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I recently viewed an interview by Christine Benz on YouTube with the finance writer for the Washington Post.
The topic was the difficulty transitioning from saving to using money for retirement income, a topic frequently discussed on HD. The writer said she was getting ready to retire and her husband was already retired. She went on about her own thinking regarding the difficulty of transitioning from saving to spending.
After a few minutes of the discussion about withdrawal strategies, she revealed that in addition to what she and her husband had saved, they both had pensions and, of course, social security. Her husbands pension provided her with a survivor annuity.
She then said she was taking her pension in a lump sum because she wanted total control over her money. Giving up a life annuity income when you have additional resources doesn’t sound like good move to me, especially after saying how difficult the withdrawal strategy would be, what do I know, I’m not a financial columnist. However, I do live on a pension and Social Security and I know the feeling that steady income provides.
Maybe she has enough investing skills to pull it off, but I bet most of the YouTube viewers would be making a mistake. To me the key to a secure, stress-less retirement is a steady income stream that does not require annual withdrawal calculations or decisions or fluctuating income.
The writer gave up the second best source, a pension, not available to many Americans these days. Most people must construct their own income stream.
If I was in that position I would use a portion of my investments to purchase an immediate annuity and I would assure an added income stream with dividends and interest. I see that as simple with few additional decisions needed on an ongoing basis. No guardrails, no ladders, no (significant) worries about the stock market. And it preserves at least a portion of investments.
In fact, to cope with my non-COLA pension, over many years I have built a supplement income stream from bond interest and dividends and because it has been reinvested for over twenty years, the monthly proceeds could now boost our pension income by nearly 20%.
No doubt there are other ways to construct a retirement income stream, better than mine very likely, but I like simplicity even at a cost.
How do people do it, that is, construct their retirement income stream from accumulated savings with minimum effort, maximum stability and minimum stress?
You’re not making a logical argument for your position, you’re making an emotional argument based on your way of experiencing the world (nothing wrong with that, but it means you value some things over others, not that it’s a better choice)
It’s not only possible to do this, but a professor from U Chicago has developed a calculator to let you create a 2 fund portfolio, input your known fixed income streams and compare the results quite easily.
The real question is, can the individual do it? Just because it’s easy doesn’t mean there’s follow thru. Just look at the long term investor returns versus market returns, even with people moving to index funds, they lag. Why because they still buy high and sell low.
SO I think you’re asking the wrong question. Everyone should ask themselves:
Can I act in my own best interests or am I best served by paying someone dispassionate (like Mr Grossman) to execute the best long term strategies? (because advisory costs that help you avoid mistakes are way more valuable than other expenses)
I think you answered the question which I also alluded to – can the individual do it? I say the answer for the great majority of people is no. I think what people are actually doing or not in terms of saving for retirement is evidence of that.
A theory proved is not necessarily applicable when you add the human factor. Pensions were designed to be annuities.
Given the possibility of making it all work as you suggest, workers should be happy with 401ks in lieu of a pension. What do you think?
I agree with your first paragraph.
On the 2nd, I’d prefer 401k to pension, it accumulates easier and is portable, that’s a big advantage. Very few people spend 20-30 years in one place to really cash in the best part of a pension.
Unless we’re going to change back to people spending a lifetime at one place 401k. Of note, union jobs, that usually lead to very long tenures, still have pensions, even if they’re not as generous as they used to be.
You are right. As I have said before, pensions do require long service to be of value. For all practical purposes 401k makes more sense- we just need to find a better way to add an annuity factor that does not require the individual to make the decision to convert a chunk of cash.
I would like to see an annuity investment option within the plan that accumulates gradually, perhaps using only employers money.
Some employers have started doing this, eliminating the employer match to a 401k and replacing it with a defined contribution pension that vests immediately so that it’s portable. Not my cup of tea but I can see why employers like it.
If it’s defined contribution, it’s not a pension unless that is buying only an annuity.
As I have mentioned before, we live on my pension and our combined social security. Combined they exceed (dare I say it) my working base salary. The checks arrive every month, just like a payday.
Would it be reasonable to trade that or most of it for a lump sum and potentially higher net worth but with risk and withdrawal decision making, especially considering existing additional qualified and non qualified investments?
If you say yes, please share your thinking.
It depends on your situation. If you retirement income is too high, taking a lump sum instead of a pension may be the way to go. The RMD schedule is very stretched out, and will require you to take much less than the pension every year.
On the other hand, if you need money to live on, the pension is the way to go.
Never heard of retirement income too high. Who doesn’t need money to live on? It must be me, but I cannot see what anyone would want to trade a pension for the risk of investments and withdrawals.
What if you’re single and in your early 60s with a short life expectancy? Would you still pick the pension over the lump sum?
In that case I’m not sure it matters either way unless there are legacy plans of some kind and even then “expectancy” is still an unknown variable.
in all my years doing pensions I can’t recall more than a handful of retirees who didn’t get at least several years of pension payments.
Apparently plans are offering lump sums more often as a way of reducing future pension obligations, probably in plans already or planning to be frozen. Just another strategy to get out from under long-term obligations.
I still maintain that few workers lucky to have a pension are prepared to manage a lump sum as their income.
Except perhaps for vested terminated employees, pension plans should not provide a lump sum payout. They are designed and their intent is to be an annuity, a lifetime income. That was the intent from the first plan in 1875.
If that is not the case, why do we care they are mostly gone? After all, a defined contribution plan provides a lump sum. If participants in a pension plan all took a lump sum, why bother with a pension?
The fact some participants feel they can do better with that cash shouldn’t undermine the pension plan. The lure of cash in lieu of an annuity has gotten many retirees in trouble. Lump sums cost a plan money.
It’s a bit ironic that some 401k plans are looking to add an annuity option.
A pension is a pension is a pension.
None of the people who are participants in pension plans have any role in plan design, how well the pension funding is invested or whether or not the plan offers a lump-sum in lieu of an annuity, or most importantly whether or not the employer has fully funded their obligations to the plan. Plan beneficiaries only have an obligation to view their options and make an appropriate decision that is to their personal advantage. If there is a lump sum option available, consideration of how well the plan is funded, meaning how likely they are to actually receive their “lifetime” benefits is an important thing.
In most cases they are not contributing toward the cost either. The status of the plan is reported to participants annually. The status of the plan is reported to the government annually. There are minimum funding requirements. The sponsor pays premiums to the PBGC for insurance. Widespread lump sum payments would put the plan at risk. Simply put a pensiin is intended to be an annuity…period.
I believe the salient point Dick is making is if everyone o the pension plan took a lump sum distribution the annuity portion of the plan would not have sufficient funds to provide said annuities.
It shouldn’t matter to a fully funded plan whether it pays it’s obligations out over time or in a lump sum at the time of retirement. The lump sum is simply the discounted value of the future stream of annuity payments for the average life expectancy for the beneficiary’s age and gender. It is the sum of all these discounted values which represents the present funding of the plan. Of course, a plan with only 50% funding probably ought not allow such lump sum payments. And, is why a beneficiary of under-funded plans should consider taking a lump sum if available.
It matters, there is a cost to the plan for lump sums. Basically lost future earnings. I had this discussion with actuaries many times.
Of course the issue is adverse selection. A pension plan needs to have the unhealthy in the plan because they die earlier than average and fund the benefits of those who live longer than average. I mean, that if you knew that you would only collect monthly payments for a few years, a lump sum would be much better for you. The average life expectancy of a 65 male being around 17 years means that half die before the end of that time span.
That’s it. DB plans are not designed to provide lump sums. To apply the financial sophistication of HD readers to the typical DB participant in handling a lump sum is wrong. Why offer a traditional pension if it is going to be used for lump sums?
I managed DB plans for many years and negotiated the benefits with a half dozen unions. They all were strongly opposed to lump sums as they knew what could happen when their members got their hands on several hundred thousand dollars.
Cash payments are what a 401k is for. A DB plan is an annuity. One argument against 401k plans is that they don’t provide an annuity, no guaranteed income stream, all the risk on the worker. To suggest turning a pension into that makes no sense.
It seems to me one discussion has morphed into another.
The first was (roughly) whether there was any sense in taking a lump sum over monthly payments.
Then it became whether pension plans should offer lump sums in the first place.
Let’s not confuse the two. Whatever the answer to the second question is, it has no bearing on one’s individual decision regarding the first question.
You’re right, except if a DB plan does not offer a lump sum there is no decision to be made.
Yeah a pension isn’t a static thing. Look at the differences between countries as to the breadth and depth of things called pensions.DB, DC, state SS etc
You’re projecting a concept from the past onto people’s highly individual reality. Taking a poor annuity in contrast to a lump sum that has potential for significant upside if invested appropriately isn’t necessarily the best decision. Taking all income when that amount is too high for a couple’s requirement may not be optimal. Having a lump sum for lifestyle needs upon retirement e.g. an RV or final home move/clear mortgage might be desirable to some. If anything people probably desire optionality and not being forced into “it’s this or nothing” based on someone’s view from 1875 as to what is best for them. If US pension schemes were all that they would at least have inflation adjusters incorporated for starters.
Calling anything other than a DB plan a pension is a misnomer. They are retirement plan. There is a difference. Having cash and other investments in addition to a pension is fine. In fact, I say a necessity, but a pension is designed to provide a steady income stream for life, maybe two lifetimes. It is not intended to be converted to cash. Why not just put the money in a DC plan if that were the case?
As far as a COLA goes, that would be nice, but it is a cost issue, somewhat unpredictable. That’s why they are mostly confined to public pension plans. Dealing with inflation is another reason to have investments beyond the pension income.
My granddaughter is a newly graduated elementary school teacher who is likely to go to work for her local Midwestern mid-size city school district. Her father often asks me about financial stuff and brought to my attention the plight of the school district pension plan. After years of investment mismanagement, it’s management had been taken over by the state and was currently only 50% funded. We are talking about over a billion dollar shortfall. The district is making $50M annual makeup payments, but doesn’t seem to be moving the deficit needle much.
After reading all the prior comments, I noticed that no one mentioned doing due diligence about the pension plan offering the lump sum option. I think that this is especially necessary when the plan’s monthly annuity payment is significantly higher than what one can buy in the annuity market. The economics of annuities don’t change much as all the entities offering them must invest in the same economy. Someone who claims to be able to pay a significantly higher annuity payment must be thoughtfully evaluated. There is no such thing as a free lunch.
I would also like to point out that with financial discipline and a little effort, it is possible to produce your own annuity and save the cost of the entity who does it for you. You need to buy a 10 year Treasury bond ladder in which the value of each year is what you would obtain from a monthly annuity. Each year as a bond matures you put one twelfth of the proceeds into your checking account each month and buy a new 10 year Treasury to replace the one that matured. You invest the balance of the lump sum in some reasonable allocation plan.
I totally understand that a lot of people wouldn’t want to do this as it is outside their comfort zone. However, fully funded pension schemes are rare. The PBGC was created for a reason. If you do not elect the lump sum, what you might collect from the PBGC should your corporate plan fail, will be less. I don’t believe that public state and local pension plans participate. Many state plans are significantly under-funded…….For example just google State of Illinois Pension Plan funding.
Could you please do an entire separate post explaining this in more detail? : “You need to buy a 10 year Treasury bond ladder in which the value of each year is what you would obtain from a monthly annuity. Each year as a bond matures you put one twelfth of the proceeds into your checking account each month and buy a new 10 year Treasury to replace the one that matured. You invest the balance of the lump sum in some reasonable allocation plan.”
To be very exact on my question:
If you have a 10 year Treasury bond of $120k that matures, when you “put one twelfth of the proceeds into your checking account each month” does that mean you put $12k into your checking account at the amount of $1k per month?
When you “buy a new 10 year Treasury to replace the one that matured”, is that a $108k bond?
Lump sums from plans in the shape you describe hasten their demise.
Not hard conceptually. Maybe taking her pension in addition to her husband’s and SS was too derisked for them and while it might cover them comfortably left little for inheritance etc. When you die early that pension doesn’t look like such a stellar deal.
Maybe the commutation offer was too good to resist.
There’s no right answer. If everyone followed the RDQ method they’d work too long to get to total income replacement particularly if they didn’t have the RDQ fortune re longevity.
Washington Post lost 100 million last year.
Perhaps the cash payout exceeded the
PGBC guaranteed value and that was
a major factor in the decision.
As of 2013, when the Graham family sold the Post to Jeff Bezo, it looks like the plan was in great shape:
https://humbledollar.com/2022/07/buffetts-pension/
I’m in the process of submitting my retirement paperwork, so the lump sum vs annuity decision is very real to me about now.
My husband retired from a California state agency in 2016 with 20 years of service and went to work in the private sector. He chose a monthly pension with survivor benefits. In fact, I had to participate in the process and confirm that I was aware of his choice (I assume because of community property laws in California). His pension does get an annual COLA, usually right around 2%.
I’ll be retiring on the same day from two separate university systems and will receive a pension check from each. While I can’t say I haven’t looked at the lump sum option, I’ll be taking the annuity with survivor benefits (and COLAs), just as he did. The upside of this is obvious—secure income for both and eventually one of us for as long as we live. The downside, of course, is that we don’t know how long we’ll live. A lump sum could go into our estate. There is one caveat to this, though. If, for example, we’re traveling together this summer and our plane goes down somewhere, my heirs are guaranteed at least the return of my pension contributions over the years. So if I have an early checkout date, they won’t “lose” everything.
I believe that a signed spousal consent form is required for private defined benefit plans under ERISA rules. Individual states may have different rules for state pensions.
I know from personal experience that TIAA also requires spousal consent for defined contribution benefit plan distributions.
Yes it is
RDQ, I think you’re not considering that the other income streams might be more than sufficient for baseline expenses and by taking her pension she can the get cash payment which she can use to help her children now vs the drip and drab payments each month. Then there is the longevity factor to consider where she may fear that she could die and the payments she would have collected would be much less than the cash value payout. She might have figured being able to help her children buy a house now with money she doesn’t really need is much better than leaving it to them 30 years down the road where the benefits are just not as great. My point there is that it’s never a decision in a vacuum, and so much has to go into the decision making process. Goals matter too.
Her situation is clearly not typical, but I thought her status as a financial writer was influencing others, not in her situation, to also grab a lump sum in lieu of a pension which more often than not I see as a poor choice.
Poor choice because she’s giving up the guaranteed income? If this was her only other sources of income other than social security then I might take the bite and agree whole heartedly. I just think one cannot blindly say it is the best option. A CFP would have to consider the entire picture including the individual’s goals to help them determine. A bird in hand can be worth many in the bush…
As long as the bird doesn’t fly away😎
She has an atypical lifestyle. She’s wealthy, and I believe she doesn’t have children. For her, I think a lump sum wouldn’t be a hardship, not so for others. I listen to her podcast and while I don’t agree with all her advice, I mostly agree with yours!
The interviewer doesn’t have children. But the person she interviewed apparently does — and that’s the person who opted for the lump sum.
Yes, she has 3 children. Chris
When I reached retirement age years ago and would no longer obtain any more benefit of returns on my hospital pension I had to address the pension vs lump sum decision. I had been reading voraciously about annuities. With about 100K in my account this amounted to just under 1% of our retirement assets. I researched online what comparable insurance annuities I could purchase on my own would pay monthly and amount was significantly lower. I went with the pension for several reasons: 1) if I was going to buy an annuity at any time in the future why not do it then when my research showed the payment was higher than what I could obtain on my own, 2) vetting- since the retirement fund included pensions for MDs I figured that the pension fund would do their homework and would pick an insurance company (Northern Trust Company) that provided a decent pay out, and was financially safe, 3) the pension also would be covered for loss by the state insurance department, 4) convenience- all I had to do was sign one document and the HR department did the rest, 5) finally the break even point (I know this excludes future earnings if invested) 12 years or when we (I chose the 100% survivorship option) lived about 12 years, or 77 years old (if my wife lives to 100 (addressed before) this would be 35 years of payments.
David, my thinking was similar to yours when I retired after working for a local healthcare system. About a year later I received a letter from said healthcare system stating they were in a class action suit with former employees because they were trying to weasel out of ERISA regulations as a Catholic hospital. Now, I have no guarantee of that monthly sum that I receive. When a friend asked me for advice on whether to take a lump sum or annuity when she was retiring, I told her to take the money and run!
I could have taken a lump sum instead of a pension. When I looked at what size annuity I could buy with the lump sum it was much, much smaller than the pension amount, possibly because I was taking early retirement.
Now I’ve moved to a CCRC I have started drawing on my portfolio – less than 1% at this point. I have a five year CD ladder, about $70,000 in a money market account and over $100,000 in an intermediate muni fund, so I don’t have sell stocks unless I choose to. If I start to feel my brain isn’t working as well as it was, I might look at automating withdrawals.
I also wanted to answer the other part of your musings, Dick. We are mid 60s. We don’t have millions of dollars like some of the other HD folks, but are what I would consider regular Americans. In our case most of what we have is in 401k/IRA, both traditional and Roth. We also have a taxable account and a HSA. We had a couple of small pensions that we ended up taking b/c with those and our SS, it is enough for our regular expenses, at least for now. It made sense for our situation. We are starting to take a very conservative amount from our traditional IRAs instead of Roth conversions. Again, it makes sense for us, but maybe not for others. We are taking to the top of the 12% bracket in taxes. Last year we sold some appreciated stock since we wouldn’t have to pay capital gains for our extra money. So far things are going well. We have different pots we can draw from, depending on taxes. And trying to spend some of the traditional IRA first for now, before we have to take RMD. I am a good saver, like the WaPo writer, and think we will be ok. We live simply, and will use some of the IRA money for travel in our “go go” years. I like having the different pots, and we think of them in a similar way to the bucket strategy that Fritz Gilbert wrote about in The Retirement Manifesto, and Jonathan/others have talked about here at HD also. Chris
With the pension and SS as a foundation your approach makes sense to me.
We have a rollover IRA and brokerage account about evenly split. Only withdrawal is the required RMD so far.
Many people take the lump sum after speaking with a fee based or commissioned financial advisor, who doesn’t get paid if they take the pension. I have to wonder if there’s a conflict of interest even when the advisor is a fiduciary. That’s another good reason to seek out an hourly paid professional.
I find it curious that generally we lament the decline of pensions and then when available some people reject them.
You have to run the numbers. In our case, it didn’t make sense to do the lump sum. The pension folks have a vested interest in you taking the lump sum also, don’t they? It gets it off their books. Chris
That would make sense Chris.
I think I know who you are talking about. I have followed her for many years. She comes from a background where she and her siblings were mostly raised by their grandmother. She has been open about her background and having irrational fears at times of being a bag lady. She and her husband recently paid off their house. Her husband has a govt pension. Her children are grown and on their own. She is frugal and saves for what she wants. She is also charitably inclined. I don’t know why she would choose a rollover instead of the pension, but maybe she is concerned about the Post’s pension long term? Chris
Yup, that’s what she said in the video. Frugal, saved, paid off house, etc. Then there was “I want to be in control of my money” Which I guess makes sense. Like you said, who knows funded status of Post pension. She didn’t allude to that.
The other thing I thought of is they might be thinking of generational wealth/legacy planning. A pension you wouldn’t have that. And some of their kids are in lower paying professional positions. Chris
My point exactly in my response. Spot on.
I have an investment portfolio with a targeted asset allocation of 70:30 – it’s actually more like 85:15 at the moment due to laziness with respect to rebalancing.
I determine my withdrawal amount for the year by using 2 calculators:
I pop in my numbers – portfolio balance expected SS and pension and when I expect to start drawing them – and look at the recommended amount to withdraw. I set up an automatically monthly transfer to my (one) checking account and that’s it. Super easy. Super simple.
I have never actually withdrawn as much as the calculators say I can, as it would far exceed my monthly expenses, but I like knowing that if there is something I want to splurge on, I can.
This approach requires minimal effort (30 minutes/year?), my withdrawal rate is low, so I feel very secure, and I feel zero stress about it. In fact, since I started using this approach, my worry about funding retirement has all but disappeared.
Trying to understand.
Are you actually retired now as you say expected SS and pension? When you say your withdrawal rate is low, what percentage would that be of your portfolio?
Do you have any concerns over the stock market or that your withdrawal amount could vary over future years?
Do you know the assumptions the calculator uses to generate your numbers?
My partner is retired (not drawing SS yet). I’ll be working for another year or so, at which point I’ll draw a small pension – I won’t draw SS until 62, which is 7 years off. The calculators take into account when SS and pension kick in, so the amount we draw from the portfolio will change. Right now we are drawing ~1.5% from the portfolio; it will likely bump up to 3% when I retire, but will drop to closer to 2.5% when SS kicks in.
I’m not super concerned about the stock market – certainly not in comparison to the concern, disbelief, and horror that grips me when I scan the headlines.
One of the cool things in the VPW worksheet is that it gives you a withdrawal amount based on your numbers, and also a ‘required flexibility’ amount that assumes a 50% drop in the market. It’s certainly possible that the amount we withdraw could vary – that’s a built in feature of both methods. The key for my peace of mind is to know that the potential required flexibility, based on a drop in the market, poses no hardship, as we don’t draw down anywhere close to that number now.
I have read extensively about both methods, and am comfortable with the assumptions. Have you played around with either of them? If not, you should! They are pretty nifty.