Lump Sum vs Annuity: Which Pension Option Is Better?

[@vicros7811]

Another option for the lump sum is to buy a property and renting it. You get a monthly payment and appreciation of your asset. In addition you can leave it to your children as their inheritance. The cons are becoming a landlord and paying taxes on the property. The pros are appreciation and you can raise the rent to accommodate for annual inflation. Great video.

[@ItsEverythingElse]

You're paying a huge tax bill up front.

[@gregnicholson689]

What’s the tax hit? Property just can’t be for personal use.

[@julhe8743]

They will kill you in taxes if I’m not mistaking if will be considered orSubaru income .

[@jeremiahreilly9739]

James, excellent! So many "financial advisors" eagerly spout rules of thumb without any understanding of the underlying complexity and consequences of decisions. Choosing between a lump sum and an annuity is so much more than a calculation, as you point out: IRR, risk tolerance, legacy desires. You can add "state of health" to the consideration of life expectancy. If you or your spouse were seriously ill, you might choose to take a lump sum and "live it up" for a few years. Perhaps financially "sub-optimal" but emotionally very meaningful.

[@RootFP]

Thank you, Jeremiah!

[@carola3046]

Just watched this and it was very helpful although my husband and I are in a somewhat different situation. I am retiring this year after 27 years in public education...I will be 75 in July. My husband (turning 82 soon) was self-employed in a small business and only has social security. I say lump sum - although I don't want to invest...I just want some left for the grandkids...he says annuity. We have to decide soon. Even at this age, it's a still hard to decide!

[@cynthiaowens9107]

I’ve read several articles where some people with a several $100K lump sum spend it in 5 years or less! Unfortunately, I know people who have experienced this situation…sad but true!

[@Gypsy2057]

I am choosing the Annuity, here's why, the market's gains vs. mutual funds. Without going by what I've been told but looking at the actual gains in the different mutual funds there's a gap. Fees and other cost brings down the return and the market's recent downturns put the icing on the cake and I'm taking annuity. Yes, the average gain might be 8% in say the S&P 500 but even with the mutual finds in that market I haven't been able to get that return. Be careful what a financial advisor tells you as they are in it for the money, their money, not your money.

[@schnell9364]

Very well presented. This is a situation that we will be facing in a few years and we have been running the numbers to make the best decision. I am leaning towards lump sum to have control of our money and leave a legacy as you mentioned. Thanks again for producing such informative videos.

[@RootFP]

You're welcome! Thanks for watching!

[@larrywilkerson1996]

😮

[@pensacola321]

The biggest consideration is if you want the lump sum amount in your estate.... Income is usually overall better for the retiree. Take the sure thing.... But if you want to leave a legacy, it is better to take the lump sum.. But you never know about the investment performance.

[@Fell214]

On of the best videos I’ve seen on this topic. Nice work.

[@clevelog]

AS INTEREST RATES RISE, THE LUMP SUM DECREASES. I hope that when/if interest rates decrease, the lump sum will increase. Lump sum values looked very good when interest rates were zero. Not the case today. Thank you for a fine presentation.

[@MrMaxamillion67]

I enjoy your videos. My wife has a teacher retirement annuity and I have a 401K plus a pension. When I retire I am looking at taking the annuity vs the lump sum. I am looking at retiring at 62, which is in 6.5 years, and have been given estimates of 7.2% for annuity payouts. If I take the annuity and take my Social Security at 70, I should only have to take out about 2% of my portfolio to help keep up with inflation. With my wife's pension and Social Security, we should be making more retired than we were working.

[@RootFP]

Sounds like you’ve got a good plan in place!

[@nestormadera8890]

⁹

[@christopherhennessey8991]

My pension comes with a 3% annual COLA.

[@wiks101]

Your Lucky!

[@roseb.5367]

3 weeks of stress until I found your video. Thank you soooooooo much for helping me yo make the best decision for myself and my family. I appreciate

[@RootFP]

Thank you!

[@murrayspiffy2815]

I disagree with the comment at 1:40 - *Maximin Payout* is not as important than *Securest Payout* - meaning - humane nature is a fickle thing and taking a little less can be a lot better for the human soul than continually stressing about how to maximize the assets I have like chess pieces on a board. A lot can be said for - *_x amount is coming in next month - and I can live really well on that - and I don't have to worry about a lot of extra curricular ongoing problems - because I'm relaxing playing checkers._*

[@johngill2853]

Great video Just one thing I didn't like is you use the guardrail approach and then figure you always will be at the top end of the guard rail. If the worst shows up it's a whole different story than at the best happens. But you explained it very well and gave great information on the choice.

[@RootFP]

Thank you

[@EdfromCanada]

This is an excellent well balanced approach. I would take the lump sum hands down. I ran the numbers in depth and concluded that an annuity is a lousy bet.

[@ItsEverythingElse]

I agree. Lump sum is so much more flexible with regards to spending and tax planning. Plus removing all risk of not living long enough.

[@jhors7777]

Thank you for posting this helpful video

[@randolphh8005]

I think the how much money you get over your lifetime should be the last consideration, as it is totally hypothetical. The only exception being known poor health leading to a high probability of early death. Legacy is a strong consideration. If there are no legacy goals then it gets to the same argument as your portfolio. We know that many people never spend down their portfolio, or if they do it is at the very end as they are dying. To me (and I’m a physician) it becomes a false argument. The total lifetime return of a portfolio/lump sum is generally calculated over 30 years, and the great majority of people don’t get close to living 30 years in retirement. So in the end you leave all that money on the table, and never actually get to use it. The only people getting to use all that money are your heirs(which is fine if that is your intention), or maybe your medical providers. So guaranteed income can be a better option, because it allows you to spend down the portfolio a lot quicker, say over 15-20 years. Thus, getting to actually enjoy your money and your life. After all money is just a proxy for a comfortable and enjoyable retirement, and that should be the goal, not some arbitrary dollar figure.

[@RootFP]

Glad it was helpful!

[@austinburns4213]

Two points I am curious about that I didn't hear mentioned: (1) adding a lump sum $700,000 IRA to your portfolio at 65 - what does that do to your RMDs/Tax rate when you turn 73 or 75 - versus not having RMDs big tax on the annuity option. (2) I didn't hear about the pros/cons of investing all or part of the monthly pension payout - for example putting into a Roth each year.

[@danasimmons2513]

A CFP advised me to take the lump sum, but sure I agree. I did the math, 305K divided by the annual payout 100% survivor option of 23,412, I came up with 7.67%. James, let me know your thoughts? Sounds better to me?

[@user-lq2xz8ui5e]

Excellent balanced approach to this topic. What I've chosen to do is a bit of both rather than an all or nothing decision. I put about 25% of my assets to annuities to create an income floor that will be there regardless of the vagaries of the market with the remaining 75% invested in a mix of market and non market assets to give growth to account for inflation. The annuities plus my expected social security should cover my essential expenses to give me the peace of mind to remain invested in the market come what may. Then I can draw from this investments to adjust the annuity income for inflation.

[@davsmith7334]

Can you review your numbers displayed around 4:49 and after? I think your lump sum total of 1,000,436 is either wrong or what you said was wrong.

[@GrrliinaK]

I saw that as well. I think it’s a typo.

[@dougreed3629]

Awesome presentation. Thank you.

[@RootFP]

Glad you liked it!

[@diggernash1]

My pension had no minimum age, so I retired and started receiving payments at 45 years old. While working a second career, I am abl we to invest about 4500 per month. I am also investing very aggressively, because of the buffer to risk that the pension represents.

[@ItsEverythingElse]

There is investment risk for lump sums but there is inflation risk for annuities.

[@Donkeyearsa]

I watched this to see what you won't cover as so many people who cover retirement planing either just don't cover things or they just gloss over them. You actually did a very good job. You only missed part of one subject. You covered the comfort of risk tolerance, but you failed to cover "lottery disease" where one finds that they have a large some of money and they blow it all within a short time. One thing that needs to be covered is would they have the discipline to only take out the proper withdraw money each month that the plan accounted for and no more no matter the circumstances. Can they basically coldly tell someone to go hit the road when some relative or other person comes to them and says, "I can't pay my bills, or I want this and you have the money to help me."

[@tedosmond413]

at 4:55 the last figure appears incorrect....

[@stevehowe209]

I think you have a typo on the $ amount you list on at the 4 minute 56 second mark

[@jessefletcher9116]

I think there's a risk management angle to consider here, what happens if over time the pension becomes underfunded or insolvent? It could be healthy today, but will that stay true 10, 20, 30 years from now? Take the lump sum and you eliminate that risk altogether. The PBGC might indemnify and it might not, the government doesn't alway work as advertised, just ask the Madoff investors who counted on the SIPC to be there for them.

[@scottbradley4012]

So the assumption is - take less money (in total dollars) in the early years but with a 3% annual interest it will catch up and exceed that annuity amount after ten years. You said a lot more then just than just that, but... I have to believe that my income needs will be the highest in the first ten years of retirement - and reduce over the remaining years. My 85 year old mother lives a pretty quiet and inexpensive life - with her biggest expenses being gifts for the grand children... But at 65 she and my father were traveling the world. The question: If a guy does not care if he leaves a single dime in his estate after he dies, does this change the calculation at all?

[@ItsEverythingElse]

No inflation adjustment is a show stopper by itself, IMO. Plus the fact that an annuity may permanently put you into higher tax brackets.

[@anhthytran2366]

Great video, James! This is so timely. I am actual in a slightly different scenario, my pension plan allows me to start collecting distribution before traditional retirement age if I leave the company. So as it turns out, I am leaving my company. I am currently 48. I have the option of annuity or lump sum. My question is, can I roll the lump sum into my next employer’s 401K plan or does it have to be rolled to an IRA? The reason I would consider rolling to the 401K versus a traditional IRA is leaving the possibility of back-door Roth IRA conversion option open to leverage. I did a $6k backdoor conversion in 2021, did the same in 2022, and planning to do another in 2023 and so on, as long as the government leaves the rules alone. I currently do not have a traditional IRA. My retirement savings are in Roth IRA, pension, brokerage account and 401K.

[@RootFP]

Hi Anthony, That’s a good question and I don’t know the answer! I would check with your pension company to see if they’d allow for a direct rollover to your new 401k.

[@bigshoe84]

So if we take the lump sum option, how do the taxes work on that? Does it count like $700,000 of income in one year?

[@RootFP]

If you roll it over into an IRA then the taxes are deferred.

[@julhe8743]

Great information🙏

[@glenglene8473]

why my pension lump sum reduced if I work past 62 years of age? Annuity is remained the same even I work after 62, but lump sum is reduced based on the fidelity in Fidelity.

[@Blublod]

Great presentation. Instant new subscriber. Given the current and foreseeable volatility of the stock market in the coming years it may be that the annuitized payments are more attractive assuming there are no legacy considerations except the spouse. Am I correct in that assessment?

[@RootFP]

Thanks, Rick! There will always be volatility in the stock market even after today’s issues pass. So I don’t know that I’d say our current events should impact the decision any more than usual. One additional thing to note - if the current issues of inflation persist then the annuity doesn’t preserve purchasing power as much as it would in low inflation times

[@Blublod]

@@RootFP - Thank you. You reaffirm the point about inflation you make in the video presentation, and you would be correct. You've given me lots to think about, and to be honest, I had not considered rolling over an annuity for reinvestment.

[@shakes3100]

Wish I knew how to figure mine out. It’s 7400 base a month with a 1.5% cola for 20 yrs with a 1000 on top of that for the first 10 yrs. Effectively 8400 a month first 10 yrs then 7400 till i die. Or 1.3 million lump sum. I’m 48.

[@marciarivera5963]

My husbands union gives a pension and an annuity we aren’t sure what to do with the annuity. Lump sum roll over or payments

[@user-jc7ck9xe7d]

Thank you

[@bruintoo]

Never a lump sum when it is government pension! They usually have COLAs , too! You can make your children beneficiaries of the pension when both pensioner and spouse die.

[@xlavahott4547]

I worked for the state for 10 years and can take a lump sum, which they call "refunding my account". I worked in the private sector and paid into social security for 20 years. So my question is can I take the lump sum (actually just rolling over to IRA) and collect my social security and avoid any WEP issues/reduction?

[@yun9393]

Is it possible to take out (rollover to traditional IRA) lump sum out from Federal pension?

[@enigmathegrayman2953]

I don’t have a lump sum option

[@robertwilson7736]

Am 64 and will have to claim housing benefit at 66 I have a plan but will loose payments because of rent is it best to take it out in lump sum now?

[@RootFP]

It depends on income, risk tolerance, etc.

[@robertwilson7736]

@@RootFP sir ì won't benefit from a private income at 66 because of pension credit claim for rent if I leave it till then I will never see any of it so is a lump sum wise reply appreciated

[@HungNguyen-se8dn]

You face higher taxes with lump sum than pension payments ❤

[@soniaalonso2557]

I don’t have any plan how can I start?

[@janibeg3247]

i took the aunnuity - money to live on. We had other investments.

[@ItsEverythingElse]

Really a bad time to take lump sum right now. I hope interest rates drop!

[@rajvo7406]

Amother thing to consider. I may get a massive heart attack 3 years into your annuity , and my wife may die of endometrial cancer 5 years down the road. How much money will be rollerd to my grand kids.....abd their kids.

[@RootFP]

Good point

[@francisoconnor2392]

Money goes back to pension fund.

[@francisebbecke2727]

Just how financially stable is the institution giving you the pension? If it run by Bernie Madoff?

[@toddmaniatoddmania9844]

5:04

[@edhcb9359]

No survivor option, no inflation increases? Understating the risk of future investment returns? Did you just graduate Edward Jones? Because that’s all their standard sales nonsense.

[@tonioyendis4464]

If your company allows for lump-sum (many don't) upon retirement, take-da-money & RUN! You can thank me later...

[@Dahmy12]

My family 1st

[@edhcb9359]

5.6% withdrawal rate? Spoken like a true financial advisor attempting to skew his argument for lump sum. 🙄

[@abrahams.lincoln6749]

👍

[@JustinCase-em6ql]

Never, ever, do any kind of annuity. Don't even consider it...ever!

[@rayzerot]

Very insightful. Or you could elaborate?

[@danzdog]

What assumption are you applying for life expectancy ? I mean retire at 65 and u assume they live another 25 years. A little of a stretch don’t ya thinl

[@junkandthangs]

This is tooo over the head of a regular working person… make it simpler