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A general guide
[By staff reporters]
As a general guide, according to financial advisor Wes Moss, if your monthly pension check equals 6 percent or more of the lump-sum offer, then you may want to go for the perpetual monthly payment. If the number is below 6 percent, then you could do as well (or better) by taking the lump sum and investing it, and then paying yourself each year (like a personal pension that you control).
Here’s how the math works:
Take your monthly pension offer and multiply it by 12, then divide that number by the lump-sum offer.
Example 1: $1,000 a month for life beginning at age 65 or $160,000 lump sum today?
$1,000 x 12 = $12,000 divided by $160,000 equals 7.5 percent.
Here, you would have to make approximately 7.5 percent per year on the $160,000 to earn the same $12,000 a year. Earning 7.5 percent a year consistently and over many years is a tall order. Taking the monthly amount in this case (7.5 percent is greater than 6 percent) may likely be a better deal over the long haul.
Example 2: $708 a month for life or a $170,000 lump sum today?
$708 x 12 = $8,496 divided by $170,000 equals 5 percent.
In this scenario, the monthly pension amount is offering you a return for life of about 5 percent. Remember, for the first 20 years even earning zero percent, you could do the same before you run out of money. If you made even a modest return (say, 2 percent per year), you would be far ahead of what the monthly pension would pay you. In this case, 5 percent is less than the benchmark of 6 percent, so you might be better off taking the lump sum of $170,000.
Assessment
Your thoughts are appreciated.
MORE FOR DOCTORS:
“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93
“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox
“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8
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Filed under: Investing, Retirement and Benefits | Tagged: 6 percent rule for pension payout decisions, Wes Moss | Leave a comment »
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