Posted on 11/09/2012 9:49:38 AM PST by Springfield Reformer
Despite the strong emotions of the moment, the reality is that we have to get through this. Whether we are in for a short or a long winter is unknown, and dependent entirely on the mercy of God. Still, it should be the objective of each of us to not merely survive, but to flourish during these dark times.
With that in mind, I have a question for our financial experts. I am being given an opportunity to convert a service annuity into a lump sum payment. The lump sum is equal to twelve years of pension payments. I hope to live at least twice that long, so on its face it looks like a bad deal. But then I consider Quantitative Easing (aka money printing madness) and I wonder if taking fixed payments for twenty or thirty years might be even more of a bad deal.
So here's what I'm really asking. Where can I park my lump sum during a dismal period like this that will preserve the value over time? Or should I bet against inflation (???) and just take the semi-monthly pension payments for the test of my life? Thoughts?
a. This is a tax matter. Tell us about the taxation of the lump sum.
b. The trouble with lifetime annuity payments: if you need to go on Title 19 (in your late 80’s for example), the annuity income is lost ... if you do not have a spouse. So, a fixed term annuity with larger payments is often a better choice.
c. Long-term care planning is what is crucial. How does this fit in with your plan.
The only real currency is the calorie!
Calories cover both heat and nutrition....
Get an EBT or SNAP card and use the damned thing to prep, that is the only damned way.... Use the rest of your money for survival food. create a “alternate economy” based on barter and claories....
Use the socialist pukes own tools as a tool against them! While we still have access to them!
Lead and brass are getting ready to escalate. I already have a stash and added to it today at my neighbohood sporting goods store.
There’s another important factor: How reliable is the payment for the rest of your life? Companies that go into bankruptcy have been allowed to renege on pension obligations. If that’s a concern, it’s an argument for taking the lump sum.
Another argument is the one you note, that continued deficits/quantitative easing/the printing of more money/other government policies will inevitably lead to hyperinflation (eroding the value of your fixed payments) and, because of crowding out, skyrocketing interest rates (increasing the return you could get on your lump sum). My problem with that prediction is that I’ve been hearing it for almost a decade now, ever since Bush broke his father’s record for biggest single-year deficit. If someone in your position back then had ignored these warnings (many from conservative economists) and had bet against inflation, he would have come out well ahead.
Welcome to the club.
If it is a bad deal, reject it.
The offer I got undervalued the pension by 50% by my calculations. So the offer was not a serious offer.
I valued my offer by using Fidelity to compare.
To obtain the same pension that my company has already ‘promised’ me, I would need to give Fidelity $109K right now to reproduce that deferred single life annuity.
My buyout offer was only for $71K.
This buyout would be subject to a 20% witholding and a 10% tax penalty unless it is reinvested.
They also offered an immediate single life annuity of about $369/month for life.
Fidelity said I would need to give them $91K right now to obtain such an annuity. So while this deal is substantially better than the lump sum offer, it is still not equivalent to the existing pension value.
Sounds to me like a d@mned if you do, d@mned if you don’t situation. The lump sum will be consumed largely by taxes and, in all likelihood, the money will not be worth as much as it is today due to the probable looming inflation.
By the same token, if you don’t want to invest it in gold or silver, there aren’t too many options. Europe is teetering on the brink of the same fiscal cliff we are teetering on so, investing offshore doesn’t provide any better safety or security.
I think your best bet would be to talk to a financial advisor. This is a tricky issue.
We are going to have to make that decision in the next few months. One of the advantages would be that we could leave the money to our children, instead of none of the pension. Would love to hear how others are making the decision.
How will I survive? How about form a mosque? (I may even include a trade union front to get my hand up that skirt at the same time) I’ll be allowed to craft strategy in secret, avoid objectionable realities, plunder without the law coming after me, obstruct, lie, commit felonies, fraud and employ some gungho bad asses to stand around with AK47’s and look tough to make sure the gullible oafs stay in line. I’ll start by finding a few really lowdown hispanics and get them strong arming their barrio bloods, telling them their recent vote for Obama came with a price. 400.00 gringo dollars or we turn them over. I’ll print small laminated membership cards with a Union no. - that’s all they’ll get for 400.00 clams. Then they’ll be told to show up each week and pay dues. I’ll wear a turban and sunglasses and paint my skin a really weird color of brown. When asked questions I will scream and wave a scimitar in one hand and a Ruger in the other. I will be rich and powerful.
So your question is whether or not you can find something that will pay you about 7% forever. That puts you into something like KMP, a pipeline partnership. They currently pay about 6%, but increase their dividends each year. The last few years, it's increase only 2% or so, but over the last 10 years it doubled (avg 7% or so).
The question is, what risk is greater, inflation or doing your own investing?
I think inflation is a big risk. One way to fight that is to save part of your pension payment. But even saving that in a "safe" interest paying account won't beat inflation right now, much less what is coming down the pike.
My choice was to pull what cash I could out of my pension, and look for ABCD investments, Anything Bernanke Can't Destroy.
Seekingalpha.com has some dividend oriented contributors, like Dividends4life or David Fish that have good articles on the why & how of dividend growth investing.
of course, if you're a govt employee, you never go bankrupt...
maybe we flood Mexico....
you could always take the payouts month to month but also buy a very good life insurance for your spouse or your kids...
I am told there is a 10% penalty and additional withholding tax if I don’t roll the lump sum immediately into an IRA or 401k, etc. The funds would sit there until I am almost 60. So any more aggressive investments, if I commenced them immediately, would have to make back up that lost ground.
As for long term care, I plan on being perfectly healthy indefinitely. :) But you raise a good point. If it came down to death panels, I have already outlived many of my betters, and would only want to hang around to help my wife and children as long as possible. I am honestly not sure what that means in terms of Title XIX. My hope would be I go till I drop outright and not make any use of it.
Great question. My wife is concerned there isn't anything safe. Whereas I tend to think some things may be safe, but I'm not sure what they are. Am I hearng you say these dividend growth instruments are "ABCD?"
excellent. But you still have us confused. This is an US Military pension? When would the payments start?
You have narrowed the choice down to:
1. keep the annuity.
2. move it into an IRA.
Cashing out is for the fool. The taxes reduce the value so low you could never recoup.
We need more information. Is there a beneficiary on the annuity? What happens to the payments when you die?
1. Not military, but a large, well funded private energy firm (nuclear).
2. Payments to start any time at my election. Smallish penalty for starting before 60.
3. Beneficiary if I die is my wife, at a reduced level.
again, if your life expectancy (based on your health) is greater than the average man your age .... and look at your wife’s life expentancy ... is she very young? .....
Is there a COLA in the annuity? You need to find the “net present value” of the annuity they offer. You need an annuity calculator. If the lump they offer is close to the value of the annuity ... yes, roll into IRA.
If they are offering a lump significantly less than the real value of the annuity, keep the annuity.
Valuing an annuity is not easy. Could take a few months for you to understand it.
http://gie.fidelity.com/estimator/gie/gielanding?refpr=annufixincom011
Indeed.
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