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Old 08-29-2016, 08:35 AM   #21
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I remember in grade school how many students thought math was either too difficult, boring, or unnecessary. It was not a popular topic. Many adults continue to think that math is not necessary in every day life. This is a great example of how easy it is to make bad decisions if you don't have basic math skills.

And yes, many people simply don't.
Well, I was well out of high school before I discovered that I've got math skills. I think the way we teach math here is largely to blame. It was all "memorize this" and "because we said so". There was no effort made to show how math was useful in daily life. No one ever mentioned in geometry that you could use it to set posts evenly and squarely when building a play structure for your kids. And I don't remember anyone talking about balancing checkbooks or compound interest or anything like that. It may also have to do with the types of people who teach math. In my 12 years of pre-college, I didn't have a single dynamic math teacher like I did in English or History or Science. Maybe it was the luck of the draw, but watching the back of someone's head as they wrote on the blackboard and droned on about the subject was nowhere near as interesting as passing notes and talking trash.
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Old 08-29-2016, 09:11 AM   #22
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Ok the original question is pretty easy. (Apparently not easy enough for many people?) Let's change it a bit. What is the payout per month that would leave you indifferent? Why? Is it just the annuity payment you could buy or something different? Assume the monthly payment is tax free for simplicity.
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Old 08-29-2016, 09:14 AM   #23
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I would gladly take 1.5 million over 5k per month.


I am often amazed how uneducated some are on financial math. I blame the high schools for that. While I was wondering in college what to major in (civil engineer) I took a business math course that really stuck with me. A typical test problem would be to calculate what percentage today would you have to make on an investment if you lost 10% yesterday in order to break even.
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Old 08-29-2016, 11:15 AM   #24
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Right, seems to me your indifference point would depend on your age, sex, health, risk appetite, current asset allocation, and maybe some other factors? I'm 66, male, excellent health. Already have a nice pension but wouldn't mind about 40% of the windfall going to an annuity to keep my AA constant. So to be indifferent, I would split the $5million and take $3million in cash to be invested in my portfolio. Then to be indifferent I would want a payout a little better than current annuity rates for my age, say 7%. So with the $2million annuity I would be indifferent if it paid 7% per year or $140,000 (or $11,667 per month).

How would others deal with this problem?
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Old 08-29-2016, 01:54 PM   #25
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Well, I was well out of high school before I discovered that I've got math skills. I think the way we teach math here is largely to blame. It was all "memorize this" and "because we said so". There was no effort made to show how math was useful in daily life.
Sounds like where I went to school, and I hated math for that reason. No one ever (that I can remember) made any effort to show me WHY I needed to learn that stuff. Being a pragmatic person even then, I wanted to know why I was making all this effort.
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Old 08-29-2016, 02:04 PM   #26
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This has to be a trick question. I'm bad at math but not that bad.
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Old 08-29-2016, 02:06 PM   #27
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Sounds like where I went to school, and I hated math for that reason. No one ever (that I can remember) made any effort to show me WHY I needed to learn that stuff. Being a pragmatic person even then, I wanted to know why I was making all this effort.
Quite seriously, when I was in about the 4th/5th grade, I though the reason you learned history, geography, English and such was in case you ended up on a game show and were asked relevant questions. Really.

Yeah, I watched too much TV as a kid.
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Old 08-29-2016, 02:15 PM   #28
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I loved Math as a kid. In fact I thought I wanted to be a mathematician so took really advanced math at University. This cured me really quickly. Turns out what I was good at was arithmetic not math. Accounting and finance a much better fit.
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Old 08-29-2016, 02:20 PM   #29
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Gosh, is there even the remotest possibility that anyone on this forum would take the $5K/month?
No, I don't think so, but I believe one of the OP's FB quotes hits the nail on the head:

"If you're answer isn't automatically $5M and you can't see all the reasons why that just makes more sense, then you probably are better off with just the 5K monthly."
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Old 08-29-2016, 02:53 PM   #30
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Well, it was on Facebook and I'm going out on a limb here...I tend to think that the "average" Facebook user...is um...well, their answers to the question pose my point well enough and once again illustrates to me that Facebook is becoming more and more irrelevant everyday (at least for me).
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Old 08-29-2016, 04:10 PM   #31
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5m is way more valuable than 5k a month - way more
+1 isn't even close. At 0%.... 5,000,000/(5,000*12) = 83 years
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Old 08-29-2016, 04:16 PM   #32
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I'd take either one.

Granted, I'd rather someone gave me $5M, but if they decide to give that $5M to someone else and give me "just" $5K per month, I'm not gonna complain.
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Old 08-30-2016, 06:46 AM   #33
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This popped up on my facebook feed as well, when one of my friends shared it. He said he'd take the $5K per month. When asked why, and explaining to him why the $5M is potentially the better deal, he responded that he's bad with money, and felt the $5K per month would be more reliable for him.

My friend is young, only 23 or 24. I explained to him that if that $5K per month wasn't indexed to inflation, in about 25 years it might only be worth about $2500 per month. And then in another 25, as he's closing in on 70, it would have roughly the buying power of maybe $1250 per month today. That is, if inflation stays roughly the same as it has, and that's not a guarantee.

So, if he takes the $5K per month, he'd also better keep on working as well, otherwise he won't be getting much of a check once SS kicks in.
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Old 08-30-2016, 07:23 AM   #34
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Isn't this kind of ironic when you consider that all the big lottery jackpot winners take the lump sum, and a discounted one, instead of the annual payout for 10(?) years without any discounting?
In the case of a lottery winner, and a lower amount, the decision is not nearly as obvious. I have a friend who recently won $1.8 million in a Lotto jackpot. After the discount and taxes, his take home lump sum would be about $600k. The annuity payout would be $72k/year for 25 years. Of course, the annuity is taxable.

He and his wife are about 60, and they were planning to retire in a few years with 2 pensions (not sure of the amount, but that and SSI was enough for them to live on comfortably).

What would you do?
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Old 08-30-2016, 07:33 AM   #35
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On the subject of lotteries, when you take the yearly payment, does it go up with inflation or does it stay the same? I was always under the impression they stayed the same, but I've read conflicting things on it.
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Old 08-30-2016, 07:33 AM   #36
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+1 isn't even close. At 0%.... 5,000,000/(5,000*12) = 83 years
Right, we all agree on that, but how much would a tax free annuity have to be to make you indifferent. I have given my opinion.
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Old 08-30-2016, 07:51 AM   #37
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Interesting that when asked this way, many people picked the monthly payment, even though the value of the $5M is considerably more than the value of the payments. When companies attempt to buy out pension obligations, they often offer a lump sum that is LESS than the value of the payment, and then people often go for the lump sum. Perhaps there are issues about the likelihood of the payment stream continuing as well as whether the payment stream is more or less than people imagine their monthly expenses to be. I wonder if there is data about this?
that's a huge issue and one I find myself in. My mega corp just merged with another Mega corp, the pension fund is already underfunded and I still have at least 9 years before I would start taking a payment. I am seriously considering taking the lower buyout because I just don't have warm and fuzzy feelings that in 9 years the company won't have totally done something and I'm left with cents on the dollar for my pension.
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Old 08-30-2016, 08:23 AM   #38
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My brother is the same way. He says "If I ever get a million dollars the first thing I'm doing is buy one of those annuities."
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Old 08-30-2016, 09:14 AM   #39
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Maybe the people who want the $5K/month are thinking "what will happen when my extended family and friends find out I have $5M - they'll be all over me for that money."

Other than that, it's a pretty strange result. True, lots of people have scanty math skills; but most can tell a big pot from a little one, and $5M is a pretty big pot.
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Old 08-30-2016, 09:42 AM   #40
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I would take the lump sum and give 40% of it away. The rest would go into equities rather than an annuity or fixed income because it is "found" money.
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