$15K A Month In Payments Or A $2.9 Million Pension, Which Makes More Sense?

Retirement decisions between spouses can range from how much to set aside in an emergency fund, what stocks to buy for an IRA account, to how much their annual expenses and discretionary spending should be budgeted for during their golden years.

In instances where at least one of the spouses is eligible for a lifetime pension, this can be a windfall boost to a retirement nest egg. However, other factors can enter the equation, such as whether to take the pension in monthly payments full spousal survivor benefits. 

Annuity or Cash?

A 52-year stay-at-home mom posted on Reddit, asking for advice about her husband’s annuity. The details she disclosed were as follows:

• She is 52, her husband is 51. 
• Her husband plans to retire at age 60.
• They have a son who is 12, and will be graduating when they reach retirement age. 
• College tuition will be covered by their 529 account.
• Not including their home, the couple’s nest egg portfolio is on track to reach a valuation of $4.8 million to $ 5 million  when they reach retirement age.
• The husband’s healthcare package will be in effect for their lifetimes and will become a backup to Medicare after age 65. 
• The couple’s combined Social Security benefits will be $65,000 at age 67.
• The couple plans to leave the remainder of the funds to their son as part of their estate after they both pass. 

The husband’s pension offer is the big question.  The offer has two options:

• Option 1: Receive a lump sum of $2.9 million to be managed at their discretion.
• Option 2: Receive $15,600 per month with 100% spousal survivor benefits.

There is no cost of living adjustment (COLA) component. 

The poster later adds some additional details:

• If they take the lump sum, they would choose to put it in an IRA as pre-tax income and pay income taxes upon withdrawal.
• The poster estimates that their annual expenses and spending budget will be $120,000.
• The 529 account is more than sufficient to cover 6 years at a state university, but a private college might require withdrawing funds from the couple’s brokerage account, or from cash flow. 
• Starting at age 50, the husband was entitled to 60% of the value of his pension. Each year he continues to work prior to reaching age 60 adds an extra 5% to the pension’s overall value. 

The Broader Perspective and The Longer Timespan

The poster had already done some initial calculations and estimated that if she and her husband live to between the ages of 85-90, they will need the portfolio to earn 5.03% annually on the lump sum, and 5.33% if they live to age 90-92. Predicated on the 5% or better APY, the monthly amount outperforms the lump sum only if the couple lives past age 89.

While those numbers and math work if that rate of return can be consistent, there are a few other factors not included in that equation:

• The current higher rate environment impacts lump sums. The poster and her husband will have to assume that the prevailing interest rates will drop by the time they need to declare their preference for the pension payout. 
• The 5% or greater market return is based on the double-digit Bull Market run returns over the past decade.  Therefore, 5% is considered to be a conservative number at present. There are no guarantees that the rate of return will consistently deliver 5% or a higher rate in the next decade. 
• The husband’s preference leans towards the monthly payout as a guaranteed separate source of income, just in case the nest egg portfolio sustains a sizable loss. 
• The poster is more optimistic and believes that the lump sum, under their management, would be able to outperform the target 5% or higher, thus offsetting an average 4% drawdown and preserving a substantial part of the nest egg for her son.
• Assumptions regarding inflation are another issue. While the likelihood of inflation returning to Bidenomics levels is slim under the current Trump administration, the next president’s policies will directly impact the economy. As such, any rise in inflation is a wild card case for taking the lump sum. The lack of a COLA in either option also makes the poster inclined to opt for “the bird in the hand principle vs. relying on the monthly pension payments to be solid for the long haul, and not be subject to mismanagement or forced liquidation due to a merger, etc.
• While the poster concedes that every year she and her husband live past age 89, the monthly payment option becomes more attractive. New medical breakthroughs and overall extended life expectancy can weigh the decision in favor of the monthly $15,600 option. 
• As the lump sum would go into the husband’s IRA account, the couple’s added Social Security benefit of $67,000 at age 67 will likely bump them up to a higher tax bracket. Unless the couple shifts funds earlier on into a Roth IRA, the couple will be potentially subject to RMD after age 70, which may result in a higher tax bill than anticipated. 

The couple will have ample time (9 years) to make their decision, so there is a strong likelihood that many of these taxes and other estate management concerns will change significantly by the time they are ready to take the step.

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