When choosing between a pension check difference of $351 a month for life or a lump sum payment to an IRA tax free of $40,000 which is better?

When choosing between a pension check difference of $351 a month for life or a lump sum payment to an IRA tax free of $40,000 which is better?
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#1

When choosing between a pension check difference of $351 a month for life or a lump sum payment to an IRA tax free of $40,000 which is better?


#2

You can use a present-value calculator such as this one, but you will have to make certain assumptions, such as your projected lifespan and your annual return. There is no way to know for sure, but it will help to have an idea of present value (the value today of all of the payments you will receive in the future).

If your money is appropriately allocated and managed, a conservative long-term return would be between 8 and 10%, but most people cannot manage that on their own. If you are thinking about DIY, read the book Simple Wealth, Inevitable Wealth beforehand and you'll be much better prepared to do so.

Good luck and I hope this helps!


#3

A lot depends on your age and whether you have the temperament to invest your money long term. Another issue is how much additional assets you have to invest.

As a rule of thumb - if you are over 55 - you probably will find it difficult to beat the guaranteed income from the pension. You could have someone run the numbers for you, but I have never found it reasonable unless you assume a very high return - 8%+.

If you are between 45-55 - you might do better if you can get a 8% return or higher. If you are under 45, then it probably makes sense to move it to the IRA and invest the money in a low fee, low turnover, highly diversified portfolio.

$351 may no seem like a lot of money to you - but, when added to your social security, it all adds up. I hope you are able to get enough info to make a wise decision.

Hope this helps you.


#4

In addition to Guy’s and Johanna’s answers, how does $351 or $40,000 fit in your lifestyle and your retirement income plan?  Do you need the $351?  Or is it nice to have?  It sounds like we need to have a more holistic conversation!


#5

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