Would You Rather? ER Edition

[Henman004]

This popped up on my FB newsfeed, today. The majority of people responded with $5K per month. I thought it might be fun to see what people said on this forum. Here are some of the "best" answers from the shared image on FB:

"take $5mil and used 100000 per year"

"5k a month it's so easy to blow 5mil if you haven't had money like that"

"Monthly 5 Grand. I have Good willpower & Would Make it Last. Pay Bills, buy Stuff My Baby Girl Needs, Buy Food & w/e I Need 4 Myself, Send $$ 2 My Boys & Throw whats left in2 Bank Accounts"

"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."

"I would want a good paying job and peace that sounds better .. (With vacations and holidays off )"

So, which would you rather?

I'm taking the $5M, investing it in a 70/30, stock/bond portfolio, and living on a couple hundred thousand a year for the rest of my life.

 

[eta2020]

I can get 10k a month in dividends from 5 Million in equities. And that 10k will grow up faster then in inflation. And I will probably owe less Federal Taxes on 10k a month in dividends versus 5k in income.

Even 12k a month for a rest of my life would not be as attractive since it will get eroded by inflation. 5k is no brainer bad deal

 

[Big_Hitter]

5m is way more valuable than 5k a month - way more

 

[38Chevy454]

Sounds like a test for people that are bad at math and finance.

Even basic quick 4% of $5M calculation gives you $200K per year. Divide by 12 and you get $16,667 per month.

Invest the $5M with reasonable risk and you have way more money for life.

 

[Big_Hitter]

the present value of a perpetuity is the annuity divided by an interest rate - so if you can get .1% a month interest, take 5000/.001 to get the 5M - however, the payout stream is finite

 

[Totoro]

Forum doesn't disappoint me: take the rational approach

5k = 60k per year / 5.000k = 1.2%.

There is your answer.

Or: A typical annuity of 5k can be had for 1 - 2 mil.

So: I'd take the 5 mil, convert part of it to 5k / month, and use the rest to educate the people that answered 5k.

 

[DrRoy]

+1 on the $5 million. Properly managed it is just worth more.

 

[braumeister]

Sounds like a test for people that are bad at math and finance.

I believe that's the point. Most people are.

 

[Major Tom]

Gosh, is there even the remotest possibility that anyone on this forum would take the $5K/month?

 

[jim584672]

5 million can buy an annuity for 21k a month. (51 yo male)

 

[BrianB]

+1 to all the above, but at least those who would opt for the $5k/month know themselves well enough not to trust themselves with big money. For some people the $5k choice could be the smart choice!

 

[Richard4444]

I'm not greedy. Kindly let the person making this generous offer know that I'd take either, and I do appreciate his/her generosity.

Rich

 

[scrabbler1]

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?

 

[gauss]

- Take the $5M today in cash
- Purchase a life annuity that pays $5k/month
- Invest the rest

 

[aida2003]

Yep, me too... $5M sounds better unless I visit Vegas with it.

 

[EastWest Gal]

Even visiting Vegas it's hard to spend that much after a lifetime of frugality. Now if you took it to Monaco...


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[growing_older]

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?

 

[FUEGO]

Took me about 3 seconds to figure out I'd take the $5 million today. I'd probably stick $300,000 in a 10 year CD/bond ladder to cover core expenses and stick the other $4.7 million in equity index funds. Even a 2% yield will give me $100k per year.

I'd still take the $5M even if it were taxed at 40%. $3 million will still spit off $5000/mo at a 2% dividend yield and that would be entirely federal income tax free (assuming qual divs). $5000/mo from a mystery person would be ordinary income most likely (maybe an annuity, then it would be partially taxable as ordinary income).

Edit: inflation. That $5000 if not inflated annually becomes near-subsistence level income at some point in several decades.

 

[harley]

You'd have to live 83 additional years before you'd break even on the $5K/month deal. And that's assuming the $5M was put in the mattress without earning a penny of interest. Are these people idiots? Or immortals?

 

[Ready]

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.


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[harley]

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.

 

[Danmar]

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.

 

[ducky911]

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.

 

[Danmar]

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?

 

[Walt34]

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.