Another great advantage to the lump sum is being able to manage/customize annual income and taxes. Who has converted their lump sum to a Roth IRA? What steps were involved? What is the final tax impact??
70 replies (most recent on top)
When I made my pension decision in January 2016, I chose the annuity over the lump Doealready had more than enough retirement savings in my Vanguard 401. When I computed the 100% joint and survivor annuity to the lump sum amount, it showed the annuity was providing us the equivalent of a 6.1% return. I figured that was very good for a no-risk investment to last the rest of our lives.
Last time I checked a while back, my initial payout was greater than 6% and also I could not find anyone with as good of an annuity on the open market, including Vanguard. Maybe things have changed or my numbers are different because of my PSL. Don't know.
And please don't ask me to post my personal info on this site. Thanks.
You can check the math yourselves if you like, using the CVX retirement calculator and the Vanguard annuity offered on their web site. Just input the numbers and compare the results.
For example, if I use the CVX retirement calculator tool it tells me my lump sum is close to $1MM and the Single Life annuity would be $56,000/yr for life or about 5.6%. For a $1MM lump sum, Vanguard offers me about $55,700/yr for life or just about 5.6%. Note that the amount the retirement tool calculates will be dependent on your age - higher age has higher payout as longevity to actuarial age is reduced. Both annuities offer different options for single, joint, fix amount, etc but Vanguard has a wider variety including inflation-adjusted annuities.
As far how to get the lump sum to Vanguard, you simply roll it over into an IRA, then fund the annuity. No tax owed.
An annuity which starts later in life has several advantages: 1) it will have a higher pay out (due to reduced longevity), 2) if also funded later it may have an even higher pay out if interest rates are higher than current (which seems likely as they are near historic lows), and 3) it will come into effect closer to the time when faculties start to fail and annuities may be more practical than portfolio management.
So, if I tell the CVX retirement tool I don't want to start receiving the Single Life pension until age 70, it offers me $84,000/yr. But if I try the same calculation at Vanguard, it offers me $138,000 per year starting at age 70 (note this assumes I fund the annuity now not later). This is a huge disconnect in the CVX pension and tells me it is only practical to take it immediately. Since Vanguard offers a wider range of options for the same benefits, no reason to stay with CVX pension at all. Someone speak up if I am missing some advantage to the CVX pension.
As a practical matter, what makes sense to me would be to 1) take the lump sum into an IRA now since low interest rates make for a large lump sum, 2) decide how to annuitize. This can be very flexible. One can annuitize the whole amount immediately (as above) with immediate or deferred payout (depending on your needs), or annuitize portions of the lump sum at different times. An annuity ladder, so to speak. Fund a $200,000 annuity now with payments to start at age 70, fund another one in 5 years if interest rates rise, fund another at age 65 and the remainder at age 70. They can be funded through different banks for diversity/safety. As far the lump sum, one can invest it very safely (e.g. treasury bonds) or stick some in the stock market, especially if it is not needed for more than 15 years (note there has never been a 15 year rolling average S&P 500 negative return).
All this being cleared up, can we still obtain a more cost-effective annuity from Vanguard than the CVX one now if we take the lump sum?
Please don't talk about apples & oranges, like future potential for buying annuities if you take the lump sum now and wait. That's a bit more complex and is not comparable. If it is not an option to take the CVX annuity at a future date and with different numbers, then it shouldn't be compared. And if you want to take your lump sum to afford yourself that option in the future, that's the same as taking the lump sum now. Period. No one knows what the markets will be like in the future and the cost of annuities, or the value of your lump sum, unless left in cash until a future date. The problem with most of these analyses is that you have a bit of market timing sentiment built into the lump sum option. That is not required for a guaranteed annuity. After record bull market runs is not a good time to be playing market timer. Just saying.
Excellent summary, Jwbk. Accurately stated too.
@Jlfa - Since you asked, I'll correct you then. The value of the single life annuity is the base figure for all other pension options (pre-2008 plan, of course). It does not depend on your spouse's age because it doesn't pay anything to your spouse once you die. If you want your spouse to continue to receive money once you die, you need to select one of the options that provide for that (either 50% or 100%). The value of these options does take your spouse's age into account and will be significantly lower if your spouse is significantly younger than you are. It's the reason why you need to enter your spouse's birthday for the retirement estimate calculator to work. What causes confusion for some people is that the 50% spousal option is the default option if you are married. You need your spouse's permission to choose one of the other options (except maybe the 100% option). So for married retirees, the option that's used as the base for all the other options is not the same as the default option.
Jcwn, That's helpful info. It's hard to imagine that after the transfer into an account, etc. then paying for a separate annuity that it would be equal. This was covered many times on this forum. Also with the lump sum you have to roll it over into a tax deferred account or pay taxes, don't you? I would wonder if that also applies to the outside private annuity. The research done before on this forum always indicated that the open market annuities would not be as good of a deal. Also, is that annuity backed/insured by something like the PBGC? I would not be worried so much about Vanguard, but just a question.
If you delay the annuity, you need to compare the entire picture, i.e. you would already have been receiving the payments for 10 years if taken at 60. Of course annuities 'til death get cheaper when you are older. The overall payout is much less. And is it 100% joint survivor?
One of the beauties of the Chevron annuity is your surviving spouse can be much younger with no affect on the value. That yields a much larger potential. Correct me if I am wrong.
Actually the Vanguard annuity you can buy today using all of any of the lump sum today is the same return as the Chevron one. And Vanguard is at least as safe as Chevron. You also have the option to customize the number of annuities and timing to suit your needs. The best time for me to annuitize is when I am 70. At that time Vanguard would pay twice what CVX pays as CVX doesn't appear to give much uplift for those who delay start of payments (the heart of my question). I can't see any advantages to the CVX annuity.
@Jxza, taking the pension annuity from Chevron is better than taking the lump sum and taking out an annuity on the open market later. Why? Because the Chevron default pension is paid out as an annuity. To take your pension as a lump sum payment, it must be converted. Depending on your age, if before you are 60, there is an early retirement discount that will take away 5% for each year you take the lump sum before age 60. The average rates of the corporate bonds and the timing of taking your lump sum is another factor that can diminish part of your pension. In any case, once you've taken your lump sum and invested it, you begin to take distributions to live on, further reducing your base capital. Market returns in investing the lump sum will either lend some support through gains to cushion the distributions or losses in the market will further take away from your nest egg. If you then choose to invest the lump sum balance in an annuity on the open market, your bank or investment institution will sell you a product in which obviously they will take a small cut for themselves. The insurance company issuing the annuity will also take their small cut as well. Your annuity will not be as generous as the one originally offered by Chevron. You would also have to worry if the insurance company who sold you the annuity could file bankruptcy one day, whereas with Chevron, you could sleep more comfortably knowing your annuity is much safer.
Conventional wisdom is to only annuitize if you need to (marginal savings, which is not the case for anyone with a CVX 401k) and to do so as late as possible, e.g age 70. But the Chevron retirement planner gives a terrible payout if I run it with an annuity payout starting date in 15 years. A Vanguard annuity pays almost double with same inputs. Any idea why? Also Vanguard currently pays same for annuity as CVX pension with immediate start, so no reason to take CVX option. Interest rates will only go up, so huge gains if one takes the lump sum now and annutitizes later with higher rates and reduced actuarial longevity. Put the lump sum in the market if you can wait long enough to ensure solid gains, or park it in a low volatility fund if you need it sooner.
I second that - bhmn. Not to mention the peace of mind the guaranteed income brings. I go to sleep comfortably every night. I count my blessings and try not to take anything for granted anymore.
It's important to have a "guaranteed" monthly income to pay those monthly expenses.
I thought so too, bynf. Currently, the market is too volatile. All the broad indexes are at 52-week highs, leaving too much speculation for further advances. A forthcoming correction of 10 to 15% is the talk of the investment community. Who knows what to believe, but we all know the conventional axiom of what goes up must come down. I think we're about there already. The downside to investing your lump sum pension is that when the market returns are low or negative, and you are taking distributions at the same time, it takes double the effort and luck to recoup your position. Having to make gains with less residual capital is almost impossible. I'm very happy i chose the annuity when I retired a year ago. My annuity provides me $4200 guaranteed each month and U don't have too touch my 401k and IRA. All my debts and home were paid off years ago and my bank savings provides me a good hedge for additional expenses. Social Security at 65 comes my way in another 13 months. Sitting pretty. Wishing everyone equal results when their time comes to hang it up and retire.
I think that those who take the lumpectomy with today's volatile market are making a big mistake. The annuity cannot be beat in the private market these days. The annuity has a backing agency that guarantees a large portion of it. You should have plenty of investments to play the market with, on top of that, if you saved wisely. No-brainer.
7zbj, Not true, See below and peruse through some of the other threads. They pick and choose selectively and seemingly at random, although there is obviously some bizarre bias. I know from experience. They will often leave an offensive antagonistic directed post but "nuke" as you call it, the rebuttals.
Haven't seen that particular post, but if you scroll down to the content rules, you can read that personal insults and using derogatory language in general is not allowed here. And the site admins can be brutal, if they catch you violating one of their rules, they nuke not just post which violated the rule, but all you ever written.
3zly, yes thanks, I agree. The "oh so offensive" post that you are referring to which was deleted by the moderators was simply a breakdown of the annuity vs the lump sum and mentioned no other posters, was not insulting nor antagonistic. I wonder what is in the mind and/or motivation behind some of these moderators. They have no rhyme nor reason behind which posts they delete other than perhaps their own politics? How is an opinion about an annuity even their concern or business? Thanks "TheLayoff.com" for the blatant participation in the censoring of innocent free speech. I post on many sites and forums and have never seen anything quite like the lunacy of your moderators. And moderators - thanks for reading.
@3ooy, Good post. I agree with taking the annuity if you are an older retiree with other substantial savings and a 401k.
The OP is a person for which the saying goes: "A fool and his money are soon parted".
@2kxv, I've not had any problems with Vanguard in the many years that Chevron has had the ESIP with them. That's not to say they have never committed a mistake, but in my experience, lots of these so-called mistakes are caused by miscommunication on the clients part, not exclusively by an institution as professional as Vanguard is. Sorry, but my opinion of Vanguard is as high as it comes.
-2kxv, I have had similar experiences with Fidelity. Lost roughly 1 to 2% of gains due to a sluggish rollover. I don't think any of them are without major screw-ups under their belt.
Don't stay with Vanguard they made numerous mistakes with what should have been a very simple transfer. It was a fn nightmare took over a year to fix it and cost me money. They have low expenses and low qaulity.
@OrCSQGR-1tnv, I don't know about you , but I always come to the layoffs.com site to chat with recently laid off, depressed, asshurt individuals about finance, relationships, family. marriage, etc. They always have such useful and positive information and you know that you are getting it from the Cream of the Crop!
Great. Then what's your reason for coming to this layoff site, 1iqf? Entertainment?
@OrCSQGR-bbs, SWEET!!!! Best advice I've seen since I've been reading this site!
The lump sum pension can be a very large amount for most ex-employees with over 25 years. I retired after 30 years at PSG 24. The amount was over $650,000. At 60 years of age, I decided to put my lump sum into my Traditional IRA at Charles Schwab instead of a direct transfer to my Vanguard ESIP 401k. I preferred that route over a Roth IRA, because I already had a Roth IRA at Schwab that I had set up some 10 years ago that I funded sufficiently. You do realize that to make a Roth work for you, the investment must be there for at least 5 years before taking any distributions on earnings tax free? Besides that, I wasn't inclined to take a high tax margin hit on the over $650k or portion of it. A Roth is an excellent thing to have, but it's best to pour money into it slowly over the years, not a good approach for investing much of a lump sum.
Not wise to convert lump sum to roth ira all at once. Should be done gradually to reduce tax impact. Best to convert it first to traditional ira.
Spoken like a true Merrill lynch advisor. Any good financial advisor will give you the same advice.
I retired last year and went with Merrill Lynch to handle the lump sum conversions. When you do the roll over, they did the NUA ( net unrealized appreciation) with my stock options. It saves you some taxes now and in the future. Of course when you do a rollover of your funds, be sure to go "directly" from one institute to the other who will be handling your finances.
Merrill Lynch is super familiar will Chevron and walked me through every step of the way. Letting me know what I had to do and when to do it.
When I did my 2016 income taxes, I had to pay 2500.00. Not bad at all.
Be sure to educate yourself on the NUA options. Very beneficial. Good Luck to you.
I get all my best financial advice from layoff boards!