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Lump sum vs. monthly payments
Old 10-20-2004, 04:40 AM   #1
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Lump sum vs. monthly payments

We plan to retire in ~ 5 years and have ~ 1.2 million including equity in 2 homes. My wife will also be offered a lump sum retirement benefit of $550,000 or $40,000 per year not tied to inflation. Which one should we take?
The way I see it the SWR at 4% on the $550,000 would be $22,000 and at 3% inflation it would be 20 years before that 22k would be 40k.

K. B. Sharkstooth
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Re: Lump sum vs. monthly payments
Old 10-20-2004, 04:53 AM   #2
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Re: Lump sum vs. monthly payments

My first impulse would be to take the 550K. - Does the 40K per year have spouse survivorship rights?

Also taking the 550K eliminates the worry if the pension fund will fail. And inflation won't bite you!

OTOH - If you feel that the pension is secure and that inflation is secure, it will take about 20 years to break even with the 40K per year and after that it is gravy. I used 3% return and ignored inflation.
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Re: Lump sum vs. monthly payments
Old 10-20-2004, 11:33 AM   #3
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Re: Lump sum vs. monthly payments

Hi Cut-Throat,
It has 10 years of spousal survivership rights so the least we would get would be $400,000.
I feel pretty good about the pension fund. My wife is grandfathered in with the ability to take $40,000 a year. A couple of years back all the employees under 50 were required to take a lump sum instead of monthly payments.
That difference of $18k in spending money when we first retire is hard to resist. I agree that 20 years down the line we would probably be better off with the lump sum.

K. B. Sharkstooth
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Re: Lump sum vs. monthly payments
Old 10-23-2004, 01:42 AM   #4
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Re: Lump sum vs. monthly payments

It is about the same, you could buy an annuity for about $550k and get about $40,000 yr. How safe is pension, what other assets do you have and what is the volatility that you like? are other important questions. Reminder, the pension (i.e. annuity) is returning some of the original investment to get to $40,000 year.
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Re: Lump sum vs. monthly payments
Old 10-29-2004, 06:08 PM   #5
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Re: Lump sum vs. monthly payments

Would the $550k lump sum be taxed, or would it be rolled over into an IRA so you can time your taxable withdrawls? Taxes on a $550k one-time payment would be pretty hefty if the entire amount is taxable.
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