The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: lentilman on November 24, 2013, 12:09:15 AM
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I have an option of taking a lump sum vs. annuity.
What is the best way to evaluate? Me:51, DW:45. Family history says I am a longshot to make actuarial longevity, DW is favorite to surpass it. Hence, only annuity with survivor is worth considering.
Annuity with survivor benefit: $300/mo, $250/mo survivor - constant payout for life - not inflation adjusted. 61k lump sum can be rolled into 401k.
Intuition is telling me lump sum is the way to go. Correct??
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1) Time value of money formula with various rate of return functions to determine the present value of the income stream.
2) Another good option is pricing a SPIA (annuity) for the lump sum amount (61k) and see what ou could get for that, and if it's worth it to keep theirs (better) or not (worse).
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Lump sum is almost always best as you can invest with a high chance of getting better return than conservative assumptions company makes. Also, you have complete flexibility to do what you want with the entire amount at any time. One downside is exposure to liability - a judgement against you in court could put the entire sum at risk whereas the annuity income stream might be protected.
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Another factor to consider is your ability to manage an investment and not blow a lump sum payout.
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Hope you took the lump sum as it was better deal for your particular case. At a 7.4% discount rate (typical nominal return), the pension payments have an NPV of less than $40K after 30 years! What a crock.