Author Topic: ***Half Million or $30K/yr for life?***  (Read 5083 times)

detroital

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***Half Million or $30K/yr for life?***
« on: May 12, 2018, 05:20:20 AM »
If you were offered $500K now or $30K/yr for life, which would you choose? 

terran

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Re: ***Half Million or $30K/yr for life?***
« Reply #1 on: May 12, 2018, 05:57:34 AM »
Is the annuity inflation adjusted? Is the source reliable for the (very) long term and/or covered by some kind of government backed insurance?

BTDretire

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Re: ***Half Million or $30K/yr for life?***
« Reply #2 on: May 12, 2018, 05:57:55 AM »
So many scenarios to take!
I'm 63yrs old, I'd take the $500k.
 If I was 20yrs old, I'd probably still take the $500k.
$500k at 7% for 30 years becomes $3.806M.
$30k a year at 7% for 30 years becomes $3.260M.
  The $3.806M would generate $152,245 at 4%
The $3.260M would generate $130,400, However, you're still getting
$30k a year sooo, $130,400 + $30,000 = $160,400. (take the $30k)
Whether I was going to spend the money on expenses, it would depend
on whether I had another $750K saved. Then I'd have $60k of income.
 Taxes would have to be accounted for one way or another.
 Here's my go to compound interest calculator.
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Have at it.
« Last Edit: May 12, 2018, 05:59:40 AM by BTDretire »

ender

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Re: ***Half Million or $30K/yr for life?***
« Reply #3 on: May 12, 2018, 06:08:44 AM »
If you were offered $500K now or $30K/yr for life, which would you choose?

If someone offered me this I would 100% take 30k/year. This would be a buffer to probably allow me to FIRE entirely at this point as it is a majority of our spending.

DreamFIRE

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Re: ***Half Million or $30K/yr for life?***
« Reply #4 on: May 12, 2018, 08:15:00 AM »
I'll take $500K tax free.

Hirondelle

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Re: ***Half Million or $30K/yr for life?***
« Reply #5 on: May 12, 2018, 08:16:33 AM »
$30k/year. Could FIRE immediately and I could save up and/or give away the surplus and never worry about market downturn as the next year there'd be another $30k coming in.

Irregular Joe

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Re: ***Half Million or $30K/yr for life?***
« Reply #6 on: May 12, 2018, 08:17:01 AM »
I'd pick the $30k option. Buying an annuity of $30k / year for life would cost a lot more than $500k if you're young and healthy.

$30k / year is worth ~$500k at a 5.6% interest rate over 50 years. There aren't any investments that provide 5.6% risk-free. The downside is if you die early your heirs won't get any of it, but on the flip side you're protected against longevity risk.

Laura33

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Re: ***Half Million or $30K/yr for life?***
« Reply #7 on: May 12, 2018, 08:17:32 AM »
Well, my gut instinct says to take the cash, because it won't go away after I die.  But an annuity calculator says that a half-million right now would buy me only about $2100/month for life, so sounds like the $30K is the better value.  And it would definitely resolve any concerns about running out of money, so probably worth it.

SwitchActiveDWG

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Re: ***Half Million or $30K/yr for life?***
« Reply #8 on: May 12, 2018, 09:20:40 AM »
Definitely the 30k/yr. As others have pointed out, it’s much better value mathematically.

Cranky

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Re: ***Half Million or $30K/yr for life?***
« Reply #9 on: May 12, 2018, 09:25:07 AM »
I'll buck the trend and take the $500k, but I'm old and I think that our income is going to work out fine, but I have something I'd do with a lump sum that size. (Or frankly, less.)

Malkynn

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Re: ***Half Million or $30K/yr for life?***
« Reply #10 on: May 12, 2018, 09:46:34 AM »
I'll buck the trend and take the $500k, but I'm old and I think that our income is going to work out fine, but I have something I'd do with a lump sum that size. (Or frankly, less.)

Me too.
Long term, we’re likely to have way more money than we need, but our debt payments right now are so high that the 30K/yr wouldn’t even cover the minimum payments.
Lump sum would drastically improve life immediately, annuity probably wouldn’t have much long term impact beyond speeding up debt repayment by a year or so and then having little impact from then on.

2Birds1Stone

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Re: ***Half Million or $30K/yr for life?***
« Reply #11 on: May 12, 2018, 09:54:05 AM »
I would take the $500k unless the $30k/yr was COLA/inflation protected.

Travis

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Re: ***Half Million or $30K/yr for life?***
« Reply #12 on: May 12, 2018, 10:00:24 AM »
Does this scenario preclude other investments or income?  A $30k pension with a small 'stache is an easy FIRE situation for most folks, and you can vastly increase the risk you'd take on any other investments.

TheWifeHalf

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Re: ***Half Million or $30K/yr for life?***
« Reply #13 on: May 12, 2018, 10:06:38 AM »
TheHusbandHalf is taking his pension, in Jan, in a lump sum, about 475,000. His yearly amount, if he took it monthly and still paying me 100% if he dies, is about 2300/mo.
(We can put in different dates, different survivor ships on Fidelity, and a month ago this is what it said.) It will go into his tIRA.

It's what he wants to do, I don't argue.
« Last Edit: May 12, 2018, 10:13:22 AM by TheWifeHalf »

undercover

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Re: ***Half Million or $30K/yr for life?***
« Reply #14 on: May 12, 2018, 10:57:00 AM »
There are pros and cons to both so it's really not so easy as to give a simple answer. Also very much depends on your individual situation. Also too little information is known. Whether or not the $30k is inflation protected makes a huge difference. In almost all scenarios I think I'd choose the $30k/life except if I was very old and had heirs. Still, $500k provides more options no matter where you're at in life.

Can't really go wrong either way unless you're on the verge of death and take the $30k.

anonymouscow

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Re: ***Half Million or $30K/yr for life?***
« Reply #15 on: May 12, 2018, 02:28:09 PM »
For me also depends on the source of the 30k, can you trust it will continue? Then again it might not take that long to get to the break even point.

Davids

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Re: ***Half Million or $30K/yr for life?***
« Reply #16 on: May 12, 2018, 03:12:59 PM »
I'm taking the $500K. Only time taking $30k/yr for life over one time $500K payment would make sense is if you are under 21.

jlcnuke

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Re: ***Half Million or $30K/yr for life?***
« Reply #17 on: May 12, 2018, 03:18:07 PM »
Assuming you'll live $40 more years, and that the $30k is NOT inflation adjusted,  and assuming you plan to spend the $30k OR the 4% SWR from the lump sum, I'd go with the $500k. Here's why:

At a 4% withdrawal rate, assuming the market grows EXACTLY enough each year to sustain that plus average historical inflation only (3.22%), you'll get the equivalent of $800k in today's dollars over those 40 years as your 4% and still have the inflation adjusted $500k left over (or $1,720,918.64 in actual dollars at that time).

Assuming that $30k/year is NOT inflation adjusted, you'd get the equivalent of $680,088.92 in total payments in today's dollars after adjusting for average historical inflation again, and have $0 left at the end of those 40 years.

Obviously there are too many potential scenarios/assumptions you could make to come up with different results, but those are the scenarios/assumptions I went with.

Column 1 - Year   
Column 2 - $30k, in today's dollars with average (3.22%) annual inflation    
Column 3 - $500k 4% SWR @2% Inflation, in today's dollars    
Column 4 - Value of $500k remaining with average inflation if you died that year   
Column 5 - Value of $30k/year remaining with average inflation if you died that year   

1    $30,000.00     $20,000.00     $500,000.00     $-   
2    $29,034.00     $20,000.00     $516,100.00     $-   
3    $28,099.11     $20,000.00     $532,718.42     $-   
4    $27,194.31     $20,000.00     $549,871.95     $-   
5    $26,318.66     $20,000.00     $567,577.83     $-   
6    $25,471.20     $20,000.00     $585,853.84     $-   
7    $24,651.02     $20,000.00     $604,718.33     $-   
8    $23,857.26     $20,000.00     $624,190.26     $-   
9    $23,089.06     $20,000.00     $644,289.19     $-   
10    $22,345.59     $20,000.00     $665,035.30     $-   
11    $21,626.06     $20,000.00     $686,449.43     $-   
12    $20,929.70     $20,000.00     $708,553.11     $-   
13    $20,255.77     $20,000.00     $731,368.52     $-   
14    $19,603.53     $20,000.00     $754,918.58     $-   
15    $18,972.30     $20,000.00     $779,226.96     $-   
16    $18,361.39     $20,000.00     $804,318.07     $-   
17    $17,770.15     $20,000.00     $830,217.11     $-   
18    $17,197.95     $20,000.00     $856,950.10     $-   
19    $16,644.18     $20,000.00     $884,543.90     $-   
20    $16,108.24     $20,000.00     $913,026.21     $-   
21    $15,589.55     $20,000.00     $942,425.65     $-   
22    $15,087.57     $20,000.00     $972,771.76     $-   
23    $14,601.75     $20,000.00     $1,004,095.01     $-   
24    $14,131.57     $20,000.00     $1,036,426.87     $-   
25    $13,676.54     $20,000.00     $1,069,799.81     $-   
26    $13,236.15     $20,000.00     $1,104,247.37     $-   
27    $12,809.95     $20,000.00     $1,139,804.13     $-   
28    $12,397.47     $20,000.00     $1,176,505.83     $-   
29    $11,998.27     $20,000.00     $1,214,389.31     $-   
30    $11,611.92     $20,000.00     $1,253,492.65     $-   
31    $11,238.02     $20,000.00     $1,293,855.11     $-   
32    $10,876.16     $20,000.00     $1,335,517.25     $-   
33    $10,525.94     $20,000.00     $1,378,520.90     $-   
34    $10,187.01     $20,000.00     $1,422,909.28     $-   
35    $9,858.99     $20,000.00     $1,468,726.95     $-   
36    $9,541.53     $20,000.00     $1,516,019.96     $-   
37    $9,234.29     $20,000.00     $1,564,835.81     $-   
38    $8,936.95     $20,000.00     $1,615,223.52     $-   
39    $8,649.18     $20,000.00     $1,667,233.72     $-   
40    $8,370.67     $20,000.00     $1,720,918.64     $-   

Total Payments in 2018 dollars:            
    $680,088.92     $800,000.00       
« Last Edit: May 12, 2018, 03:20:04 PM by jlcnuke »

Seadog

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Re: ***Half Million or $30K/yr for life?***
« Reply #18 on: May 12, 2018, 07:41:49 PM »
Assuming you'll live $40 more years, and that the $30k is NOT inflation adjusted,  and assuming you plan to spend the $30k OR the 4% SWR from the lump sum, I'd go with the $500k. Here's why:

At a 4% withdrawal rate, assuming the market grows EXACTLY enough each year to sustain that plus average historical inflation only (3.22%), you'll get the equivalent of $800k in today's dollars over those 40 years as your 4% and still have the inflation adjusted $500k left over (or $1,720,918.64 in actual dollars at that time).

Assuming that $30k/year is NOT inflation adjusted, you'd get the equivalent of $680,088.92 in total payments in today's dollars after adjusting for average historical inflation again, and have $0 left at the end of those 40 years.

Obviously there are too many potential scenarios/assumptions you could make to come up with different results, but those are the scenarios/assumptions I went with.

Column 1 - Year   
Column 2 - $30k, in today's dollars with average (3.22%) annual inflation    
Column 3 - $500k 4% SWR @2% Inflation, in today's dollars    
Column 4 - Value of $500k remaining with average inflation if you died that year   
Column 5 - Value of $30k/year remaining with average inflation if you died that year   

1    $30,000.00     $20,000.00     $500,000.00     $-   
2    $29,034.00     $20,000.00     $516,100.00     $-   
3    $28,099.11     $20,000.00     $532,718.42     $-   
4    $27,194.31     $20,000.00     $549,871.95     $-   
5    $26,318.66     $20,000.00     $567,577.83     $-   
6    $25,471.20     $20,000.00     $585,853.84     $-   
7    $24,651.02     $20,000.00     $604,718.33     $-   
8    $23,857.26     $20,000.00     $624,190.26     $-   
9    $23,089.06     $20,000.00     $644,289.19     $-   
10    $22,345.59     $20,000.00     $665,035.30     $-   
11    $21,626.06     $20,000.00     $686,449.43     $-   
12    $20,929.70     $20,000.00     $708,553.11     $-   
13    $20,255.77     $20,000.00     $731,368.52     $-   
14    $19,603.53     $20,000.00     $754,918.58     $-   
15    $18,972.30     $20,000.00     $779,226.96     $-   
16    $18,361.39     $20,000.00     $804,318.07     $-   
17    $17,770.15     $20,000.00     $830,217.11     $-   
18    $17,197.95     $20,000.00     $856,950.10     $-   
19    $16,644.18     $20,000.00     $884,543.90     $-   
20    $16,108.24     $20,000.00     $913,026.21     $-   
21    $15,589.55     $20,000.00     $942,425.65     $-   
22    $15,087.57     $20,000.00     $972,771.76     $-   
23    $14,601.75     $20,000.00     $1,004,095.01     $-   
24    $14,131.57     $20,000.00     $1,036,426.87     $-   
25    $13,676.54     $20,000.00     $1,069,799.81     $-   
26    $13,236.15     $20,000.00     $1,104,247.37     $-   
27    $12,809.95     $20,000.00     $1,139,804.13     $-   
28    $12,397.47     $20,000.00     $1,176,505.83     $-   
29    $11,998.27     $20,000.00     $1,214,389.31     $-   
30    $11,611.92     $20,000.00     $1,253,492.65     $-   
31    $11,238.02     $20,000.00     $1,293,855.11     $-   
32    $10,876.16     $20,000.00     $1,335,517.25     $-   
33    $10,525.94     $20,000.00     $1,378,520.90     $-   
34    $10,187.01     $20,000.00     $1,422,909.28     $-   
35    $9,858.99     $20,000.00     $1,468,726.95     $-   
36    $9,541.53     $20,000.00     $1,516,019.96     $-   
37    $9,234.29     $20,000.00     $1,564,835.81     $-   
38    $8,936.95     $20,000.00     $1,615,223.52     $-   
39    $8,649.18     $20,000.00     $1,667,233.72     $-   
40    $8,370.67     $20,000.00     $1,720,918.64     $-   

Total Payments in 2018 dollars:            
    $680,088.92     $800,000.00       

You aren't comparing apples to apples. I'm not sure exactly what you're comparing. A 20k lifestyle in perpetuity based on 4% + an increasing nest egg, vs a 30k decreasing lifestyle?

at 6% return, the 500k is the better choice as you get equal outlay (30k) not inflation adjusted, and maintain the 500k which will also decrease in purchasing power as inflation eats away. At 0% returns and a 75 year timeframe, then the 30k/yr would be better. 

Both answers could be correct, and are purely a function of expected returns, and years left to live.



If you want you could make a 3 axis graph for various value of r and n as per your situation. Which ones are bigger than 500k?

jlcnuke

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Re: ***Half Million or $30K/yr for life?***
« Reply #19 on: May 12, 2018, 07:48:17 PM »
Assuming you'll live $40 more years, and that the $30k is NOT inflation adjusted,  and assuming you plan to spend the $30k OR the 4% SWR from the lump sum, I'd go with the $500k. Here's why:

At a 4% withdrawal rate, assuming the market grows EXACTLY enough each year to sustain that plus average historical inflation only (3.22%), you'll get the equivalent of $800k in today's dollars over those 40 years as your 4% and still have the inflation adjusted $500k left over (or $1,720,918.64 in actual dollars at that time).

Assuming that $30k/year is NOT inflation adjusted, you'd get the equivalent of $680,088.92 in total payments in today's dollars after adjusting for average historical inflation again, and have $0 left at the end of those 40 years.

Obviously there are too many potential scenarios/assumptions you could make to come up with different results, but those are the scenarios/assumptions I went with.

Column 1 - Year   
Column 2 - $30k, in today's dollars with average (3.22%) annual inflation    
Column 3 - $500k 4% SWR @2% Inflation, in today's dollars    
Column 4 - Value of $500k remaining with average inflation if you died that year   
Column 5 - Value of $30k/year remaining with average inflation if you died that year   

1    $30,000.00     $20,000.00     $500,000.00     $-   
2    $29,034.00     $20,000.00     $516,100.00     $-   
3    $28,099.11     $20,000.00     $532,718.42     $-   
4    $27,194.31     $20,000.00     $549,871.95     $-   
5    $26,318.66     $20,000.00     $567,577.83     $-   
6    $25,471.20     $20,000.00     $585,853.84     $-   
7    $24,651.02     $20,000.00     $604,718.33     $-   
8    $23,857.26     $20,000.00     $624,190.26     $-   
9    $23,089.06     $20,000.00     $644,289.19     $-   
10    $22,345.59     $20,000.00     $665,035.30     $-   
11    $21,626.06     $20,000.00     $686,449.43     $-   
12    $20,929.70     $20,000.00     $708,553.11     $-   
13    $20,255.77     $20,000.00     $731,368.52     $-   
14    $19,603.53     $20,000.00     $754,918.58     $-   
15    $18,972.30     $20,000.00     $779,226.96     $-   
16    $18,361.39     $20,000.00     $804,318.07     $-   
17    $17,770.15     $20,000.00     $830,217.11     $-   
18    $17,197.95     $20,000.00     $856,950.10     $-   
19    $16,644.18     $20,000.00     $884,543.90     $-   
20    $16,108.24     $20,000.00     $913,026.21     $-   
21    $15,589.55     $20,000.00     $942,425.65     $-   
22    $15,087.57     $20,000.00     $972,771.76     $-   
23    $14,601.75     $20,000.00     $1,004,095.01     $-   
24    $14,131.57     $20,000.00     $1,036,426.87     $-   
25    $13,676.54     $20,000.00     $1,069,799.81     $-   
26    $13,236.15     $20,000.00     $1,104,247.37     $-   
27    $12,809.95     $20,000.00     $1,139,804.13     $-   
28    $12,397.47     $20,000.00     $1,176,505.83     $-   
29    $11,998.27     $20,000.00     $1,214,389.31     $-   
30    $11,611.92     $20,000.00     $1,253,492.65     $-   
31    $11,238.02     $20,000.00     $1,293,855.11     $-   
32    $10,876.16     $20,000.00     $1,335,517.25     $-   
33    $10,525.94     $20,000.00     $1,378,520.90     $-   
34    $10,187.01     $20,000.00     $1,422,909.28     $-   
35    $9,858.99     $20,000.00     $1,468,726.95     $-   
36    $9,541.53     $20,000.00     $1,516,019.96     $-   
37    $9,234.29     $20,000.00     $1,564,835.81     $-   
38    $8,936.95     $20,000.00     $1,615,223.52     $-   
39    $8,649.18     $20,000.00     $1,667,233.72     $-   
40    $8,370.67     $20,000.00     $1,720,918.64     $-   

Total Payments in 2018 dollars:            
    $680,088.92     $800,000.00       

You aren't comparing apples to apples. I'm not sure exactly what you're comparing. A 20k lifestyle in perpetuity based on 4% + an increasing nest egg, vs a 30k decreasing lifestyle?

at 6% return, the 500k is the better choice as you get equal outlay (30k) not inflation adjusted, and maintain the 500k which will also decrease in purchasing power as inflation eats away. At 0% returns and a 75 year timeframe, then the 30k/yr would be better. 

Both answers could be correct, and are purely a function of expected returns, and years left to live.



If you want you could make a 3 axis graph for various value of r and n as per your situation. Which ones are bigger than 500k?

I'm not sure you read my post outside of the numbers.. I stated the assumptions I was using; a standard 4% SWR rule per MMM in perpetuity (including appreciation for inflation adjustment with principal growing appropriately) vs a $30k/year non-inflation adjusted payment for life, and using a 40 year horizon.

I also included the statement:
Quote
Obviously there are too many potential scenarios/assumptions you could make to come up with different results, but those are the scenarios/assumptions I went with.

There is no "apples to apples" comparison because the two options aren't "both apples", thus my stating the scenarios I was discussing....was I unclear in some manner on that, because I thought I said it a couple times to make it quite clear (i.e. when I stated my assumptions for the comparisons I was making, and when I reiterated that there were many other scenarios/assumptions possible).

MDM

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Re: ***Half Million or $30K/yr for life?***
« Reply #20 on: May 12, 2018, 08:34:29 PM »
If you were offered $500K now or $30K/yr for life, which would you choose?
Depends which side of the curve I expected for the future:

RedmondStash

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Re: ***Half Million or $30K/yr for life?***
« Reply #21 on: May 12, 2018, 10:10:30 PM »
If the $500k was taxed, I'd probably take the $30k per year, and invest it annually. Otherwise I could end up losing about half of the money up front, whereas if I can keep other income sources low, I could pay little to no tax on the $30k per year.

If the $500k was untaxed, I'd probably take it in a lump sum.

EscapeVelocity2020

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Re: ***Half Million or $30K/yr for life?***
« Reply #22 on: May 12, 2018, 11:32:50 PM »
On the '4% rule' basis, 500k is only worth 20k/yr, so 30k seems like the obvious choice for older folks.  Also, if you already have substantial savings and are near Medicare benefits, 30k/yr should be a 'no-brainer'.  But I can understand why younger folks get excited about a 500k lump sum, especially with recent market behavior.  As long as the market keeps going up over 10% on average, cash invested is working out pretty well.

No right or wrong answer to this one, although the FIRE movement believes it's on the right side of absolutes and optimization.  Sometimes you make a pretty significant bet and it turns out poorly.   But it hasn't happened yet to FIRE bloggers, so what do I know? 

I'd go for 30k for life because I could live pretty well on that nice extra for a foreseeable time.  If 30k is worthless in 40 years, I'm not so sure the half million would've worked out any better.

Radagast

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Re: ***Half Million or $30K/yr for life?***
« Reply #23 on: May 13, 2018, 12:43:01 AM »
        Inflation Adjusted   
Tax   Yes   No
Yes   30k   30k
No    30k   500k
« Last Edit: May 13, 2018, 12:48:58 AM by Radagast »

Laura33

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Re: ***Half Million or $30K/yr for life?***
« Reply #24 on: May 13, 2018, 09:01:03 AM »
@jlcnuke:  I think the primary issue for the apples and oranges is that in the $500k scenario, you are taking out $20k/yr, while in the $30k scenario, you are taking out $30k/yr.  So if you want to try to do a more equal comparison, either assume that you live on $20k in both cases and reinvest $10k of the $30k, or that you live on $30k in both cases and draw $10k/yr from the $500k.

Seadog

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Re: ***Half Million or $30K/yr for life?***
« Reply #25 on: May 13, 2018, 11:37:55 AM »
There is no "apples to apples" comparison because the two options aren't "both apples", thus my stating the scenarios I was discussing....was I unclear in some manner on that, because I thought I said it a couple times to make it quite clear (i.e. when I stated my assumptions for the comparisons I was making, and when I reiterated that there were many other scenarios/assumptions possible).

Actually there is. It's called future discounting. Would you prefer $1 today, or $2 tomorrow? $2 a year from now? $2 ten years from now? That's purely a function of interest rates. $10 today vs $1/mth for 12 months? Getting a bit more complicated.

Basically this is no different than valuing a bond.

Further, there's no reason to invoke the 4% rule here, as 4% is designed around avoiding insolvency while dealing with the variance of the market. It's really a very easy text book calculation. 500k obviously has a present value of 500k, and 30k/yr has a present value completely dependent on number of years it's paid, and effective interest rate.

jlcnuke

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Re: ***Half Million or $30K/yr for life?***
« Reply #26 on: May 13, 2018, 11:52:55 AM »
There is no "apples to apples" comparison because the two options aren't "both apples", thus my stating the scenarios I was discussing....was I unclear in some manner on that, because I thought I said it a couple times to make it quite clear (i.e. when I stated my assumptions for the comparisons I was making, and when I reiterated that there were many other scenarios/assumptions possible).

Actually there is. It's called future discounting. Would you prefer $1 today, or $2 tomorrow? $2 a year from now? $2 ten years from now? That's purely a function of interest rates. $10 today vs $1/mth for 12 months? Getting a bit more complicated.

Basically this is no different than valuing a bond.

Further, there's no reason to invoke the 4% rule here, as 4% is designed around avoiding insolvency while dealing with the variance of the market. It's really a very easy text book calculation. 500k obviously has a present value of 500k, and 30k/yr has a present value completely dependent on number of years it's paid, and effective interest rate.

There is no "apples to apples" because what is done with the money makes all the difference, and that isn't set in stone here, just there for us to guess. The OP didn't give us the data needed to do anything but "guess" at which of a ton of different scenarios might be being discussed. For instance, we could evaluate for scenarios such as:

A. How far into the future are we looking, comparing $30k/year for 1 year to $500k up front is a much different comparison than comparing $30k/year, non-inflation adjusted, for 50 years vs $500k up front?
B. Is the $30k/year invested over those 40 years or is the $30k/year spent in full the day it's received each year, or just used to provide income continually?
C. If taken, will the $500k to be spent immediately, used to continually provide some income, or just being invested?
D. Is the $30k/year inflation adjusted payments or not?
E. What return rates are we getting on investing if that is the choice made? 2% with bonds only, 20% with risky investments, historical average S&P 500?
F. Is the $500k tax free or do we still need to pay taxes on it? What about the $30k?
G. Is the potential value of each the only consideration, or is the security of the income and it's emotional value thus also in play?
etc. etc.

We simply don't have the data to do say that a future value calculation (with whatever assumptions for that you choose to make) will actually answer the OPs question. So I made an assumption for what was happening to each. You've made different assumptions. The next person can make assumptions that don't match either of ours.  When we don't have the necessary information and have to make up assumptions, the answers derived can be dead wrong despite being correct with the assumptions you decide to make or they could be exactly right, we just don't know with the info provided here though.

jlcnuke

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Re: ***Half Million or $30K/yr for life?***
« Reply #27 on: May 13, 2018, 12:46:36 PM »
@jlcnuke:  I think the primary issue for the apples and oranges is that in the $500k scenario, you are taking out $20k/yr, while in the $30k scenario, you are taking out $30k/yr.  So if you want to try to do a more equal comparison, either assume that you live on $20k in both cases and reinvest $10k of the $30k, or that you live on $30k in both cases and draw $10k/yr from the $500k.

The "apples" I was trying to compare were total received and available with a "perpetual withdrawal" over an arbitrary 40 years. As mentioned though, there are a ton of scenarios people could make up with the little information given..

bacchi

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Re: ***Half Million or $30K/yr for life?***
« Reply #28 on: May 13, 2018, 04:39:19 PM »
What terran wrote.

Is the $30k/year going to be there when the insurance company disappears during the next GFC?

detroital

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Re: ***Half Million or $30K/yr for life?***
« Reply #29 on: May 14, 2018, 05:13:14 AM »
We are comparing a PBGC protected pension to taking a lump sum here, to be clear. 

talltexan

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Re: ***Half Million or $30K/yr for life?***
« Reply #30 on: May 14, 2018, 07:28:23 AM »
The 4% rule makes a lot of sense in the draw-down phase, but--if $30,000/year is only a fraction of what you need to retire--then there is a lot of appeal in taking the $500,000, then trying to invest it very aggressively to create a major advance over 5-7 years.

Of course, I recognize some of you HCOL mustachians might have mortgages in excess of $500,000.

Of course, if you're an ambitious investor, you could commit to putting the $30,000 annually into some spectular 3x leveraged small cap fund right on Jan 2 of each year and see where you wind up.

dogboyslim

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Re: ***Half Million or $30K/yr for life?***
« Reply #31 on: May 14, 2018, 07:43:26 AM »
Given my circumstance, I'm taking the 500k.  Bird in the hand and all that.

Roadrunner53

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Re: ***Half Million or $30K/yr for life?***
« Reply #32 on: May 14, 2018, 07:53:39 AM »
I would take the $500K. You could get hit by a truck and not collect the $30k more than one year. At least your family could benefit from the money.

It would take 16.6 years to collect the $500K. You could be earning interest on the $500K from day 1.

mathlete

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Re: ***Half Million or $30K/yr for life?***
« Reply #33 on: May 14, 2018, 08:25:22 AM »
Take the lump sum unless you have extremely conservative investment return assumptions.

Using the social security life tables, and an 8% fund return assumption, taking the annuity doesn't make sense, even for a newborn baby. You have to use a 6% assumption for the annuity to start making sense, and even then, only for ages below 20.

BTDretire

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Re: ***Half Million or $30K/yr for life?***
« Reply #34 on: May 14, 2018, 08:35:28 AM »
We are comparing a PBGC protected pension to taking a lump sum here, to be clear.

 Ok, so now that it's a real situation, you can add details for actual computations.
PBGC protected, No chance of failure?
How old are you?
Would your spouse continue to collect $30K after your death?
When do you expect to start spending?
 What is your comfort level of risk? 100% stocks, 80/20 70/30 50/50?
 And any other questions posed or hinted at by statements may need answering.

Prairie Stash

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Re: ***Half Million or $30K/yr for life?***
« Reply #35 on: May 14, 2018, 09:12:52 AM »
We are comparing a PBGC protected pension to taking a lump sum here, to be clear.

 Ok, so now that it's a real situation, you can add details for actual computations.
PBGC protected, No chance of failure?
How old are you?
Would your spouse continue to collect $30K after your death?
When do you expect to start spending?
 What is your comfort level of risk? 100% stocks, 80/20 70/30 50/50?
 And any other questions posed or hinted at by statements may need answering.
So much of this. I would take the lump so that my spouse could have it after I pass. Otherwise I would have to buy insurance to cover the risk; shrinking the $30,000. But its different without a spouse or anyone to pass the money to.

For fun, look at a drawdown rate of 6% (SWR), which is $30k. It works sometimes, in some cases it even grows, its a higher risk strategy for people over 70, not for those at 30. In your 80's it's better to have the lump sum to draw from when you might have increased medical costs (old age home perhaps). Not everyone needs to have the balance protected forever.

If you leave that $500 alone for 7-8 years, you can have the principle and $30k at a 4% WR, so many choices.

Awesomeness

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Re: ***Half Million or $30K/yr for life?***
« Reply #36 on: May 14, 2018, 10:12:32 AM »
30k a year.    If I ever became disable and couldn’t manage my money I wouldn’t need to worry.

Knapptyme

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Re: ***Half Million or $30K/yr for life?***
« Reply #37 on: May 14, 2018, 12:24:09 PM »
Lump sum for a lot of reasons already mentioned. Even if it was about spending money and all that, you could pretty easily invest in a few rental real estate projects, pay to have them managed for you, and still clear $30k/year, and it's inflation adjusted.

5 SFR @ $100k each rented for $1k/month each. Assuming 50% goes to pay expenses, taxes, management fees, etc., you're clearing $2500/month => $30k/year.

Plus, there are some tax advantages with write offs. Again, a more savvy real estate investor will likely do better than that. And, of course, you can will those real assets to family/heirs.

jlcnuke

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Re: ***Half Million or $30K/yr for life?***
« Reply #38 on: May 14, 2018, 01:29:06 PM »
Lump sum for a lot of reasons already mentioned. Even if it was about spending money and all that, you could pretty easily invest in a few rental real estate projects, pay to have them managed for you, and still clear $30k/year, and it's inflation adjusted.

5 SFR @ $100k each rented for $1k/month each. Assuming 50% goes to pay expenses, taxes, management fees, etc., you're clearing $2500/month => $30k/year.

Plus, there are some tax advantages with write offs. Again, a more savvy real estate investor will likely do better than that. And, of course, you can will those real assets to family/heirs.

Where are you finding $100k homes, not in need of renovation/repairs, that rent for $1k/month? Homes that rent for that in my area cost ~twice that much..

jim555

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Re: ***Half Million or $30K/yr for life?***
« Reply #39 on: May 14, 2018, 01:30:31 PM »
For me the price of an immediate annuity for 30K yr is more than $500,000 so the annuity makes more sense financially.

Knapptyme

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Re: ***Half Million or $30K/yr for life?***
« Reply #40 on: May 14, 2018, 06:28:28 PM »
Lump sum for a lot of reasons already mentioned. Even if it was about spending money and all that, you could pretty easily invest in a few rental real estate projects, pay to have them managed for you, and still clear $30k/year, and it's inflation adjusted.

5 SFR @ $100k each rented for $1k/month each. Assuming 50% goes to pay expenses, taxes, management fees, etc., you're clearing $2500/month => $30k/year.

Plus, there are some tax advantages with write offs. Again, a more savvy real estate investor will likely do better than that. And, of course, you can will those real assets to family/heirs.

Where are you finding $100k homes, not in need of renovation/repairs, that rent for $1k/month? Homes that rent for that in my area cost ~twice that much..

It's an estimate. I bought a home in NE FL a few years ago for $120k that needed minimal repairs (I painted the entire inside of the house). It rents for $1200/month. I might be able to get more, but there's been a good, solid renter in there for the last three years. It's a decent market to get roughly 1% or more of the purchase price in rent. Multi-family units in the more hip urban area would generate more cash flow, but require a larger buy-in that the $500k could offer.

Also, per the OP's query, there are decent foreclosure deals/auctions if you have the cash-in-hand to buy them. You wouldn't have that with $30k/year. If I was a more savvy/risky investor myself, the lower income neighborhoods offer an even lower buy-in with greater returns. Literally, a 3/2 in rentable condition for $50k that could rent for $800 or more. It's just located in what some people would consider the wrong part of town.

ender

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Re: ***Half Million or $30K/yr for life?***
« Reply #41 on: May 14, 2018, 08:57:58 PM »
We are comparing a PBGC protected pension to taking a lump sum here, to be clear.

 Ok, so now that it's a real situation, you can add details for actual computations.
PBGC protected, No chance of failure?
How old are you?
Would your spouse continue to collect $30K after your death?
When do you expect to start spending?
 What is your comfort level of risk? 100% stocks, 80/20 70/30 50/50?
 And any other questions posed or hinted at by statements may need answering.

+1

I mean this is fun and all but it does the OP no good if a 60 year old says "500k" and a 20 year old says "30k/year" because... their circumstances are so different.


detroital

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Re: ***Half Million or $30K/yr for life?***
« Reply #42 on: May 15, 2018, 05:18:40 PM »
I am 60.

Roadrunner53

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Re: ***Half Million or $30K/yr for life?***
« Reply #43 on: May 16, 2018, 07:46:32 AM »
Doesn't matter if you are 60 or 30 if you get hit by a train. Take the $500k.

mathlete

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Re: ***Half Million or $30K/yr for life?***
« Reply #44 on: May 16, 2018, 08:10:16 AM »
Doesn't matter if you are 60 or 30 if you get hit by a train. Take the $500k.

It doesn't matter for the numbers given in the OP, but there are numbers for which it very much does matter.

Betting on getting hit by a train is a poor bet.

jim555

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Re: ***Half Million or $30K/yr for life?***
« Reply #45 on: May 16, 2018, 08:12:56 AM »
Doesn't matter if you are 60 or 30 if you get hit by a train. Take the $500k.
But if your dead the lump isn't helping you.  If you live to 98 the 30k would be greatly appreciated.

boarder42

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Re: ***Half Million or $30K/yr for life?***
« Reply #46 on: May 16, 2018, 08:15:27 AM »
today if i was 60 i'd easily take the 500k and invest it as long as it was tax free. if its going to cause an income event that would criple that amount of money and make the 30k worth it even at 60 

OP you really need to answer the detailed questions posed above and propose a life expectancy based on your health and the amount of time your older relatives have lived.

Roadrunner53

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Re: ***Half Million or $30K/yr for life?***
« Reply #47 on: May 16, 2018, 08:31:43 AM »
Doesn't matter if you are 60 or 30 if you get hit by a train. Take the $500k.

It doesn't matter for the numbers given in the OP, but there are numbers for which it very much does matter.

Betting on getting hit by a train is a poor bet.

There are plenty of ways other than trains to lose a life. Car accidents, drugs, fatal diseases, workplace accidents, other accidents...

mathlete

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Re: ***Half Million or $30K/yr for life?***
« Reply #48 on: May 16, 2018, 09:03:31 AM »
There are plenty of ways other than trains to lose a life. Car accidents, drugs, fatal diseases, workplace accidents, other accidents...

Sure. But unless you're extremely sick or old, it's usually best to bet on being alive tomorrow. All of us do that every day when we save as much as we do instead of spending to our heart's content.

I agree with you, that with the specific numbers listed above ($500K lump sum or $30K/year annuity), I'd rather have the lump sum for almost any age. But the answer changes with the numbers.

If it's say, $350K instead of $500K, give me the annuity provided that I'm under 50 years old (assuming an 8% return on my money).

I made those calculations using the social security actuarial life tables, in which a death is a death.

detroital

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Re: ***Half Million or $30K/yr for life?***
« Reply #49 on: May 16, 2018, 08:03:37 PM »
I see comments about the money being "tax free."  When is anything tax free?  You will defer the tax on the lump sum by rolling it all into an IRA.  The IRS would tax you on the $30K/year and eventually on the $500K once they force you to start withdrawing out of the IRA. 

This is a PBGC protected pension from a major corporation.  You are allowed a lump sum option or an annuity.  I have longevity in my family, one never knows, but I could live into my 90s. 

Considering if the lump sum is not risked and is left uninvested, the corporation is betting that I'll die in 16.7 years and if I take the lump sum, I agree with them.  I think I will live past the 16.7 years.  That's the way I see it.