Tom Walters (not his real name) faces such a dilemma. He is planning to retire at 62 from a company where he has worked 35 years. Before he retires, he has to decide whether to take his pension as a monthly annuity from the company or opt for a lump sum payout of almost exactly $475,000.
If Tom takes a single life annuity, he’ll get $2,875 per month for the rest of his life, but if he should predecease his wife, she would get nothing. If he takes the 60 percent joint and survivor annuity, he and his wife, who is 10 years younger, will get $2,565 per month while both are still living, and the surviving spouse would get $1,539 when the other died.
If he were to opt for the lump sum without putting it in an annuity, Tom would have to earn 5.41 percent annually to generate monthly payments of $2,565 for 33 years, until he reaches age 95. At that point the account would be depleted, his wife would be 85 years old and quite possibly in excellent health.
Neither the annuity payments nor the monthly withdrawals in these calculations would rise with inflation.
Once the Walterses make their decision, it is irrevocable. “It might be the most financially significant decision that most people ever have to make,” says Donald W. Patrick, a Certified Financial Planner and managing director of Atlanta-based Integrated Financial Group, a consortium of planners.
Before the Walters hold their noses and jump one way or the other, they — or anyone in this position — should consider these basic issues about whether to get an annuity or choose the lump sum.