Retirement

Annuity or lump sum?

A 64 year old woman calls a financial advisor radio talk show.

Her question.

“I’m getting ready to retire. My husband is already retired. I have a pension of about $50,000 a year, but I can get a lump sum of $750,000.

I want the lump sum, but my husband says take the pension because we need the income. If I take the pension, when I die my children won’t get anything, but I could select a joint and survivor option for my husband.”

“$750,000 is a lot of money I can leave my children, what should I do?” But how do you both use the money to live on and leave it to your children?

The rest of the discussion made it clear this lady had virtually no understanding of investing even asking what a mutual fund was.

As expected, the radio host didn’t answer the question, but suggested an in person merging.

But I have a question.

Isn’t your first priority making sure you and your husband have sufficient income for your combined lifetimes?

It is possible that earnings on the $750,000 could supplement income sufficiently, but we don’t know and apparently neither does she. If her priority is preserving the $750,000 with minimal risk, the ability to generate income will be modest.

This is the type of conundrum that requires putting paper to pencil and talking to one another.

✔️ What are your income needs based on your desired retirement lifestyle?

✔️ Do you want leaving money to children to take priority over your lifestyle in retirement?

✔️ What income will your husband generate?

✔️ What will Social Security provide?

✔️ What is the gap, if any?

✔️ Do you need $50,000 a year?

✔️ How will you invest the $750,000 to generate $50,000? Conventional wisdom says you will be able to take about $30,000 (plus inflation) a year with little risk of running out of money, but there will be some risk to your investment.

5 replies »

  1. The caller clearly has a limited understanding of finances. She needs to make a decision soon, so it’s not sensible to expect her to learn enough to manage a lump sum. I’d point out that the pension pays her $50k a year even if she lives to be 95, but the lump sum could run out in her mid-70s if she’s not lucky with investments. Then I’d suggest she take the pension and invest part of it in an index fund each month. That way, she and her husband can live comfortably on the pension, with the investment account available to pay for long-term care or leave to her children.

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  2. I think that this woman needs more help in basic financial education than a radio host can give. Pensions are not life insurance. If this was her plan to leave the money to her kids when she needs now to live on, than she should have talked to a professional decades earlier and not at retirement for proper planning.

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  3. I also had that choice. I took the lump sum and never looked back. I have managed it myself and invested it conservatively, A decade later my lump sum has doubled in size because I also live conservatively [by choice.]

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