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Lump Sum -OR- Distributed Pension Payout?
How to Decide which One to Take?
Your thoughts are appreciated?
63 months ago
3 answers
In theory, it is a straight-forward calculation. You already know the expected cash flow if you take the pension monthly payments. What you need to figure out is what kind of cash flow could you generate on your own. For example, you could take the lump sum and buy an annuity that pays (for illustration) 5.5% annually. Which one generates higher monthly payments?
There is an important second factor to consider. When do the pension payments stop? In many cases, the payments stop when you die, even if you die right after receiving your first monthly check. If you take the lump sum and invest it yourself (whether in an annuity or something else), there could potentially be a death benefit to your beneficiaries.
The easiest way to figure this out would be to go see a fiduciary financial planner who can help you with the calculations and help you figure out which way is in your best interest.
Lump Sum -OR- Distributed Pension Payout?
A general 6% example guide
As a general guide, if your monthly pension check equals 6 percent or more of the lump-sum offer, then you may want to go for a perpetual monthly payment. If the number is below 6 percent, then you could do as well (or better) by taking the lump sum and investing it, and then paying yourself each year (like a personal pension that you control).
Here’s how the math works:
Take your monthly pension offer and multiply it by 12, then divide that number by the lump-sum offer.
Example 1: $1,000 a month for life beginning at age 65 or $160,000 lump sum today?
$1,000 x 12 = $12,000 divided by $160,000 equals 7.5 percent.
Here, you would have to make approximately 7.5 percent per year on the $160,000 to earn the same $12,000 a year. Earning 7.5 percent a year consistently and over many years is a tall order. Taking the monthly amount in this case (7.5 percent is greater than 6 percent) may likely be a better deal over the long haul.
Example 2: $708 a month for life or a $170,000 lump sum today?
$708 x 12 = $8,496 divided by $170,000 equals 5 percent.
In this scenario, the monthly pension amount is offering you a return for life of about 5 percent.
Remember, for the first 20 years even earning zero percent, you could do the same before you run out of money. If you made even a modest return (say, 2 percent per year), you would be far ahead of what the monthly pension would pay you. In this case, 5 percent is less than the benchmark of 6 percent, so you might be better off taking the lump sum of $170,000.
Any thoughts?
63 months ago
JOHN C. BOGLE R.I.P [Age 89]
I attended medical school in Philadelphia back in the day, which was not far from Malvern; PA. My girl friend at the time was at the Wharton School
So, we were thrilled to have the occasion to actually visit and tour Vanguard Headquarters.
We were not able to meet Mr. Bogle but I am very grateful to him.
63 months ago