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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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As a retired civil servant, I stayed with getting a pension with COLA’s instead of going into the FERS program back in 1984, we were given one chance to switch over. From what I recall, only one other worker chose to switch out of the pension and into FERS. Am so glad I kept the pension option but took it while agreeing that my wife will get half of what I get if I should pass before her.
Very happy that I know I’ll get a payment into our checking account each month. Having the COLA just means it will grow according to the current financial situation. The peace of mind I get knowing all this makes me sleep well at night. Especially with the stock market volatility of late, quite happy with my choice. Watching my investment portfolio go up & down like a yoyo recently is hard to watch but the one thing I have learned is not to panic & just stay the course. Those who panic usually end up selling low & buying high, two mistakes I do not intend to make.
Am glad though in your case, taking the lump sum works & you are happy with your decision. I wish you many years of prosperity & good health…as I do us all!
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:
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