I’ll Take It From Here

Blake Hurst

I RETIRED FROM MY other job in 2022, so I could return to our family farm. Upon leaving, one of the first decisions I had to make was whether to take my pension as a lump sum or as monthly annuity payments.

The pension plan based the lump sum on length of service, salary and age, plus the interest rate as of the prior December. The lower the interest rate at the time of retirement, the higher the lump sum benefit. I made my decision in April 2022, using the interest rate set in December 2021.

The decision about how to take pension benefits is a difficult one. If you aren’t comfortable handling a large sum of money, an income annuity is the obvious choice. If all of your ancestors shuffled off this mortal coil before their hair turned gray or their joints began to ache, and you aren’t feeling so good yourself, then perhaps the lump sum might be the wiser option. Ditto if your idea of a fun day during retirement includes the consumption of illegal drugs interspersed with skydiving.

In my case, my parents are both still living and in their late 80s. Three of my grandparents lived well into their 80s. In fact, my paternal grandfather fell just short of living in three centuries. He was born in 1900 and died in 1999. With those antecedents, a lifetime annuity might seem like a good bet.

But to make a considered decision, it’s important to have some idea of the interest rate assumption used to value the annuity payments. After all, if that rate is higher than your personal long-term investment returns, or close enough so that the longevity insurance provided by the annuity plus the imputed return seem like an attractive deal, then you should choose the annuity.

In my case, the imputed interest rate was 2.5%. That made sense, given the low interest rates available at the time of my retirement, but less than I expect to make from my investments. And that’s why I chose to take the lump sum. Because of our family business, I’m comfortable handling large sums and knowing that those sums must last for a long period during which no income is likely.

That’s the nature of agriculture and particularly the greenhouse business, where our yearly income comes in a three-week period. Moreover, I have other sources of income and didn’t immediately need regular pension payments. An added bonus: Interest rates in December 2021 were at historic lows. The value of the lump sum payment would never be higher, and I was aware that the timing of my decision was fortuitous.

Now, given the lofty valuation of the stock market, even after the recent unpleasantness, maybe 2.5% or 3% is what we should expect for future investment returns. Gosh knows, my 2022 results fell short of that benchmark. But if I can average 5% or 6% over the next few years without touching the principal, my lifetime expected returns will be much larger than I could have received from the annuity.

While Social Security promises an increase in monthly payments for delaying the start of benefits, there was no advantage to postponing my pension, so the only logical choice was to take it as soon as I was eligible. Rolling the lump sum into my IRA allows the principal to grow tax-deferred, which will save me taxes over the next few years, when I expect I’ll still be receiving income from the family business.

Does all that sound well-reasoned and rational? It does to me. But truth be told, that’s not really the reason I decided to do what I did.

Among the biases identified by psychologists, one of the most persistent is our overconfidence in our abilities. I’m not immune to such bias when it comes to evaluating myself as an investor. Of course, I ignore this and other biases every day—otherwise they wouldn’t be biases.

I love to invest, spending hours each week studying the market and thinking about my portfolio. The thought of investing that lump sum over the next few years is, to me, like a fly fisherman discovering a new stream, a golfer seeing Pebble Beach for the first time, my wife finding a new flower to plant… well, you get the idea. I took the money all at once because it would be fun to invest it. If that’s a bad decision, it’s not likely to affect our retirement, but rather the size of our estate. Sorry kids, but the old man has an expensive hobby.

Blake Hurst farms and grows flowers with his family in northwest Missouri. He and his wife Julie have three children. Their oldest daughter and both sons-in-law are involved in the family business, growing corn and soybeans, and shipping flowers to four states. Their middle daughter is the chief operating officer for a small hospital. Their youngest, a son, is a lawyer for the Department of Justice. Blake and Julie have six grandchildren. Blake is the former president of the Missouri Farm Bureau and a freelance writer. His previous article was When to Quit.

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