1. Receive a lump sum and take it as cash or roll it over into an IRA. $13,000 is the payout. Subject to taxes and IRS penalty if taken as cash.
2. Receive annuity in the form of $75/month starting in December 2014 and continuing until I die
3. Defer all payments until I'm 59.5, or whenever I chose. If I wait until age 66, I would get $375/month until I die.
Assuming you will live 50 more years, get 5% after-inflation returns, tax rate = 25%, inflation = 3%, and have an option to wait 34 years for a higher monthly annuity:
n = 50
r = 5%,
t = 25%
i = 3%
m = 34.
Present Value of options:
1. $13,000
2. $75 * 12 * (1 - t) * (1 - (1 + r)^-n) / r = $900 * 0.75 * (1 - 1.05^-50) / .05 = $12,322
3. $375 * 12 * (1 - t) * (1 - (1 +r)^-(n - m)) / r / (1 + i)^m = $4500 * .75 * (1 - 1.05^-16) / .05 / 1.03^34 = $13,389
Given the uncertainties in r, t, i, and m, for the values chosen it's reasonable to say all options are ~equal - not too surprising if the former employer has good actuaries. So just pick one and don't look back.
Except for one thing: in option 1 you get to defer taxes in the IRA. If you expect to be in a lower (e.g., 15%) tax bracket in retirement, option 1 gets my vote. Otherwise it's back to a 3-sided coin flip.
Brief background on the formulas (edification for some, and an opportunity to critique for others):
Calculation for option 2 is for annuity present value. See the first formula in
http://en.wikipedia.org/wiki/Annuity_(finance_theory).
Calculation for option 3 is for annuity present value at age 66, discounted back to today's value based on assumed inflation.