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Taking It Slow

Michael Flack

IT’S A QUESTION FOR the ages—or perhaps the aged. Since the day the first pension was promised, someone has wanted to know the answer. If you look hard enough, I’m sure it’s referenced in the Bible.

I’m writing this article not to help you answer the question, but to help me answer it. You see, my old employer, Exxon Mobil, has offered me a “onetime lump-sum opportunity.”

I have the option to take a single lump-sum payment of $335,641.85 starting Nov. 1, 2022, or a joint life annuity payment of $3,124 a month starting March 2031, with my wife receiving 50% of that sum if I predecease her. I’m age 56, my wife is 65 and we don’t have children.

When I retired a few years ago, Exxon Mobil didn’t give me the lump-sum option because I wasn’t yet age 55. This didn’t prevent me from thinking about it, not least because that’s all my older colleagues wanted to talk about. Every one of them, when they retired, claimed to have taken the lump sum. Most of them mentioned how historically low interest rates had made the lump-sum option a “no-brainer.”

Still, the New Yorker in me always wondered, “Why would Exxon Mobil give retirees such a great deal?”

To be honest, my cynicism might have been due less to the location of my birth and more to William Baldwin, a Forbes columnist. He wrote an article in January 2016 that mentioned that, “If a lump sum is offered (as it is for roughly half of pensions), it is more likely than not a rotten deal.” While federal law requires the offer to be fair, some employers use bond rates and mortality tables that may not necessarily be annuitant friendly.

Baldwin offered a calculator that cut through all the numbers and computed a “fair value.” It also allowed me to vary the inputs, so I could better understand what it all meant and avoid the black box syndrome. A few years ago, when my wife was offered the option of a lump-sum payment by her former employer that seemed a little light, the calculator only confirmed our suspicions.

When I used the calculator to analyze my “lump-sum opportunity,” it returned the following results:

With Exxon offering me $335,641.85, above the $330,400 fair value computed by the calculator, it appears the offer is a little more than fair.

Still, after reading what HumbleDollar had to say on the matter, I decided to take a look at the issue from another angle. I contacted a number of brokers, asking for monthly income quotes for a 50% joint-and-survivor annuity that commenced on my 65th birthday, assuming I made a single payment of $335,641. This, of course, is what Exxon Mobil is offering me.

Even though I knew the exact annuity I wanted to buy, the process was quite complex, filled with terms like guarantee type, period certain, QLAC, return of premium and so on. Both ImmediateAnnuities.com and Schwab quoted some $3,000 a month, with $1,500 a month going to my wife, assuming I die first. The upshot: The Exxon Mobil annuity is superior to these annuities, to the tune of more than $100 a month.

Meanwhile, I was drawn to two other benefits offered by an annuity: longevity insurance and stupidity insurance.  If I live until I’m 99, as my mother did, the annuity option would work out quite well and, if I don’t, I won’t be shortchanging my nonexistent offspring.

On top of that, while I currently think of myself as a fairly savvy investor—though the less said about certain investments, the better—who knows how savvy I’ll be a few decades from now? I find the idea of $3,124 coming in every month, no matter how many Tokyo Weather Futures I purchase, to be quite reassuring.

I have another week to make a decision. But I think I’ll go with the Exxon Mobil annuity.

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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John Bett
John Bett
3 months ago

Mike,
Thanks for sharing your assessment. The followup comments/postings are also very illuminating; valid perspectives across the board. I don’t think there is a perfect right answer, strict economic analysis may drive one preference but as you and other posters have already articulated, there are intangible peace of mind/factors. Some observations if I were in your shoes for your/the community’s consideration:

  1. My biggest angst would be the effect of inflation on the future annuity option. 9 years down the road by my rough calculations is not insignificant. Order of magnitude for 3% inflation; purchasing value of a dollar today is about $0.77 in yr 9. I estimate that your case has a double whammy, “sequence of inflation” risk w/ currently high infl rates foreseeable for the next year or 2 become the compounded foundation when inflation returns if ever to a nominal 2%.
  2. I could not see any inflation erosion factor in the Baldwin “blackbox” in order to assess its effect on the PV value of the annuity. I attempted to put in a real return value for the discount rate, e.g. Real rate = (Nominal Rate – Inflation Rate)/ (1 + Inflation Rate) but using a 3 % inflation rate w/ your 10yr UST rate results in a small decimal which says the future annuity is worth a huge PV so the math is not correct by inspection. I think a more realistic discount rate if using the black box calc would be to add an average inflation estimate to the UST rate, e.g. say 3 for a net discount factor of 5.89%. The result PV fair value looks reasonable in reflecting the loss of purchasing power.
  3. The last hard economic parameter would be pay back time of the annuity vs. the LS. For the case where the annuity option is immediate, payback of the LS choice not taken is about 9 years ignoring TVM (time val of $). I believe it only gets longer if the UST rate is used as the LS investment risk free return (12.5 yrs?).

Full disclosure, I was very fortunate to have had a 34 yr career w/ Shell E & P. Shell had one more RIF (red in force; about 15 total over my 34 yrs) in ’19 and I was eligible at age 60 in ’19. My yrs of serv + age made me immediately pension eligible and Shell covered 100% of the corp share of my family’s med insurance until I go on MediCare. In absence of age/yrs of service (pts), Shell’s and XOM’s plan look very similar, have to have “80 pts” or in absence, age 65, exactly your situation. Shell spared me the angst of your assessment as it didn’t offer a LS option on the base pension. In absence of knowledge, I elected the annuuity option for a non-qualified sister plan back in ’96 so ended up w/ two annuities. The non-qual plan would have been immediately disbursed and taxed and coupled w/ severance, colleagues who elected it saw a 50% marginal tax rate on it. Still, it will take about 11 years to recover the LS choice not taken even after taxes. Very fortunate/appreciative for my situation. Shell’s pension has no built in COLA but the corp has increased it per older colleagues. Haven’t seen anything yet but I’m a newby. I whole heartedly agree w/ one of the fellow posters on peace of mind not having to manage/create an income stream from a LS. Much easier to spend the monthly pension income than assess a “safe withdrawal rate” and all the clap trap (buckets, etc) w/ asset allocations in support of it.
PS. Your comment on the career effect of “hey, wait a minute” comment (aka “The 10th Man”) on career dissipation effects unfortunately has been mirrored by other XOM employees over a few beers. I’m sure it happened at Shell, I just didn’t notice/experience it directly… Once again, very lucky/blessed….

mjflack
mjflack
3 months ago
Reply to  John Bett

John Brett, you know your article might be interesting when the length of the responses exceed the length of the article.

There is no “inflation erosion factor” because inflation is baked into the “Base interest rate”. Over a billion dollars a day of 10 year Treasury Notes are traded, though if you feel you have a better grasp of where interest rates are heading over the next 10 years, then feel free to insert your own number.

Steve Spinella
Steve Spinella
3 months ago

Very nice. I see your logic.
As to why Exxon would offer you a lump sum option, I believe it may relate to risk management. As you point out, Exxon has to both administer and guarantee the annuity, while the lump sum, once disbursed, requires no guarantees of any kind. Accountants are quite fond of managing risks by reducing them to equivalent certainties whenever that is possible.
Exxon also recently replaced the retiree’s medicare health plan (maybe 2-3 years ago?) with a medicare advantage (Part C) plan. Again, I suspect that this replaced a variable expense with a fixed expense.
As to why people lean to the lump sum–well, most of us are not accountants. You on the other hand are trading a variable income–the invested lump sum, for a fixed income–the annuity. So you, assuming you take the annuity, are doing just what Exxon is doing: trading a risk for an equivalent certainty (relatively speaking, of course.)

mjflack
mjflack
3 months ago
Reply to  Steve Spinella

Steve Spinella, my question was not why ExxonMobil offered the lump sum option, but why they would offer such a great deal.

You make a valid point in that ExxonMobil is offloading their risk onto their retirees.

And as ExxonMobil is in a much better position to manage this risk, they would only lay it off if it made financial sense. Now while this could be a win-win, in that both ExxonMobil and retirees both reduce their risk . . . Me thinks not.

John Wood
John Wood
3 months ago

As I understand it, Mike, the decision is cash flexibility today or a “guaranteed” benefit 9 years from now.

Given that you can provide yourself with all of the options that Exxon is offering you – i.e. invest the money for 9 years, then buy an immediate annuity if you need to create your own monthly pension — my inclination would be to choose the greater flexibility of taking the cash today.

I have no idea what life will bring me 9 years from now (or anytime in-between, for that matter), but I do know that, by taking the cash, I’d have more financial flexibility to address whatever might come my way.

Also, in your case, I imagine that you’ll have other financial buckets to operate with, so who knows if the pension would be your best financial move 9 years from now. Also, it may prove more helpful for your wife to receive 100% of your monthly pension if you should predecease her – not an option with the Exxon pension, but one you could create with your own immediate annuity.

In your shoes, my inclination would be to maximize my financial flexibility, and take the cash.

mjflack
mjflack
3 months ago
Reply to  John Wood

John Wood, you make some good points. As ExxonMobil is offering me a better annuity than is currently on the market, I’m not sure taking the lump sum and then buying an annuity nine years makes sense. In nine years I may be able to buy a superior annuity, but I may very well not.

According to your analysis, everyone should just wait until later to buy an annuity.

MikeinLACA
MikeinLACA
3 months ago

Am I the only one who wants Michael to take the money and run? He’s got 10 years until payments start. He has no control over whether, how, or where Exxon invests his money. And the worst case scenario of hoping that a regulator will come in to rescue a potentially failed pension situation down the road?

Or he can invest it himself. Why not take the money and CHOOSE how to invest. Stocks, bonds, private annuity, etc. One firm, multiple firms, representatives or websites that he trusts, with real diversification. I understand the security and cost-benefit issues that our wise commentors make below. However, I see real value in self-directing this investment rather than relying on a single black-box solution that his corporate employer offers.

Full disclosure – I’m a federal employee. My pension will come as long as the nation stands, although I have no ability to make the decision that Michael does. It’s a real tradeoff.

mjflack
mjflack
3 months ago
Reply to  MikeinLACA

MikeinLACA, I appreciate your pushback. When everyone is saying one thing it’s useful for someone to say “Wait a minute!” (though that always seemed to have negatively affected the career progression of the person at ExxonMobil who said it).

One thing that I should have mentioned in my article, was that I already am overweighted in stocks (80-90%) and therefore see this annuity as a way to add some bonds to my portfolio. Also, remember that ExxonMobil offers a superior annuity than what is offered in the market.

A number of readers have mentioned the possibility of the pension plan not paying out my annuity, though for that to happen, ExxonMobil would have to go bankrupt, the ExxonMobil pension plan would have to bankrupt and the PBGC would have to go bankrupt. While this is a possibility, so is the possibility of my broker/money manager stealing it or me misinvesting it. Every option has a risk.

Government pension plans are not completely bulletproof. Laws can be changed It may seem unimaginable, but I never thought I’d see the US Capitol ransacked with half the country cheering it on.

tshort
tshort
3 months ago

I asked my financial advisor a couple years ago about this for a smaller amount in a pension I had been hanging onto for 15 years or so since leaving the company that provided it for me. I had left it untouched waiting until I retired for good figuring I’d make my decision then as to whether to take the lump sum or one of the various annuity options they offered.

My financial advisor asked me these questions:

  1. Are the annuity options fixed or adjusted/indexed to inflation or interest rate changes?
  2. What was the lump sum value 15 years ago, and what is it today?
  3. How soon will you need the money?

The answer to the first question was no – no adjustments to the monthly annuity payments. Once they start, they stay fixed.

Re the second one, fortunately I had tracked the lump sum value on a regular basis as part of my overall portfolio management approach, so I was able to go back in time and review the lump sum value and how it changed over the years.

I shared that info with my advisor who did a back of the envelope calculation and concluded that my pension’s lump sum growth rate was around 1.5% per year – about the same rate as average bond rates during the same time.

In other words, had I taken the lump sum 15 years ago and invested it with the rest of my portfolio, I would’ve done considerably better than I did by leaving it sit there for that time. Then, when I was ready to start drawing it down, I could’ve either annuitized it myself via periodic portfolio withdrawals, or bought an annuity.

Either way, I would’ve done better had I taken the lump sum earlier, since I didn’t need the money then anyways then (answer to question 3), and I still don’t.

Once we worked that all out I took the lump sum, put it all in my portfolio as a rollover IRA, and invested it according to my overall asset allocation.

One other point for you to consider: if you take the lump sum, I do believe it will go into a rollover IRA (your pension documents should explain that), so at some point it will hit as income as you withdraw from it; and will be subject to RMDs as well.

mjflack
mjflack
3 months ago
Reply to  tshort

tshort, thanks for the feedback, though I don’t agree with your analysis.

Comparing historic lump sums with current lump sums is immaterial. What matters is what the lump sum is worth today vs. the annuity option. If you could go back in time, take the lump sum 15 years, ago and then invest it in Amazon, then the lump sum will always make sense. Why didn’t your advisor insist that you take the lump sum 15 years ago? If you are paying this guy to tell you what you should have done in the past, you are paying him too much.

tshort
tshort
3 months ago
Reply to  mjflack

I didn’t have any advisor 15 years ago, nor much of a portfolio. By the time I got an advisor, it never occurred to me that the projected 6% per year growth rate they were using to project future values when I would periodically check online was very optimistic, and so the annuity values at 65 they were showing me were likewise flights of fancy (had I read the fine print I would’ve seen their disclaimer about that). Maybe the comnpany’s way of discouraging people from taking the lump sum? Dunno. Whatever. It wasn’t that much, as I said, <$100k.

As for invalidity of comparing historic to current values of the lump sum, I’d say “ish”.

In my case the backtest look was valid because I didn’t need the money either lump or annuity five years ago, and wouldn’t for quite a long time, and so there was no point letting it continue to grow at the bond rate.

Your situation may be completely different. So I agree there’s no point crying about spilt milk, as it were.

What might have been is history now, and if you need the money now or in the near term, then your only question is whether you could self-annuitize it for a bigger monthly payout than what Exxon is offering you. If yes, take the lump and buy an annuity on your own (or keep it as cash/investments). If no, take theirs. (Just my opinion – not investment advice).

Last edited 3 months ago by tshort
mjflack
mjflack
3 months ago
Reply to  tshort

tshort, when you first hired your investment advisor did he review your pension plan and make the above recommendations? Or did he wait until you came to him?

tshort
tshort
3 months ago
Reply to  mjflack

My ‘advisor’ is a courtesy service offered to me via the robo that I use. As such, it is not a full service advisory service. They give me white glove service because I’m a high value customer of their robo. I call them and discuss questions/concerns I have.

Why are you pursuing this? The backtest approach he used was very useful to me, and I never felt as though he had dropped the ball by not looking at it earlier – not his responsibility in our relationship. And it never felt like a significant enough amount for me to prioritize. Anyway, I stand by my suggestion, which is to do a backtest to see what rate of return has been, or if you can’t do that because you’ve been working (and therefore they’ve been adding to it), then I’d look at the plan docs and see what they say about that after you leave.

My wife’s company provided a minimum growth percentage she could expect after she left the company until she started claiming it. Turns out they delivered that and a bit more in terms of how the account value has grown. So her experience was very different to mine. And so likely will yours be.

BenefitJack
BenefitJack
3 months ago

Potentially, something else may be at issue here (is there a post-retirement COLA/inflation adjustment in the Exxon plan – perhaps on a portion of the benefit?). I ask because the Exxon plan must use unisex mortality, and annuities available in the marketplace do not.

I assume that all or almost all of the Exxon pension is taxable income to you as ordinary income. So, you will want to consider the impact of income taxes, taxes on Social Security benefits and IRMAA Part B and Part D income premium surcharges in making your decision.

Another comparison you may want to consider are the claiming opportunities Social Security provides – whether perhaps using some of those assets to “bridge” a delayed commencement is an effective annuitization decision for you and your spouse.

Rob Jennings
Rob Jennings
3 months ago

Sounds like a good plan-as long as you also have a plan for inflation protection.

John Yeigh
John Yeigh
3 months ago

I believe ExxonMobil also offers a hybrid plan of partial lump sum and partial annuity so you can get the best of both worlds: per their website “a retiree may elect to receive 25%, 50% or 75% of their pension in the form of a lump sum with the remaining benefit payable as a monthly annuity”

mjflack
mjflack
3 months ago
Reply to  John Yeigh

John Yeigh, my recent “One Time Lump Sum Opportunity” only offered a Lump Sum or an Annuity.

R Quinn
R Quinn
3 months ago

Take the annuity, but make sure the amount is locked in and can’t vary with interest rates, make sure the trust is adequately funded and if you take annuity get it all in writing and make sure the administrator has you on file and keep them advised of any address changes verify again every couple of years.

mjflack
mjflack
3 months ago
Reply to  R Quinn

R Quinn, the amount is locked in and cannot vary with interest rates. A review of the annual report indicates the pension plan is adequately funded. I have documentation indicating the promised payout and that my contact details are correct. Thanks for sharing your opinion and feedback.

R Quinn
R Quinn
3 months ago
Reply to  mjflack

Just based on 50 years running pension plans and seeing what can go wrong.

William Perry
William Perry
3 months ago

Your analysis and the Humble Dollar comments are on point and your decision to ask the group to comment should help in arriving at good decision for you.

I went back and reread what Humble Dollar had to say and also the James McGlynn 12/31/2021 blog on the subject. I think his thoughts and view of looking at the whole of his expected streams of retirement income is insightful and your decision criteria on choosing the pension annuity or lump sum would be well served by additionally considering your decision on claiming SS benefits, other annuities and expected future income and related federal and state income taxes.

I chose for me to wait until age 70 to claim my SS benefit which I view as buying a guaranteed inflation indexed annuity for me and likely my wife as she will likely survive me. At 72 I now find that the additional tax on my SS benefits makes me regret not having contributed more to a Roth or converting more traditional deferral to Roth before my SS benefits began. You appear to be at a age sweet spot for Roth conversions.

My guess is your decision to go with the Exxon Mobil annuity will bring you and your wife the most financial happiness and security and running the numbers on the other sources of retirement income will likely reinforce such a decision. Still, more analysis may be beneficial to you.

I always enjoy your references to events in your military service in your blogs and they remind me of my time in service in the early 1970’s. Thanks for your service and your blogs.

Best, Bill

mjflack
mjflack
3 months ago
Reply to  William Perry

Bill, thanks for reading and for sharing your thoughts.

John Goodell
John Goodell
3 months ago

Now I understand why you had a vested interest (see what I did there) in writing a counterpoint to my article on my aversion to investing in commodities. Putting aside your potential hindsight bias, incentive-caused bias and confirmation bias to focus on the primary issue in this article, you are making the right call mathematically assuming that XOM can honor their pension obligations far into the future. There are other factors at play worth considering. I seem to recall you receive a military retirement that is indexed to inflation? If so, that may change the math depending on lifestyle spending needs, your assets and liabilities. I’d be careful about assuming XOM will always be able to pay its obligation (that’s not a commentary on oil, but rather business cycles/debt/collective bargaining etc.). If not, I’d be surprised if the PBGC covers 100% of the shortfall. The argument in favor of taking the lump sum and diversifying is no more or less valid because it’s impossible to know what the future will hold. Though with the market down 25% and fixed income back to reasonable levels, the math is certainly more compelling for the lump sum withdrawal than it was 10 months ago if you were to invest in those asset classes depending on you and your wife’s longevity.

mjflack
mjflack
3 months ago
Reply to  John Goodell

John Goodell, thanks for your thoughts. I’m pretty sure that the PBGC will cover my annuity if ExxonMobil cannot. It’s really not that large.

William Perry
William Perry
3 months ago
Reply to  John Goodell

Good point on PBGC maximum insurance coverage. The PBGC website -https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee indicates benefit and is based on a current maximum much lower than the proposed annuity.

Jim Burrows
Jim Burrows
3 months ago

Mike,

One thing you really need to consider is just how sure are you that Exxon Mobil will be able to meet their pension obligations for the next 30+ years. History, especially recent history, is full of companies abandoning their pension plans via bankruptcy. If Exxon Mobil goes down that path, what happens to your $3,124 a month?

mjflack
mjflack
3 months ago
Reply to  Jim Burrows

Jim Burrows, that is a valid concern. Though the pension plan is adequately funded, and I also have the PBGC backstop. But you never know.

mytimetotravel
mytimetotravel
3 months ago

My megacorp offered a lump sum back in the 90s. The pension plan would start paying out if I retired with 30 years service, and the benefit would not increase if I continued working. I checked to see what size annuity the lump sum would buy and was taken aback by the difference. I declined the lump sum and retired the day I reached 30 years.

The mention of the PBGC below is timely. The megacorp has just decided to stop handling pension payouts itself, and bought annuities from two insurance companies instead. This means that our coverage moves to state entities instead of the PBGC.

Rick Connor
Rick Connor
3 months ago

Mike,
Thanks for the link to the Baldwin calculator. I input my data from 5 years ago and it came up with very similar results (98.9%) to the offer I received at the time. The lump sum option was an addition to the plan in 2014, and used the IRS defined “pension regulation” valuation method. The “fair value” calculation was over $400K higher than the IRS method. I’m glad I chose the annuity.

Rick Connor
Rick Connor
3 months ago

Mike, great article. Thanks for sharing your detailed information. I had a similar decision 5 years ago when interest rates were lower. Lower interest rates mean higher lump sums. We also had an early retirement subsidy which allowed you to take your full retirement annuity (65 yr old) at 60 if you met certain service criteria. The plan did not consider the subsidy when calculating the lump sum, so the decision at 60 was a no-brainer. The PV pf the annuity was ~$300,000 higher than the lump sum offered. The lump sum at 65 was actuarially equivalent to the annuity.

When I was looking at this decision I had the benefit of talking to an actuary who worked in the pension industry. He gave me a rule of thumb – think in terms of an annuity factor = Lump sum/Yearly annuity. In your case the Value is

Annuity Factor = $335,641.85 / (12*$3,124) = 8.95

For comparison, the lump sum I was offered in 2017 for a 50% J&S had an annuity factor of 14.3. An annuity of $3,124 at that time, with our plan, would have generated a lump sum of about $536,000.

Here are the caveats – I am not an actuary, the plans are probably different, interest rates are different, and your plan may have nuances I’m not aware of. I’ve learned over the years that pension plans can be very different in approach and design, so comparisons can be difficult.

I resonate with your thoughts on “stupid-proofing” a part of your retirement income. The older I get the more wisdom I see in locking in certain income in retirement. It sounds like you are making a good choice.

Jo Bo
Jo Bo
3 months ago

Thanks for sharing your investigative work with us, Michael. Longevity and stupidity insurance are top of mind for me, too.

My retirement funds are with T-CREF, and I plan to fully annuitize them next year rather than taking withdrawals or interest-only payments. The payout rate is fair (according to the Baldwin calculator; thanks for that link), and annuitizing eases a third concern: fear of withdrawing principal. For this life long saver, spending annuity payments will be much easier, psychologically, than drawing from savings and should lead to greater well-being.

Kevin Thompson
Kevin Thompson
3 months ago

great discussion and timely. If you look at it from a corporations perspective, why would they offer this benefit. Most companies want to remove this liability off their balance sheet and back into the hands of the individual, i.e 401k. So ask yourself, is it better for me or the company? The company is likely to give you a little “juice” or incentive to take the money as to rid itself of the obligation of paying you for life. The pension is the right decision 9 out of 10 times. Cover 60/70%+ of your fixed expense by guarantees and go enjoy yourself.

OldITGuy
OldITGuy
3 months ago

Interesting article. It seems you covered the financial “income side” of the decision very well. I particularly liked your reference to “stupidity insurance”, which is related to my next comment but not exactly the same. It seems to me that one aspect of this type of decision would be whether or not the pension under consideration is covered by ERISA protection. I don’t know, but I strongly suspect that Exxon’s defined benefit plan is so covered. If so, then your Exxon pension would have two additional major benefits: ERISA protection from creditors and some level of protection by the Pension Benefit Guaranty Corporation. Depending on the state you live in, the Exxon pension protections might exceed (in some states significantly) protections provided if you took the lump sum and then purchased your own annuity. It’d be interesting to see someone discuss this topic in a future article.

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