If you are planning on taking the AT&T annuity, you will love taking the lump-sum and buying an annuity. When evaluating the best options for retirement, it is beneficial to plan ahead in order to avoid being left shorthanded. In an online survey of 1,911 Americans aging 50 to 75, 34% of retirees who took a lump-sum buyout from their defined-contribution plan depleted that sum within five years [1]. With that taken into account, if you are an AT&T employee being offered a lump-sum buyout, it may be worth looking into a better alternative. The purchase of an annuity using your lump-sum pension may prove to be a better option.
Why Should I Consider Taking the Lump-Sum & Buying an Annuity?
Your AT&T lump sum pension is calculated using the Composite Corporate Bond Rate. When interest rates rise, AT&T pension lump sum payouts fall. When rates fall, pension payouts rise. As an AT&T employee looking to retire at a time of increased interest rates, it is worth considering taking the lump sum now to lock in the higher value prior to next year’s decrease, and purchasing an annuity with a third party. When it comes to most annuities, payments increase with the cost of living, helping you keep up with inflation. Opting for an annuity may also reduce your taxes in retirement. Only yearly payments are taxed in an annuity, and the investment grows tax-deferred. On the other hand, a lump sum buyout is taxable when taking it for yourself, which is why we recommend a rollover to avoid unnecessary taxes. Taking the lump sum and buying an annuity with a third party may also prove better considering AT&T’s limited annuity options. Unlike other annuities, the AT&T option only offers fixed payments and does not have a COLA, effectively reducing your purchasing power over time. Furthermore, in AT&T’s single and joint life annuity, if something were to happen to the retiree and their spouse early in retirement the pension would end. With a wide variety of options to choose from, going with a third party gives you the opportunity to elect a plan tailored towards your needs, and eliminates AT&T’s annuity limitations.
Risk Versus Return
Research commissioned at The American College of Financial Services found that while consumers often hear about and have had annuities recommended to them, almost none of those surveyed understood the specifics of annuities [2]. As an AT&T employee looking to retire, it is essential to understand annuities and potential to provide great benefit when set up accordingly. Annuity payments can be collected for a designated number of years, or last throughout the remainder of your livelihood. The timing which income starts being received is also your choice. When choosing to receive income immediately, you will be paid within a month of purchase. If immediate income is not a necessity, a deferred annuity can delay payments to a future date providing opportunity for your savings to grow tax free over a longer period. The type of annuity chosen also determines how your money is invested. A fixed annuity behaves similarly to a CD, offering a specific % return over a number of years. Fixed annuities are the safest option as growth can be projected exactly and the amount of income received is certain. Despite that, it is worthy to consider how potential returns of fixed annuities are lowest when compared to other options, making it more vulnerable to inflation.
Variable annuities invest in market-based accounts and savings growth is dependent on investments. When investments perform well, a higher income is paid off. When performance is poor, payments may be reduced. In addition to that, a variable annuity risks partial loss of your contributions if returns are terrible. As an AT&T employee looking to retire, it is imperative to consider an annuity company that guarantees a base level of monthly income in the event you run out of money under a variable annuity.
An additional type of annuity worth considering is a fixed index annuity. A fixed index annuity lies within the middle when it comes to risk and return. While performance is tied to a market based fund such as the S&P 500, a gain and loss limit is instilled. Depending on the contract, gains can vary between 0% and 11% due to participation, regardless of actual investment gain. When the market experiences a downturn, you are protected in that year returning 0%. Heightened returns are forfeited in exchange for the security of not losing money in a bad year.
Is an Annuity The Best Option For a Retiring AT&T Employee?
As an AT&T employee nearing retirement, it is imperative to consider the longevity of your funds whether you are taking a lump sum or an annuity. While receiving a large sum of money at once might seem more appealing than smaller continuous payments, one must also consider the loss of value due to inflation, whether to invest the money or not, and how much of it to spend every year. If you choose to invest the money, there is always the possibility of a market downturn which could significantly impact your net worth. Essentially, taking a lump sum payment could prove more profitable than an annuity if the money is being managed effectively. On the other hand, the risk in taking the buyout and managing it yourself is significantly higher than purchasing an annuity that fits your needs. As an AT&T employee, it is imperative to recognize that the pension plan offered typically provides an all or nothing choice. By taking the lump sum you can annualize the needed portion and leave additional assets for growth, effectively benefitting from market gains while remaining protected. Currently, many third party annuities provide the same level of income offered by your AT&T annuity with only a portion of your total lump sum being used. An example would be taking the lump sum and annuitizing 85% of it, leaving 15% to invest or for flexible access. Essentially, when planning for retirement it is crucial to prioritize sustaining your current lifestyle while nullifying risks of asset loss, instead of taking large amounts of risk for a higher return. With a wide variety of annuity options, it is fairly likely that you will find one that meets your necessities while keeping your assets safe from market volatility and inflation. With that taken into consideration, you may want to contact us at The Retirement Group to explore different options and consolidate a plan that is right for you.
The Retirement Group is not affiliated with nor endorsed by AT&T. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.
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