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Old 10-26-2014, 06:41 AM   #21
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Aeowyn's Avatar
Join Date: Jan 2011
Location: Scotts Hill, TN
Posts: 105
The reason it is hard to give a definitive answer is there is a lot of controversy about what return you can expect to get from your investments, what asset allocation should be, what withdrawal rate you should take from your nest egg and of course how long are you going to live.

One more thing to consider Ė are you married? If you are I assume the pension payments die with you. If you take the lump sum it would still be there for your spouse after you die so that needs to be factored in.

In the original post some assumptions were laid out. It was assumed that the invested portfolio would return 5%. There was also an assumption of 3.5% inflation, but this doesnít factor in for comparison against the pension payout because the pension is not adjusted for inflation (unless the 5% return was net of inflation).

The other issue with a long term portfolio estimated return is that you donít get that return each and every year. Some times you get less (or negative) and some years you do much better. But if we assume you get the same return every year, we could see how long the money lasts if we pull the same pension amount annually. So if you take the lump sum of $85K and a return of 5%, let it grow for a year and then start drawing $6,646 (12*553) annually, you will run out of money when you are 79. Will you still be alive?

If I misread your assumptions and you think you can get a 5% return above inflation of 3.5% (i.e. 8.5% return), then if you only take out the $6,646/year Ė you can live to 110 and you will have a nest egg from the lump sum left of $1.2 Million dollars.

By the way Ė I think a return of 8.5% long term is completely reasonable depending on how the money is invested. But it wonít be a calm ride (like the pension monthly is).

If it were me, I would take the lump sum because:
  • I like having control over the money
  • I donít like the idea that the pension dies with me
  • I like the flexibility of taking variable withdrawals (also am willing to adjust withdrawals to compensate for bad years in the market)
  • Iím confident enough in historical market returns that I think they will enable me to take overall withdrawals from the portfolio that both exceed what the total pension payment is (no matter how long I live) and leave a nice nest egg for my heirs after I am gone.
  • Iíve been through several dips in the market and know that I am comfortable with the volatility.
  • I am willing to stay with a portfolio that is heavily weighted toward equities through retirement (planning to keep cash/bonds to < 20% that I am willing to spend completely down to zero during a market downturn)

Quit my J.O.B to become a farmer/rancher - December 2011
Now working part time from home on contract to support prior employer.
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Old 10-26-2014, 07:29 AM   #22
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pb4uski's Avatar
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
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Originally Posted by rodi View Post
Simple math.

520/month * 12 months = 6240/year.

vs 85k lump sum.

6240/85k = 7.3%.
Basically a CD that pays 7.3% for life - but you never get the principal. back. (Kind of a big gotcha - that principal thing.)
The 7.3% is a payout rate (benefits/premium) not an interest rate or rate of return. While you don't know when you will die, you can calculate the interest or rate of return assuming you live to various ages.

Monthly benefit 520
Lump sum 85,000

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