Would You Rather? ER Edition

[marko]

This has to be a trick question. I'm bad at math but not that bad.

 

[marko]

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.

 

[Danmar]

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.

 

[euro]

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."

 

[ExFlyBoy5]

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).

 

[pb4uski]

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

 

[MichaelB]

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.

 

[Andre1969]

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.

 

[CardsFan]

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?

 

[Andre1969]

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.

 

[Danmar]

+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.

 

[bclover]

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.

 

[razztazz]

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."

 

[Amethyst]

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.

 

[kcowan]

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.

 

[RobbieB]

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.

What would you do?

If I won the lottery I would take the payments, they make a lot more sense than the 5 mill or 50 grand a month deal. And of course you have less "hard luck cases" lined up at your door.

 

[bclover]

Also guys remember it's not just about the math. You ask two different people in two very different situations and the answer maybe vastly different.

You ask a good friend of mine who unfortunately is living with the stress of a hubby who is a chronic gambler (add to the fact we're sandwiched in between a boat load of casinoes) and she's taking the 5K a month simply because she'll know where her next mortgage payment is coming from.

I took my late husbands pension in a lump sum even with the huge decrease not because of the math but because it had a no beneficiary clause, so when I became a single mom, if I got hit by a bus the very next day my kiddos wouldn't get a dime. I didn't like that so I took the decreased payout and it's part of my estate.

so let's take a break from patting ourselves on the back for mastering math because not all decisions come down to simple dollars and cents

 

[harley]

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.

If you are lucky they stay the same. Illinois Lottery winners again might not get paid.

This is a major reason I always lean toward the lump sum. I don't like "my" money to be under someone else's control.

 

[HFWR]

When people say the lump sum is "decreased", do you mean beyond what a present value calculation would be?

 

[CardsFan]

When people say the lump sum is "decreased", do you mean beyond what a present value calculation would be?

The decrease is is based on the present value of the annuity payment. In the case I gave earlier it looks like the lottery used about a 5.5% ROR for the calculation, dropping the $1.8 million to around 950k (before taxes). After taxes he said the lump sum would be something just over $600k.

 

[Music Lover]

You ask a good friend of mine who unfortunately is living with the stress of a hubby who is a chronic gambler (add to the fact we're sandwiched in between a boat load of casinoes) and she's taking the 5K a month simply because she'll know where her next mortgage payment is coming from.

She should take the $5 million, immediately divorce the gambling addict, and then live happily ever after with her $2.5 million half.

 

[bclover]

She should take the $5 million, immediately divorce the gambling addict, and then live happily ever after with her $2.5 million half.

Lol, that is my advice even without the 5 mil. Unfortunately it's one of those "can lead a horse to water...."


Sent from my SPH-L710 using Early Retirement Forum mobile app

 

[YVRRocketSurgery]

Also guys remember it's not just about the math. You ask two different people in two very different situations and the answer maybe vastly different.
<snip>

I agree but on the surface, the only reason one isn't taking the lump sum is because of a lack of self control or external forces burning through the lump sum faster than it can generate income.
On a board like this where next to everyone is striving for FIRE, any question is typically going to skew towards an answer that leans towards some form of efficient management your money. On a broader forum like FB, answers are going to be all over the place.

 

[kcowan]

When megacorp did the calculation for our golden handshakes, they used mortality tables for those who worked for full pension. But the reduced pension was granted right away. That was 22 years ago! They overlooked the fact that retiring early is good for longevity.