates. Related % payout is Pytxxx%;  and to account for possible company expenses related to single-life annuity, 95%Pytxxx%. Haircuts for guaranteed-periods, joint-lives, and other bells-and-whistles may be more.

Int Rate    A360      Pyt360%   95%Pyt360%      A240       Pyt240%   95%Pyt240%
0.00%      -277.78  3.33          3.17                   -416.67   5.00          4.75
2.50%      -395.12  4.74          4.50                   -529.90   6.36          6.04
3.00%      -421.60  5.06          4.81                   -554.60   6.66          6.32
4.00%      -477.42  5.73          5.44                   -605.98   7.27          6.91
5.00%      -536.82  6.44          6.12                   -659.96   7.92          7.52
6.00%      -599.55  7.19          6.83                   -716.43   8.60          8.17
7.00%      -665.30  7.98          7.58                   -775.30   9.30          8.84
8.00%      -733.76  8.81          8.36                   -836.44  10.04         9.54
9.00%      -804.62  9.66          9.17                   -899.73  10.80       10.26
10.00%    -877.57 10.53        10.00                   -965.02  11.58       11.00

Table was generated by using the Excel formula  PMT(rate, nper, pv, [fv], [type]), with [optional] & default is 0 .

   % rate is monthly, so % annual interest rate/12 .
   nper is 360 months (30 years) or 240 months (20 years).
   pv is 100,000.00 .
   fv is 0 (so, skip).
   type is 0 for end of period (so skip).

Life-Expectancies can be found from SSA, IRS (for IRAs). Insurance/annuity companies use proprietary tables.

Single-Life-Expectancies
www.ssa.gov/oact/population/longevity.html

Joint-Life-Expectancies
IRS (IRA)
www.irs.gov/publications/p590b#en_US_2022_publink100090444
www.federalregister.gov/documents/2020/11/12/2020-24723/updated-life-expectancy-and-distribution-period-tables-used-for-purposes-of-determining-minimum