Lump sum versus annuity pension, which one's better? I got a call the other day, and the guy is retiring from a very large company, saying, "Hey Stan The Annuity Man, they're offering me this lump sum. They, the company. They're also offering me this pension payment, which is an annuity. They're offering me a lifetime income stream. Which one do I take? Which one is better?" Remember, there are no good answers, just bad sales pitches. I'm never going to sales pitch you. We have to dig into that question so I can help you make that informed decision so you will get the highest contractual guarantee.
Getting back to the phone call. The guy says, "They're giving me this lump sum, then having me choose between that and a lifetime income stream. Which one's better, Stan, The Annuity Man? Which one should I take?" Well, it comes down to your specific situation. You have to ask yourself two questions. What do I want the money to do, and when do I want those contractual guarantees to start?
Now, if you do not need the income to start immediately, I would give you a couple of choices. You can just roll that money into an IRA or whatever and manage that money yourself or have someone manage that money in non-annuity assets. If you want to protect the principle, then you can transfer it to an annuity to protect the principle. Two types do that, Multi-Year Guarantee Annuities, the annuity industry version of a CD, and Fixed Index Annuities, which are also CD-type products. Shocker, they're not market products. You could do that and protect the principle.
But if you say, "You know what? I think the spouse and I need a lifetime income stream to combine with social security, which, shocker alert, that's an annuity. Everybody owns an annuity that has a social security number. Let's just say you ask me... I'm asking you to tell me the exact number and monthly guaranteed amount the tour company, your former employer, is offering you. From that, I'll take that number and the same structure that you're thinking, and this is very, very, very, very important. Many companies don't offer all the structuring choices as on the street would. Essentially, you’re saying that a Single Premium Immediate Annuity is what you're buying. A Single Premium Immediate Annuity is a lifetime income pension that can start as soon as 30 days to a year.
What the company is offering you is a Single Premium Immediate Annuity. What you're saying to me is, Stan, please shop all Single Premium Immediate Annuities with the same quote parameters so I can compare apples-to-apples, son. That's my job. Now, spoiler alert, 85% or more, and this isn't some documented Yale Harvard study; this is Stan The Annuity Man, which is probably better because I'm on the street. I'm in there with you. I'm in the annuity weeds. Most of the time that I do this, 85% of the time, I find the company offers a higher contractual guarantee than I can shop for on the outside with an SPIA.
You say, "Wait, whoa, whoa, whoa, whoa. Why is that?" Think logically. If your company is offering you a pension, run your own quotes on my site to make sure you’re getting a competitive offer. Because I have the best calculators on the planet, they're going to find out what the guarantees are and probably have them a little bit higher. Why? To keep your money so they can keep it and dole it back to you over your life expectancy or life expectancies instead of having to come up with the lump sum.
That's my job. When this gentleman's like, "Okay, we want the lifetime income stream," I say, "How do you want to structure it?" This is key. "Do you want it joint life only? Do you want it joint life with a cash refund or joint life with an installment refund, or a period certain? What do you want?" Again, I've written a book on immediate annuities. I'll send it to you for free. Go to theannuityman.com and sign up for it. But that's the conversation we're going to have.
Once you tell me the structuring choice that you've chosen to compare with your employer, I will run that exact immediate annuity quote under the same parameters so we can see who has the highest contractual guarantee. You own an annuity for what it will do, not what it might do. The will do is the contractual guarantees. You're going to choose the contractual guarantee.
My grandfather always said, "If you tell the truth, you don't have to remember anything." If I'm providing a lifetime income quote based upon the same parameters as your company is offering, and the comp company is a good, solid company, and they have a higher contractual guarantee, I'm going to say, "Go with that." But suppose I have the highest contractual guarantee. In that case, I'm going to say, "You might want to consider taking the lump sum and transferring it to this Single Premium Immediate Annuity company because we contractually beat the contractual offer from your employer."
One big factor in your decision is the stability and strength of not only the annuity companies that I'm quoting but your employer. Can they back up the claim? Are they financially stable enough to provide that lifetime income stream? I mean, you need to think about that.
Now we can help you with the annuity side, but on your side, where the employer, you're going to probably have to do your research on that and make sure that they can back up the claim if they have the highest contractual guarantee because, in essence, you're transferring the risk to your company if they're the highest contractual guarantee to pay you for the rest of your life. If you choose an annuity fee, the annuity quote is higher, and you're transferring the risk to the annuity company to pay you for the rest of your life regardless of how long you live as long as you breathe.
Now, what I would encourage you to do is when you get this offer, you're going to get a single life offer, meaning just on your life or joint life offer with your spouse or partner. Now, the single life offer will always be higher from a guaranteed standpoint, from a monthly income Standpoint. Why? Because they're guaranteeing that monthly income on just one life. But I would encourage you to do this. You married people out there or long-term partners that love each other, put your spouse or partner on the contractual guarantee for lifetime income because that's important. When you pass away, and I know you're invincible, I know you're saying, "Hey, I'm invincible. Nothing is going to happen to me." Trust me; it’s going to happen. But when something happens to you, if you set up the joint with your spouse or partner, that income will continue uninterrupted and unchanged for the rest of their life as long as they're breathing. Also, you can structure it so that 100% of any unused money will go to your list of beneficiaries and the evil annuity company, or your company will not keep a penny under any circumstance, all right, even though they're on the hook to pay for as long as you're breathing.
This is a big decision. I will tell you this. I get these calls all the time because many people are retiring. There are over 10,000 baby boomers hitting age 65. They're either thinking about retiring or retiring or retiring pretty soon. You have to make the right decision. If you're a golfer, I always say there are no mulligans in retirement. There are no do-overs. Once you make this choice with your employer, it's done. You can't go back to them, "I've changed my mind." No, there's no change in your mind. That's why we need to talk one-on-one and walk you through this decision so that you can make an informed decision.
There's no urgency ever to buy an annuity. There's no urgency to decide on your company plan unless they give you a time horizon on when you need to do it. But we need to start quoting all carriers, looking at the contractual guarantees, and making sure that what you're doing and what you're getting ready to do for you, your family, spouse, or partner, is exactly what you want to happen. Because annuities, they're customizable. People say, "I hate all annuities." You can't say that unless you're stupid because many of them are out there. There's a ton. There are at least seven that I can count different types, and then you already own one because of Social Security.
But I want you to understand that you've worked hard for this company. You've laid it on the line. You sacrificed. You've given them all you have, and now you're at the finish line. They're saying, "Lump sum or pension?" Let's go very slow. Let's go very slowly together and walk through that process. I will tell you the truth if you get me on the phone. If the best deal is for you to stay at the company, I will tell you that, period: two words, monthly payment. I'll say it again—monthly payment. When you retire, that's the game. What's my monthly payment? What's my monthly payment on Social Security? What's my monthly payment on my annuity? What's the monthly payment on my pension that my company's offering? Monthly payment equates to an income floor, the guaranteed amount hitting your bank account every month.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.