Great video. I recently retired and after doing the math which was a toss up, I decided to take the lump sum. My monthly with 50% joint and survivor was higher than your example but at the end of the day, I did not want the forced income and took the lump sum, rolled it over to an IRA and invested in fixed income averaging 5.6%. The income generated is less than my lump sum by about 20% (not counting taxes in either case) but I don’t need the money so I would rather have control of the money and ability for my heirs to inherit it.
One other point. Taking the lump sum can allow you to take out more early on and defer SS to age 70. The COLA on SS is a good hedge combined with the lump sum, with one benefitting from a longer life and the other benefitting from a shorter life.
In my case as an advisor, my client's ability to manage their money well is a huge factor I consider when making this decision. The numbers are the numbers, and people can try to maximize all they want, but it all falls apart when people start spending A LOT more money than they should if they want sustainable withdrawals. As the video plays I see that you did address this. I just see so many videos on YT that completely ignore the human factor. Some people are terrible with lump sums. Unless the lump sum number is extremely compelling I'm inclined to suggest they keep the pension. Just the other day I had a client tell me that purchasing his variable annuity (that a previous advisor had sold him, but that I help him with) was "the best financial decision he's ever made". He's blown through his IRA and other liquid money because he simply can't manage his finances. That was the first time in 15 years I'd ever heard anyone say they loved their annuity.
Good video but my emoloyer has a healthcare benefit for the pension with COLA. I plan to retire between 52-55. How do you factor that in the calculation?
I know someone who took a $151,000 lump sum payment in 2017 vs $1,240 a month 100% survivor at 65. He just turned 65 and the Lump sum grew to $275k and it's still growing. He doesn't need the money so now he can withdraw money and control when he pays taxes on it. If he dies the money goes to his wife and eventually his kids.
We already had allot Invested outside of work in the stock market. The Guaranteed Pension pays all our monthly bills, barley, (Note: We have Zero Debt). Our IRA's were basically the Go-Go-Years Fun Money. We took the Pension for that reason. We have 50% of our IRA's in a S&P Index Fund, 25% in Bonds and 25% in Cash. We will not turn on Social Security for 5 more years at FRA. That is back up number 3. We could be wrong, but that is our plan. Next update, Year 2040.
Thats great! Speaking of having all your equity money in the S&P500, you may find this video useful: ua-cam.com/video/6_md8q5pDng/v-deo.htmlsi=d87F9J9SlameAVKo
According to studies, a significant percentage of retirees who take a lump sum pension payment deplete their funds within a relatively short period of time. MetLife did a study reported in its "Paycheck or Pot of Gold" report - about one in three retirees exhausted their lump sum in just five years.
Pension monthly income almost always works out better than lump sum. My brother in law is a CPA and his calculation shows you would have to earn a guaranteed yearly growth of 10-15% to meet the same amount of what the company would provide. When companies try to make you cash out it's because they don't want to keep the guarantee. Also if the pension goes bankrupt the federal government guarantees to about $45k a year. My old company wanted to cash me out and I said no.
I disagree but I guess this is why it's always debated. I want control of my money and pensions do not increase with inflation typically. Also, I want someone else to have it if I pass sooner than later. Then there is ability to spend more of it early while you are still "healthy and younger".
I agree. Having a pension that substantially pays basic expenses provides peace of mind. You can create a COLA for the pension, and an inheritance for others, by means of other investments. Of course, many “financial advisors” counsel against keeping a pension - for their own benefit, not yours. They want you to cash out and then pay them to manage the money.
Those are really bad monthly benefits. You also need to compare the monthly benefits offered from buying a SPIA. They could take the lump sum and use it to buy a 100% joint annuity with a $2,755 monthly benefit. A single life annuity (female 65) would provide a monthly benefit of $3,074.
Didn’t have a choice so it’s a monthly payment. 6K a month will work for me with 50% survivor for my wife. Your also assuming that people know how to invest their money which from what we’ve seen the vast majority of people dont. Monthly is better in my opinion.
Great video. I recently retired and after doing the math which was a toss up, I decided to take the lump sum. My monthly with 50% joint and survivor was higher than your example but at the end of the day, I did not want the forced income and took the lump sum, rolled it over to an IRA and invested in fixed income averaging 5.6%. The income generated is less than my lump sum by about 20% (not counting taxes in either case) but I don’t need the money so I would rather have control of the money and ability for my heirs to inherit it.
I meant the lump sum income is 20% less than the monthly
Nice! Congrats on retirement! 🎉
How to you calculate peace of mind?
When I retired, there was no choice between lump sum and monthly. I’m fine with my monthly.
I also have my monthly Social Security payments .
Same here Chris...
I have a federal pension with COLA, which is great + SS ( won't take until FRA) and no debt, wife also has a smaller fed pension with SS
I've been retired for 12 years now. I still love getting my pension check at the beginning of every month.
One other point. Taking the lump sum can allow you to take out more early on and defer SS to age 70. The COLA on SS is a good hedge combined with the lump sum, with one benefitting from a longer life and the other benefitting from a shorter life.
Yes, great point! I talk a bit about that in this video around the 10:30 mark ua-cam.com/video/Ukdkb5hR7bM/v-deo.htmlsi=gpwla8bcGlqK3xaO
In my case as an advisor, my client's ability to manage their money well is a huge factor I consider when making this decision. The numbers are the numbers, and people can try to maximize all they want, but it all falls apart when people start spending A LOT more money than they should if they want sustainable withdrawals. As the video plays I see that you did address this. I just see so many videos on YT that completely ignore the human factor. Some people are terrible with lump sums. Unless the lump sum number is extremely compelling I'm inclined to suggest they keep the pension.
Just the other day I had a client tell me that purchasing his variable annuity (that a previous advisor had sold him, but that I help him with) was "the best financial decision he's ever made". He's blown through his IRA and other liquid money because he simply can't manage his finances. That was the first time in 15 years I'd ever heard anyone say they loved their annuity.
Good video but my emoloyer has a healthcare benefit for the pension with COLA. I plan to retire between 52-55. How do you factor that in the calculation?
I’d say take the monthly payments
I know someone who took a $151,000 lump sum payment in 2017 vs $1,240 a month 100% survivor at 65. He just turned 65 and the Lump sum grew to $275k and it's still growing. He doesn't need the money so now he can withdraw money and control when he pays taxes on it. If he dies the money goes to his wife and eventually his kids.
exactly. That's pretty good though to get 1240 a month from 151K with 100% survivor.
What would I roll a lump sum payment into , to avoid having it taxed all at once. 401k,IRA?
Not a complete analysis until you also consider taxes and RMD impacts on the lump sum.
All depends on your income and health
Would you consider taking out a 20-year term life insurance policy as a good hedge against early death of pensioner taking monthly payments?
A lot of people do..
We already had allot Invested outside of work in the stock market. The Guaranteed Pension pays all our monthly bills, barley, (Note: We have Zero Debt). Our IRA's were basically the Go-Go-Years Fun Money. We took the Pension for that reason. We have 50% of our IRA's in a S&P Index Fund, 25% in Bonds and 25% in Cash. We will not turn on Social Security for 5 more years at FRA. That is back up number 3. We could be wrong, but that is our plan. Next update, Year 2040.
Thats great! Speaking of having all your equity money in the S&P500, you may find this video useful: ua-cam.com/video/6_md8q5pDng/v-deo.htmlsi=d87F9J9SlameAVKo
I’m in the same boat and will take the pension with survivor benefit.
Great video. TY
Thanks for watching! Glad you found it useful. - Alex
According to studies, a significant percentage of retirees who take a lump sum pension payment deplete their funds within a relatively short period of time. MetLife did a study reported in its "Paycheck or Pot of Gold" report - about one in three retirees exhausted their lump sum in just five years.
I believe it. Most people see it as a windfall if they don’t plan well.
Pension monthly income almost always works out better than lump sum. My brother in law is a CPA and his calculation shows you would have to earn a guaranteed yearly growth of 10-15% to meet the same amount of what the company would provide. When companies try to make you cash out it's because they don't want to keep the guarantee. Also if the pension goes bankrupt the federal government guarantees to about $45k a year. My old company wanted to cash me out and I said no.
I disagree but I guess this is why it's always debated. I want control of my money and pensions do not increase with inflation typically. Also, I want someone else to have it if I pass sooner than later. Then there is ability to spend more of it early while you are still "healthy and younger".
100% lump sum. If you have kids then it's 200%
I agree. Having a pension that substantially pays basic expenses provides peace of mind. You can create a COLA for the pension, and an inheritance for others, by means of other investments.
Of course, many “financial advisors” counsel against keeping a pension - for their own benefit, not yours. They want you to cash out and then pay them to manage the money.
Those are really bad monthly benefits. You also need to compare the monthly benefits offered from buying a SPIA. They could take the lump sum and use it to buy a 100% joint annuity with a $2,755 monthly benefit. A single life annuity (female 65) would provide a monthly benefit of $3,074.
Yes, no one knows how long you’ll live. I’d take the lump sum and earn 18% in investments that I can pass on to my heirs.
So, you have a pension and a substantial 401 plus SS. Do you take the lump sum or the annuity?
Didn’t have a choice so it’s a monthly payment. 6K a month will work for me with 50% survivor for my wife. Your also assuming that people know how to invest their money which from what we’ve seen the vast majority of people dont. Monthly is better in my opinion.
I’ll take the lump sum.
And the nursing home will keep you alive until it's depleted
100% lump sum. If younhave kids then 200%. Someone deserves this money when me and my wife die.