Help, I have no idea how to weigh/decide which is the better option.All you need to know is the investment return you will get and how long you will live. ;)
One way to evaluate "lump sum now" vs. "pension later" |
Compare pension payment promised at the later time to either |
- the "Interest generated by the Future Value (FV) of the lump sum" (FV principal is not touched), or |
- the "Constant withdrawal of FV over time L" (principal goes to zero), or |
- "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero) |
Lump sum now | PV | $72000 | |
Interest rate | i | 5.547% | /yr |
number of years | n | 18 | yr |
number of payments/year | freq | 12 | /yr |
When payments are made for each n | type | 0 | 0 = at end, 1 = at start |
Future Value | FV | $194968 | |
Interest generated by Future Value | FV(i,n,P) * i | 901 | $/payment |
Longevity of future pension | L | 25 | yr |
Constant withdrawal of FV over time L | Pmt_future | 1203 | $/payment |
Spending growth rate (e.g., CPI) | g | 2.0% | /yr |
First year Trinity-style withdrawal | W(FV,L,i,g) | 11784 | $/yr |
. | . | 982 | $/payment |