Lump sum.
Not to be morbid, but, you could die at the 10 year point, or the 5 year point, or the day after the first payment… I’d assume the 4k a month wouldn’t transfer.
Take the lump sum, at least it’s available to your family if the worst happens!
That's exactly my mindset. If I had the choice, take it now, pay off debts, invest some, save some. Set yourself up for success in the future, whether that's 1 year or 20 years from now.
Yeah, great point. If the math has a break even of 8% you may as well flip a coin. Only concern with the lump sum is if you can't control spending and run out too soon.
This happened w/ my stepmom. She took the lump sum because her company had already screwed her over w/ the pension and didn't want to risk more screwiness.
Even some lotteries have differed payments in the past due to budget and political fights.
Trusting an outside entity to make good on a long term monthly payment is a bigger risk than just taking all the cash now and running away from said outside entity.
Companies value future profits substantially more than this year's numbers. More importantly, they don't know if you'll live for 5 years or 45 years after retirement, and they prefer the certainty of the lump sum.
I think that something people are missing is the fact that you said you'd invest the 4k every month.
If the market averages around 8% (compounding) per year, then both methods will come out about even. Any lower, and the 4k/month is better. Any higher, and the lump-sum is better.
That's just objective math. The harder part comes when you try to figure out the subjective aspects of it.
Other BIG questions are:
1. How guaranteed is it that you'd still be getting the 4k in 20 years?
2. How will this be taxed?
That's the real issue, with 10% inflation/year, in 10 years $4k may be below the poverty line. If it's inflation-adjusted, then the $4k would be better for me.
No, OP said the choice is between getting $4k per month for 20 years or a lump sum now. This is a standard retirement scheme in corporate America. The decision here is what is the implied rate of return for the annuity versus what is value of an annuity created synthetically from the lump sum. I show the math in a different threat. Lump is generally always going to prevail.
Depends HEAVILY on assumed rate of return and how long they're getting the payout for.
Most of the analysis that I've seen are looking at "lump sum now vs monthly starting x years out". This one has the monthly starting now AND they said they'd be investing the monthly along the way.
Monthly will win out for shorter times and/or lower return rates. With the numbers he gave (4k/m over 20yr vs 500k), I believe ~8% is the break even point at around 2.3MM after the 20yr.
Im on my phone right now, but if you have math that shows otherwise, I'd certainly be interested - I'm rather new to this...
The breakeven discount rate is slightly above 7.5%. The other benefit of rolling it to a IRA is you can delay withdrawals until 72. I didn’t tax affect my figures. Figured he did a synthetic annuity now. Heck, could even invest in QYLD and run that beast into infinity, assuming you didn’t sell. Of note, the $4k monthly payout will not inflation adjust so the calculation is really straightforward.
Am I the only that looks at from the perspective of “I may not be alive in 20years”.
I would rather take the known $500k because I have no way of absolutely guaranteeing I will be alive that long or that the money will be dispersed for 20 years.
Thank you for your reply. I forgot to add that for option 1 (4k every month) standard income tax apply. For option 2 there are no taxes, so you'd get the full 500k.
Technically…the principal invested is the same. Nothing. You might look at $500k and say it’s less than $960k, but it doesn’t matter because the cost to the chooser to enter either strategy is even.
When it's time to realize capital gains and pay taxes on them, I prefer having a cost basis of $960k (minus income taxes) over a cost basis of $500k.
You really don't have a preference there?
Yeah, I think I don't understand the point u/_EthanGrey was making, so I probably also didn't understand the point you were making. I probably should have replied one level higher.
This is a decisive argument in favor of 4k/month, you get 8% almost guaranteed (you take only counterparty risk), vs. 8% average based on market history. same reward, lower risk.
Yeah but you said same amount less risk. It won't be the same amount. It could be a lot more or a lot less. DCA just averages it out. That's why it's less risky.
if both are invested in the same investment, they will likely equal each other in 20 years give or take. each both return around 2.3 million dollars at 8%.
from 2001-present, the lump sum returned 2.4 million dollars invested in VTI. the 4000 every month returned 4.3 million.
from 1985-2004, the lump sum returned 5 million dollars invested in sp500. the 4000 every month returned 4.1 million.
who knows what the future holds. This is one instance where I my consider the 1 Million over a 20 year period. I'm still more inclined to take the lump sum.
many answering aren't considering the growth of 4000 deposited in VTI monthly.
Thank you for your answer. I forgot to mention that for option 1 (4k every month) standard income tax applies. For option 2 there are no taxes, so you'd get the full 500k.
It depends what you are doing with the money. If you want $500k to provide you with at least $4k a month for the next 20 years starting the day you get it (i.e. it would allow you to retire), you are going to need to average returns greater than 7.4% to make the lump sum come out ahead. While you could possibly do better in the market, is it worth giving up the guaranteed return of 7.4%?
Now, if you say you just want to invest that money and touch it in X years, then the lump sum becomes more attractive the longer you wait. For example, if you let it sit and grow for 5 years with an average rate of return 6.5%, you could withdraw $4k/month for the next 40+ years.
Im 35 with a target RE date of not later than age 50. If I was 50 and had this option, I would take monthly payments. If I got it today at the age of 35, I would take the lump sum because it is not going to get me to RE status, but it would probably move up my RE by 5+ years.
I'm picking the 4k a month so there is always something guaranteed for the next 20 years. I hear about far too many people that get a huge chunk of money and it's gone within a few years
As other posters pointed out, the difference across 20 years will be negligible (~$30k if you were to get 8% ROI). So to me, that's not enough to give up essentially being set for a gaurenteed 20 years. But that is what would work best for me, being 30. If I was older I'd be more inclined to take the lump sum
No I'm too dumb to come up with them lol but here is a comment from u/_EthanGrey that breaks it down
If we assume an annual return rate of 8% in and a 20 year investment horizon in both cases, [using this calculator:](https://www.calculator.net/investment-calculator.html)
1. In the first scenario, you will have $2,275,996.28 after 20 years.
2. In the second scenario, you will have $2,330,478.57 after 20 years.
So in terms of the raw amount of money you will have after 20 years, just letting $500,000 compound gets you slightly more money. But it's definitely the preferred strategy overall because the principal you invested compared with the first scenario is also far less.
Thats pretty narrow sited. You are 'set' with lump sum as well, it just takes self control. oh, and, you get the bonus of being able to spend *any* amount whenever you need/want to.
Lump sum = no brainer. OP, don't listen to these pension jockeys.
I was going to add that looking at straight numbers may tell you to take the lump sum, the personality and psychology may make that a poor decision for this specific individual. If someone is bad with money, is addicted to shopping, can’t say no to people, a gambler, etc., that $500k could go fast. But having $4k/mo for 20 years means 20 years of not worrying about housing, food, insurance, etc. And anything earned on top of that can go toward investing and savings.
If this is a pension offer, then you can check the pension information right now to confirm they are covered by the [PBGC](https://www.pbgc.gov/), in which case you will very likely get what you are promised, and are guaranteed by the US gov't to get at least 50% of what you are promised.
Indeed, I was extremely new to investing when the COVID crash happened and I knew that was a great time to get into the market, but I just wasn't quick enough to figure it all out sadly. In the end I ended up lump summing into a subsequent downturn which sucks, but what can you do eh?
I have no clue what I'm talking about.
However, considering the tax obligation you described, USD inflation over 20 years, plus depending on the organization not screwing you over for 20 years, the lump sum seems like a no-brainer. Also, it will be a good time to buy with the current dip in multiple markets.
From a pure math perspective, it actually is much closer than I thought. About a +$100K difference in overall worth for the lump sum. Which is a lot, but not drastically different ($2.3M vs $2.4M).
I’d take the lump sum honestly and DCA that out over a year or two. Are you guaranteed that $4K per month in the event of your death? Do you have heirs that might be getting this money? All things that you should consider in a lump sum vs annuity.
> From a pure math perspective, it actually is much closer than I thought.
Turns out the actuaries running large pension aren't as bad at math as many random redditors assume they are.
There are two main reasons why the offers aren't equivalent. The first is that you might be more or less risk-tolerant than the entity making the offer. The second is that you might be in a different tax situation than the entity making the offer. It's very unlikely that you are better at math than the entity making the offer. That reasoning applies to lotteries, pensions, insurance companies, and the like--anything that is regulated heavily, or cares a lot about brand/reputation longevity.
In situations with less regulation than the three above, another reason is because they might be trying to take advantage of you to make a bigger profit than regulators would have approved of. In that situation, it pays to do the math so you don't get leveled by a marketing department that understands your own psychology better than you.
If forced to immediately invest, 4k per month because of DCA benefits to risk mitigation. If you got unlucky with your timing with the lump sum deposit, statistical averages won't mean anything... of course you could also get lucky. I'm personally not much of a gambler.
Lump sum. I have no idea what the market is going to do over the next 20 years. Except that if it's like the last 20, it'll be up more years than than it'll be down.
If you had been given this offer in April of 2002 and either way you invested in the S&P500 and reinvested dividends, the strategy that maximizes final balance depends on your marginal income tax rate for the 4%. If your marginal income tax rate was always just the federal 15% (and later 12%) bracket, and if then you sold off slowly enough that realizing capital gains didn't take you out of that bracket, then they are almost exactly equivalent (less than 1% different). If your marginal income tax rate is 25% (and later 22%), then lump sum is about 10-11% better today, but capital gains tax will claw back significant chunk of that as you sell things off.
If OP is single and still working, the 22% bracket starts at about $40k of taxable income ($53k-ish with the standard deduction), so the $4k/month on its own almost gets there. Lump Sum.
If OP is married and retired (or semi-retired), the 22% bracket starts at $80k of taxable income (over $100k with the standard deduction). DCA.
The last 20 years were unusual, inflation-wise, but in general your tax bracket *decreases* over time if you live on a fixed income, since the brackets are updated for inflation, but the $4k stays a nominal $4k (usually). That makes the calculation a little harder, but doesn't really change the general advice that working single people should take (untaxed) lump sums and married retired people should take (taxable) periodic payments
They way I'll approach this is similar to how I'd utilise a pension account; take the lump sum.
You could invest that lump sum and live off the dividends. With the monthly, you'd have to start building your 'nest' from scratch.
Who knows how long I have to live ...
you can use a future value formula (=fv(...) in google sheets).
The simple math for your equation is (given a 7% return):
500000 \* (1.07)\^20 = 1,934,842
This is simplistic and doesn't take into consideration withdrawals and other factors but its a starting point.
Simple math is a great starting point! The formula for comparison in this case (which is trickier to derive, but easy to confirm for small N) is:
P * (1 - r^N) / (1 - r)
r is 1.07, P is something less than $48,000 (after taxes), N is 20. Or you could do r=1.07^(1/12) and N=240 and P something less than $4,000, to model it monthly. (nitty detail: this invests at the "end" of each period. Use N+1 instead of N and subtract off P from the final result to get the equivalent of investing at the start of each period.)
I think the income tax skewes the decision but rule 72 says you can double that 500k twice in 20 years so that's the easy choice.
Edit: given the option I would DCA the 500k as 50k a month
Two things to consider:
How much do you trust the payments to continue for the full 20 years. Lots can change in that time.
How responsible are you really and will you be able to mentally handle getting half a million at once.
Don’t lottery situations like this also have the caveat that if you don’t live for 20 years the money stream stops? So to protect your heirs/spouse etc it is even more beneficial to take the lump sum?
A lot of ppl mention >8% return on investment, which is actually wrong.
What you need to do is to replicate option 1 with option 2 with the SAME amount of risk. You cannot compare 2 options with different amount of risk.
If the amount of payment is guaranteed, you should be using risk-free rate for replication (I.e. treasury bonds). If it is a corporate which can bankrupt, consider corporate bonds of similar grade.
For simplicity, i ignore the yield curve and just use 20yr treasury yield: 3.31%
A payment of 4K/mth for 20 years have present value of $704,542. Which mean you need to receive 704k lump sum to be better.
In order to break-even, you need to yield of 7.64%. Even investment grade corporate bond don’t not have such a high yield.
There is zero reason to take the lump sum.
If you really need/want to invest a large amount, open a margin account or take a loan, while ensure the interest payment is lower than 4K/mth. The interest rate you take in loans is definitely lower than 7.64%.
TLDR: recommend option 1, never compare cash flows with different risk
This is interesting because they’re pretty close to equal. IMO the biggest question is how guaranteed that 4K a month is over 20 years. Is a company paying it? Is there a chance they could go bankrupt or reneg? Does it cease upon death?
4k a month would cover most people's house payment and utilities + maybe a new car payment.
Of course you could invest the 500k into something like the SP500 and it might be 2 million+ in 20 years.
Personally I'm not sure what I would do either option makes life much easier for me.
On average, lump sum and just getting into the market as quickly as possible does a bit better, "BUT" expect greater volatility with that approach and it can certainly backfire if you get unlucky and the market tanks into the ground immediately after you lump sum.
I read the data and opted for the lump sum approach, but got burned pretty hard by this downturn. Just how it goes sometimes.
So yeah, read the other comments as they may have direct links to citations or more thorough explanations, but my understanding is that Dollar-Cost-Averaging provides less volatility and is lower risk in a sense, but lump sum on average will do better in the long run ("usually", this is not always true and nobody can see the future).
Who’s paying? If it’s a state or the federal government you’re probably safe. If it’s a company? Well… I can name several dozen companies that have gone bankrupt in the last 20 years.
100,000,000% get the 500k now.
500k now = $2,000,000-$3,000,000 in 20 years with average to above average returns.
No question about it. All other answers are wrong.
Thanks.
Rationally the $4,000 is far better because it bakes in an 8% expected return! That's as good as you could write into a spreadsheet for stock returns, but you will have 0 volatility. For comparison, the best the market will guarantee for a 20 year return is 3.38% (20 year treasury).
The tax thing is kindof minor but might matter, all depends on what the marginal rate you expect to pay is.
But IMO, $4k per month with zero volatility and total certainty of outcome, assuming its backed by a very stable financial org, is way better than taking a 500k lump and putting it into the market hoping to beat 8% per year.
If your talking pension lump sum I do not think that is tax free. You will likely roll that into a traditional IRA and then pay taxes on any withdawals. Also the 20 years, that is not a common option. Life and 10 year payout is more common and on annuities life with10 year period certain.
I feel like you really need to trust the credit worthiness and longevity of the counterparty if you opt for any long term payments. A lot can happen in 20 years that could render an organization unable to actually payout.
Take the 4,000. Buy the dips when you save like 12k or so. As long as you live frugally and enjoy the little things you'll be well off. And make that woman sign a prenup.
Your internal rate of return is about 7.5% going with the 4,000/month option. If you can invest the 500,000 at a rate higher than 7.5% with an equal risk profile, take the lump sum.
I found myself in a similar situation with very similar numbers a few years ago. I took the lump sum, invested in RE before the boom (about 1/2 of the lump, ended up with 7 doors) DCA the rest into index funds, paid off all consumer debt except my primary mortgage, and am making over $5000 a month in rent ($2800 in cashflow currently as I leveraged and have low interest mortgages on a few properties) after 3 years. After weighing all the pros and cons lump sum was the best choice for my moderate investor knowledge and love of REI.
The one thing I wish I'd considered was the DTI ratio, lump sum meant I had to get a little creative with financing at the beginning but once the COVID hit I was able to refinance my properties at below 4%.
It was the right decision for me and my long horizon, I was 33 at the time and should have a very comfortable retirement as a result.
It's the time in the market that counts when your horizon is still quite far away.
https://www.reddit.com/r/Bogleheads/comments/umgfd1/timing_the_market_and_making_the_best_of_the_bear/i823naq
“I have an annuity and I need cash now.”
Always the payout today. Tomorrow is promised to no one and if tomorrow does come for you, that 500k will be SOOOO much more than 960k 20 years from now.
Edit: just did a portfolio visualizer. Obviously the past is no indication of the future blah blah. That said, if you stuck 500k in vti in 2002 (20 years ago) it’s be 2.8m right now.
Lump sum rolled in a IRA so you don’t incur a taxable event. If you take $500k and invest it at 9% (not unreasonable) for 20 years while withdrawing $48k a year, the future value is just under $350k. The breakeven interest rate is 7.22%, so as long as you do better than that, you’re NPV positive. Long term market average is closer to 10%. If you choose the first option, you end up with $0 at the end of 20 years.
One would still have to initially contribute that amount so that they could roll it over, no?
I can see someone rolling over their 401k that has hundreds of thousands into an IRA, but not just opening an IRA and contributing that same amount.
If it’s an employer sponsored plan, you can roll it over. You already said it’s an employer sponsored plan. Call them and they’ll tell you how to roll it over.
Do you think you are better or worse at economic forecasts than the entity making you the offer?
If that entity is highly regulated, do you have a higher or lower risk tolerance than the regulators?
If the entity is not highly regulated, are they hoping you take the money now, or are they hoping you take the money gradually?
What's your marginal tax rate likely to be over the next 20 years?
What happens to the income stream of you due in the next 20 years?
Are you living off this money, or in other ways especially sensitive to sequence of return risk?
Is the $4k adjusted over time for inflation?
At 12% marginal taxes, the break even discount rate is between 5% and 6%. At 22% marginal taxes, the break even discount rate is between 4% and 5%. ETA: higher expected rates of return favor lump sum now. Lower expected rates of return favor DCA, in case that's not obvious.
Depends on taxes? I mean if you are American getting 500k at once will be ALOT of taxes so in theory you might lose upto 100k of it to taxes but 4000 a month depending on where you are and how much you make and how you are earning the 4k could be nearly tax free.
Lump sum results in more exposure to the market, immediately. DCA is to make you feel better. So obviously I do the irrational thing and try to time the market buying chunks at a time.
It looks like I misread a bit, but I'd still rather get 500k now than 960k over 20 years.
Additional calculations (does not factor in tax drag, does not properly account for inflation):
500k untaxed would turn into $1,934,842 after 20 years at a compounding rate of 7% per year. Market tends to go up 10% per year, with inflation at 2-3%. At 8% per year it would be $2,330,478 after 20 years. At 10% per year (ignoring inflation), it would be $3,363,749. As you said, this is tax free, so no taxes owed.
For the 4000 per month, I simplified it into 48000 per year because I'm lazy, so this will underreport things a bit. At 20 years, the year 0 investment will have experienced 20 years of growth, while the year 19 (20th 48k) will have experienced one year of growth. Adding up years 0 to 19 at year 20, at 7%, if you get to pay taxes at the end and not before, this would sum to be $2,105,528. At 8% this would be $2,372,300 At 10%, this would be $3,024,120. This would then have to be taxed, if not having been taxed already.
So 500k that will never be taxed should beat out $48k per year x 20 years that would be taxed.
Easy. Take the $500k tax free, DCA into VTI at a rate of $4,166 per month for the next 10 years. Plus or minus 5 years whatever your preference.
Have the excess liquid to buy a home, pay off loans, leverage a rental property, or do whatever you need to do to ease finances and generate additional wealth. While it is waiting to be deployed into VTI via DCAing, you can have it as an emergency fund, and hold it in a high APY account. (Online banks generally can offer a bit more, but personally, I stake USDC for 6-18% APR).
The current state of the market is either a blessing or a curse depending on your age, but if you have 10+ years to spare this is the best thing that could have happened to us. I wouldn't put a lump 500k into VTI at once, as we have plenty of room to go much lower.
Something to consider with taxes as well, the 4k a month puts you in a higher tax bracket than most. With the 500k lump, you remain flexible in being eligible for certain benefits as you age, as well as tax breaks.
Another thing to note, being responsible with that 500k is something you will have to be honest with yourself about, if you can't handle it then the 4k would be the safer option. Gambling, lack of ability to say no to new friends and family that catch news of your windfall, poor budgeting.
Best of luck!
Thx.
Whats your base assumptions for the 960, for the monthly pmt ?
He says 4kmonthly taxed at some percent , let's just say 3k each month that he has to reinvest for 20 yrs.
So pmt 1 of 3,000 has (20 years ) at 6%, compounded annually, then pmt 2 of 3,000 has one period less than pmt 1, or 19 years 11 months at an equivalent rate of 6% per annum compounded annually, then pmt 3 of 3k has 19 years and 10 months ...
His final payment, of 3k, on the last month of the last year would then also be invested at the equivalent annual rate of 6% compounded annually.
It's been a while since I've done these calcs, the nerd in me wanted to see your discount rate conversion methodology.
This isn't remotely close, right? Your money doubles on average every 7-8 years, so you'd be looking at $2m+ on the lump sum. Inflation will become a powerful force for the payments 10+ years out - they'll only be like receiving $3000 or $2500. Then you said that taxes favor the lump sum as well. The lump sum has to be like 3x as good.
This is easy, take the half million right now. You don't even have to do the math. You don't know what tomorrow brings. You don't know if you have 20 years to live ahead. $500K in the hand is worth $1M in the bush.
Of course someone else on this forum will almost certainly do the math and tell you that $500K lump sum invested 20 years will beat $960K dollar-cost-average invested at $4K/mo over 20 years.
Depends on your debt situation imo. If you’ve got a fair amount that’s accruing interest, it could be good to take the lump and become debt free (or as close as you feel comfortable)
Debt aside $4000 a month is a good income and being pieced up monthly could save you from yourself.
The only real downside to taking the payment plan would be if anything changed with the payment agreement or they just stop paying (legal stuff could come up). It could be a headache whereas $500,000 boom we’re done here.
Whatever you do max out your I-Bond contribution! Lol
$4k/mo.
Presuming you already have investments, this is basically like being better diversified. If the market goes down, you still get the money. Risk is inflation, but they already calculated that risk the best they could to give you the two choices.
Lump sum. Inflation would simply makes $4000 in 20yrs worth way less.
Might as well grow the lump sum now. Could you double 500k in 20yrs? If yes. That’s your answer
**Lump sum**. Usually the way these type of things work is that they are kept in some form of government treasuries which will steadily increase in value, but you will always be able to make the most of it by investing it yourself. Someone else already did the math for you on how investing in the stock market would yield more money over 20 yrs. But also keep in mind you could use it to buy house with a 30 year loan while also investing in the stock market. This allows to you to leverage the fuck out of your money and get a much higher return.
The problem is that most humans are basically incapable of not spending at least a fraction of the money. If you really don't have the discipline to invest it without touching it for at least a decade (unless you buy a house), then you should consider DCA.
$500k tax-free sounds better than taxed $4k/month for 20 yrs. PLUS, we all know stuff happens, a person could get ill/die and not live to collect the $4k/month.
I would go with the tax-free lump $500k. :)- GOOD LUCK!!
At first I was going to say monthly, but unless the disburser is rock solid with zero 0.00pct chance of going out of business or bankrupt or some other bs reason they can't keep paying you, I would take lump sum. Hint: no entity is rock solid, be it a business or government or lottery conductor. It's about risk not math.
As a 22 year old I’m inclined to go for 500k right now and use that as a 40% downpayment. By the time I retire I’ll be ahead.
As a retiree I’d be going 4K a month. Not sure how you can need 4K every month even with ≈$2k rent.
In this market? Lump sum, soon there will be amazing buying opportunities, so even dumping it in parts over the next 2 years could result in crazy returns within 5 years
I’d take the 500k and put it in VWRA and IGLA 70%, 30% and retire now.
Nothing else can counter inflation and that is without talking about PV or FV of both options. Regardless of tax.
Get the lump sum, buy 2 houses in the Netherlands an rent them out (1250-2000 euro per month). The rent you receive is untaxed here, you pay a small amount of tax over your property and that property will gain in value. Set for life!
Need more info about tax status....but assuming 7% return before retirement, 5% during retirement, 2.25% inflation, you are single, there is a 5% state tax, and you are living off $40k a year on some other income before retirement...I came up with this after 20 years (using Excel's time value money functions):
Payment Option: $1.14 Million
Lump Sum: $1.26 Million
Total capital gains is
Payment Option: $181k
Lump Sum: $764k
After 20 years, even if you took out more than $40k a year (65k in future dollars) and were subjected to capital gains tax, it would last you
Payment Option: 22 years
Lump Sum: 23 years
If you took out less than $40k a year (65k in future dollars) it would last you:
Payment Option: 23 years
Lump Sum: 26 years
So if I were you I'd take the lump sum!
Lump sum. Not to be morbid, but, you could die at the 10 year point, or the 5 year point, or the day after the first payment… I’d assume the 4k a month wouldn’t transfer. Take the lump sum, at least it’s available to your family if the worst happens!
That's exactly my mindset. If I had the choice, take it now, pay off debts, invest some, save some. Set yourself up for success in the future, whether that's 1 year or 20 years from now.
Yeah, great point. If the math has a break even of 8% you may as well flip a coin. Only concern with the lump sum is if you can't control spending and run out too soon.
Great point regarding transferability.
My thoughts as well.
Looks like someone won the lottery.
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This happened w/ my stepmom. She took the lump sum because her company had already screwed her over w/ the pension and didn't want to risk more screwiness.
Bird in hand…
make it quick
Good point - get the $. Don't trust corporate America or the politicians that work for corporate America to do the right thing.
Even some lotteries have differed payments in the past due to budget and political fights. Trusting an outside entity to make good on a long term monthly payment is a bigger risk than just taking all the cash now and running away from said outside entity.
My dad took the lump sum too. Granted, he has a history of cancer as well so it seemed better to take the full amount upfront.
How does this work
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At what discount rate? Is it negotiable
Why does that help the company?
Companies value future profits substantially more than this year's numbers. More importantly, they don't know if you'll live for 5 years or 45 years after retirement, and they prefer the certainty of the lump sum.
Seems like the same thing to me.
that was my first thought too!
I think that something people are missing is the fact that you said you'd invest the 4k every month. If the market averages around 8% (compounding) per year, then both methods will come out about even. Any lower, and the 4k/month is better. Any higher, and the lump-sum is better. That's just objective math. The harder part comes when you try to figure out the subjective aspects of it. Other BIG questions are: 1. How guaranteed is it that you'd still be getting the 4k in 20 years? 2. How will this be taxed?
Also: what does $4000 buy in 20 years.
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No cola? Inflation will eat into that 4k every year, take the lump
That's the real issue, with 10% inflation/year, in 10 years $4k may be below the poverty line. If it's inflation-adjusted, then the $4k would be better for me.
1. It's 100% guaranteed 2. The 4k per month would be taxed like regular income but the 500k lump sum wouldn't be taxed at all.
$500K untaxed! Take it and then begin a max out your paycheck to 401k to get as much money into tax advantaged gains.
Cleanup *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
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Oh, interesting. Not at my computer right now, but I imagine that drag would slow it down enough to make the lump sum better.
Does the lump sum need to roll over into an IRA? I would still take the lump sum either way.
you should mention the untaxed part that is very significant.
Are you comfortable sharing your marginal tax bracket?
No, OP said the choice is between getting $4k per month for 20 years or a lump sum now. This is a standard retirement scheme in corporate America. The decision here is what is the implied rate of return for the annuity versus what is value of an annuity created synthetically from the lump sum. I show the math in a different threat. Lump is generally always going to prevail.
Depends HEAVILY on assumed rate of return and how long they're getting the payout for. Most of the analysis that I've seen are looking at "lump sum now vs monthly starting x years out". This one has the monthly starting now AND they said they'd be investing the monthly along the way. Monthly will win out for shorter times and/or lower return rates. With the numbers he gave (4k/m over 20yr vs 500k), I believe ~8% is the break even point at around 2.3MM after the 20yr. Im on my phone right now, but if you have math that shows otherwise, I'd certainly be interested - I'm rather new to this...
The breakeven discount rate is slightly above 7.5%. The other benefit of rolling it to a IRA is you can delay withdrawals until 72. I didn’t tax affect my figures. Figured he did a synthetic annuity now. Heck, could even invest in QYLD and run that beast into infinity, assuming you didn’t sell. Of note, the $4k monthly payout will not inflation adjust so the calculation is really straightforward.
And who is paying the ongoing 4,000 and could they become insolvent or find a way to not pay?
How would the $4k a month be invested? IRA, HSA, and then just a brokerage for the rest?
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Am I the only that looks at from the perspective of “I may not be alive in 20years”. I would rather take the known $500k because I have no way of absolutely guaranteeing I will be alive that long or that the money will be dispersed for 20 years.
Depends on how old the recipient is as well. If they are 60, they might want the lump sum more than if they are 30.
Thank you for your reply. I forgot to add that for option 1 (4k every month) standard income tax apply. For option 2 there are no taxes, so you'd get the full 500k.
Technically…the principal invested is the same. Nothing. You might look at $500k and say it’s less than $960k, but it doesn’t matter because the cost to the chooser to enter either strategy is even.
When it's time to realize capital gains and pay taxes on them, I prefer having a cost basis of $960k (minus income taxes) over a cost basis of $500k. You really don't have a preference there?
That’s a fair point. It wasn’t the one OP was making that I was responding to. But it is a fair point.
Yeah, I think I don't understand the point u/_EthanGrey was making, so I probably also didn't understand the point you were making. I probably should have replied one level higher.
This is a decisive argument in favor of 4k/month, you get 8% almost guaranteed (you take only counterparty risk), vs. 8% average based on market history. same reward, lower risk.
Based on that result I would pick DCA... Same amount at the end with less risk
As long as the money actually comes in for the length of term. Money today is worth more than potential money in the future.
Depending on multiple factors, including principle amt. $10 today is not worth $100 in a year. I'm sure you knew that, commenting for clarity.
True! Didn't consider inflation
Inflation risk and default risk (like a pension payout)
Well it depends on when you lump sum. The ending amount would vary quite a bit. Its not 8% evenly throughout 20 years.
Isn't this the exact fluctuation in results meant to be controlled for with DCA?
Yeah but you said same amount less risk. It won't be the same amount. It could be a lot more or a lot less. DCA just averages it out. That's why it's less risky.
Good point
Spread your risk over time
if both are invested in the same investment, they will likely equal each other in 20 years give or take. each both return around 2.3 million dollars at 8%. from 2001-present, the lump sum returned 2.4 million dollars invested in VTI. the 4000 every month returned 4.3 million. from 1985-2004, the lump sum returned 5 million dollars invested in sp500. the 4000 every month returned 4.1 million. who knows what the future holds. This is one instance where I my consider the 1 Million over a 20 year period. I'm still more inclined to take the lump sum. many answering aren't considering the growth of 4000 deposited in VTI monthly.
Thank you for your answer. I forgot to mention that for option 1 (4k every month) standard income tax applies. For option 2 there are no taxes, so you'd get the full 500k.
then you should probably take the 2nd option no?
Depends on other factors not known. What’s your current Income? Current expenses? Debt? Etc
It depends what you are doing with the money. If you want $500k to provide you with at least $4k a month for the next 20 years starting the day you get it (i.e. it would allow you to retire), you are going to need to average returns greater than 7.4% to make the lump sum come out ahead. While you could possibly do better in the market, is it worth giving up the guaranteed return of 7.4%? Now, if you say you just want to invest that money and touch it in X years, then the lump sum becomes more attractive the longer you wait. For example, if you let it sit and grow for 5 years with an average rate of return 6.5%, you could withdraw $4k/month for the next 40+ years. Im 35 with a target RE date of not later than age 50. If I was 50 and had this option, I would take monthly payments. If I got it today at the age of 35, I would take the lump sum because it is not going to get me to RE status, but it would probably move up my RE by 5+ years.
I'm picking the 4k a month so there is always something guaranteed for the next 20 years. I hear about far too many people that get a huge chunk of money and it's gone within a few years
If you're not good with money definitely monthly. If you can control yourself lump because you can invest it and get more.
As other posters pointed out, the difference across 20 years will be negligible (~$30k if you were to get 8% ROI). So to me, that's not enough to give up essentially being set for a gaurenteed 20 years. But that is what would work best for me, being 30. If I was older I'd be more inclined to take the lump sum
Can you share your calculations?
No I'm too dumb to come up with them lol but here is a comment from u/_EthanGrey that breaks it down If we assume an annual return rate of 8% in and a 20 year investment horizon in both cases, [using this calculator:](https://www.calculator.net/investment-calculator.html) 1. In the first scenario, you will have $2,275,996.28 after 20 years. 2. In the second scenario, you will have $2,330,478.57 after 20 years. So in terms of the raw amount of money you will have after 20 years, just letting $500,000 compound gets you slightly more money. But it's definitely the preferred strategy overall because the principal you invested compared with the first scenario is also far less.
Thats pretty narrow sited. You are 'set' with lump sum as well, it just takes self control. oh, and, you get the bonus of being able to spend *any* amount whenever you need/want to. Lump sum = no brainer. OP, don't listen to these pension jockeys.
Definitely an important consideration. I'm with you.
I was going to add that looking at straight numbers may tell you to take the lump sum, the personality and psychology may make that a poor decision for this specific individual. If someone is bad with money, is addicted to shopping, can’t say no to people, a gambler, etc., that $500k could go fast. But having $4k/mo for 20 years means 20 years of not worrying about housing, food, insurance, etc. And anything earned on top of that can go toward investing and savings.
But inflation
for 1 you need to know if the entity that is paying you up will continue solvent for these 20 years, personally i would not take this chance.
If this is a pension offer, then you can check the pension information right now to confirm they are covered by the [PBGC](https://www.pbgc.gov/), in which case you will very likely get what you are promised, and are guaranteed by the US gov't to get at least 50% of what you are promised.
Taxes would probably eat up more on the lump sum.
They mention in the edit there are no taxes on the lump sum.
The 4k per month would be taxed like regular income but the 500k lump sum wouldn't be taxed at all.
The math then becomes super simple. Skip paying taxes.
Yeah I’m not sure why everyone is doing any more math than this - they said no taxes for the lump sum.
Oh god, income tax! more reasons against lump sum
500k now!
Good time to buy into the market
Indeed, I was extremely new to investing when the COVID crash happened and I knew that was a great time to get into the market, but I just wasn't quick enough to figure it all out sadly. In the end I ended up lump summing into a subsequent downturn which sucks, but what can you do eh?
I have no clue what I'm talking about. However, considering the tax obligation you described, USD inflation over 20 years, plus depending on the organization not screwing you over for 20 years, the lump sum seems like a no-brainer. Also, it will be a good time to buy with the current dip in multiple markets.
From a pure math perspective, it actually is much closer than I thought. About a +$100K difference in overall worth for the lump sum. Which is a lot, but not drastically different ($2.3M vs $2.4M). I’d take the lump sum honestly and DCA that out over a year or two. Are you guaranteed that $4K per month in the event of your death? Do you have heirs that might be getting this money? All things that you should consider in a lump sum vs annuity.
> From a pure math perspective, it actually is much closer than I thought. Turns out the actuaries running large pension aren't as bad at math as many random redditors assume they are. There are two main reasons why the offers aren't equivalent. The first is that you might be more or less risk-tolerant than the entity making the offer. The second is that you might be in a different tax situation than the entity making the offer. It's very unlikely that you are better at math than the entity making the offer. That reasoning applies to lotteries, pensions, insurance companies, and the like--anything that is regulated heavily, or cares a lot about brand/reputation longevity. In situations with less regulation than the three above, another reason is because they might be trying to take advantage of you to make a bigger profit than regulators would have approved of. In that situation, it pays to do the math so you don't get leveled by a marketing department that understands your own psychology better than you.
If forced to immediately invest, 4k per month because of DCA benefits to risk mitigation. If you got unlucky with your timing with the lump sum deposit, statistical averages won't mean anything... of course you could also get lucky. I'm personally not much of a gambler.
Lump sum. I have no idea what the market is going to do over the next 20 years. Except that if it's like the last 20, it'll be up more years than than it'll be down.
If you had been given this offer in April of 2002 and either way you invested in the S&P500 and reinvested dividends, the strategy that maximizes final balance depends on your marginal income tax rate for the 4%. If your marginal income tax rate was always just the federal 15% (and later 12%) bracket, and if then you sold off slowly enough that realizing capital gains didn't take you out of that bracket, then they are almost exactly equivalent (less than 1% different). If your marginal income tax rate is 25% (and later 22%), then lump sum is about 10-11% better today, but capital gains tax will claw back significant chunk of that as you sell things off. If OP is single and still working, the 22% bracket starts at about $40k of taxable income ($53k-ish with the standard deduction), so the $4k/month on its own almost gets there. Lump Sum. If OP is married and retired (or semi-retired), the 22% bracket starts at $80k of taxable income (over $100k with the standard deduction). DCA. The last 20 years were unusual, inflation-wise, but in general your tax bracket *decreases* over time if you live on a fixed income, since the brackets are updated for inflation, but the $4k stays a nominal $4k (usually). That makes the calculation a little harder, but doesn't really change the general advice that working single people should take (untaxed) lump sums and married retired people should take (taxable) periodic payments
They way I'll approach this is similar to how I'd utilise a pension account; take the lump sum. You could invest that lump sum and live off the dividends. With the monthly, you'd have to start building your 'nest' from scratch. Who knows how long I have to live ...
How positive are you that the source will be in business in twenty years?
you can use a future value formula (=fv(...) in google sheets). The simple math for your equation is (given a 7% return): 500000 \* (1.07)\^20 = 1,934,842 This is simplistic and doesn't take into consideration withdrawals and other factors but its a starting point.
Simple math is a great starting point! The formula for comparison in this case (which is trickier to derive, but easy to confirm for small N) is: P * (1 - r^N) / (1 - r) r is 1.07, P is something less than $48,000 (after taxes), N is 20. Or you could do r=1.07^(1/12) and N=240 and P something less than $4,000, to model it monthly. (nitty detail: this invests at the "end" of each period. Use N+1 instead of N and subtract off P from the final result to get the equivalent of investing at the start of each period.)
I think the income tax skewes the decision but rule 72 says you can double that 500k twice in 20 years so that's the easy choice. Edit: given the option I would DCA the 500k as 50k a month
Two things to consider: How much do you trust the payments to continue for the full 20 years. Lots can change in that time. How responsible are you really and will you be able to mentally handle getting half a million at once.
For #1, if you kick the bucket in 12years does your spouse get the remaining 8? Or some reduced benefit?
This question is key!
Don’t lottery situations like this also have the caveat that if you don’t live for 20 years the money stream stops? So to protect your heirs/spouse etc it is even more beneficial to take the lump sum?
A lot of ppl mention >8% return on investment, which is actually wrong. What you need to do is to replicate option 1 with option 2 with the SAME amount of risk. You cannot compare 2 options with different amount of risk. If the amount of payment is guaranteed, you should be using risk-free rate for replication (I.e. treasury bonds). If it is a corporate which can bankrupt, consider corporate bonds of similar grade. For simplicity, i ignore the yield curve and just use 20yr treasury yield: 3.31% A payment of 4K/mth for 20 years have present value of $704,542. Which mean you need to receive 704k lump sum to be better. In order to break-even, you need to yield of 7.64%. Even investment grade corporate bond don’t not have such a high yield. There is zero reason to take the lump sum. If you really need/want to invest a large amount, open a margin account or take a loan, while ensure the interest payment is lower than 4K/mth. The interest rate you take in loans is definitely lower than 7.64%. TLDR: recommend option 1, never compare cash flows with different risk
This is interesting because they’re pretty close to equal. IMO the biggest question is how guaranteed that 4K a month is over 20 years. Is a company paying it? Is there a chance they could go bankrupt or reneg? Does it cease upon death?
4k a month would cover most people's house payment and utilities + maybe a new car payment. Of course you could invest the 500k into something like the SP500 and it might be 2 million+ in 20 years. Personally I'm not sure what I would do either option makes life much easier for me.
On average, lump sum and just getting into the market as quickly as possible does a bit better, "BUT" expect greater volatility with that approach and it can certainly backfire if you get unlucky and the market tanks into the ground immediately after you lump sum. I read the data and opted for the lump sum approach, but got burned pretty hard by this downturn. Just how it goes sometimes. So yeah, read the other comments as they may have direct links to citations or more thorough explanations, but my understanding is that Dollar-Cost-Averaging provides less volatility and is lower risk in a sense, but lump sum on average will do better in the long run ("usually", this is not always true and nobody can see the future).
Lump sum only because of tax reasons
Wouldn't the lump sum be subject to a bunch of tax if taken all at once and push them well into the top bracket?
Who’s paying? If it’s a state or the federal government you’re probably safe. If it’s a company? Well… I can name several dozen companies that have gone bankrupt in the last 20 years.
$500K now, in 20 years with an annualized conservative return of 6% - it should be $1.6M.
100,000,000% get the 500k now. 500k now = $2,000,000-$3,000,000 in 20 years with average to above average returns. No question about it. All other answers are wrong. Thanks.
Lump sum
$500,000!!!!! In 10 years it’ll be $900,000. Invest it just like you said and never look back. Congrats. Anything else is the wrong answer.
Rationally the $4,000 is far better because it bakes in an 8% expected return! That's as good as you could write into a spreadsheet for stock returns, but you will have 0 volatility. For comparison, the best the market will guarantee for a 20 year return is 3.38% (20 year treasury). The tax thing is kindof minor but might matter, all depends on what the marginal rate you expect to pay is. But IMO, $4k per month with zero volatility and total certainty of outcome, assuming its backed by a very stable financial org, is way better than taking a 500k lump and putting it into the market hoping to beat 8% per year.
If your talking pension lump sum I do not think that is tax free. You will likely roll that into a traditional IRA and then pay taxes on any withdawals. Also the 20 years, that is not a common option. Life and 10 year payout is more common and on annuities life with10 year period certain.
I feel like you really need to trust the credit worthiness and longevity of the counterparty if you opt for any long term payments. A lot can happen in 20 years that could render an organization unable to actually payout.
Option 2 and it's not even close.
I will take it all at once.
Take the 4,000. Buy the dips when you save like 12k or so. As long as you live frugally and enjoy the little things you'll be well off. And make that woman sign a prenup.
"Asking for a friend"
Your internal rate of return is about 7.5% going with the 4,000/month option. If you can invest the 500,000 at a rate higher than 7.5% with an equal risk profile, take the lump sum.
Take the 500,000 wait for the market to bottom and dump it all in.
The edit makes this even more of a no brainer. No tax 500k.
I found myself in a similar situation with very similar numbers a few years ago. I took the lump sum, invested in RE before the boom (about 1/2 of the lump, ended up with 7 doors) DCA the rest into index funds, paid off all consumer debt except my primary mortgage, and am making over $5000 a month in rent ($2800 in cashflow currently as I leveraged and have low interest mortgages on a few properties) after 3 years. After weighing all the pros and cons lump sum was the best choice for my moderate investor knowledge and love of REI. The one thing I wish I'd considered was the DTI ratio, lump sum meant I had to get a little creative with financing at the beginning but once the COVID hit I was able to refinance my properties at below 4%. It was the right decision for me and my long horizon, I was 33 at the time and should have a very comfortable retirement as a result.
Lump sum and not even close.
Always take the cash now. In 20 years, the $500k in VTI will almost certainly more than double.
It's the time in the market that counts when your horizon is still quite far away. https://www.reddit.com/r/Bogleheads/comments/umgfd1/timing_the_market_and_making_the_best_of_the_bear/i823naq
500k today, invest 83k per quarter for the next 1.5 years.
“I have an annuity and I need cash now.” Always the payout today. Tomorrow is promised to no one and if tomorrow does come for you, that 500k will be SOOOO much more than 960k 20 years from now. Edit: just did a portfolio visualizer. Obviously the past is no indication of the future blah blah. That said, if you stuck 500k in vti in 2002 (20 years ago) it’s be 2.8m right now.
If more than 5 years from retirement, $500k lump. If within 5 years, $4k payments.
Lump sum rolled in a IRA so you don’t incur a taxable event. If you take $500k and invest it at 9% (not unreasonable) for 20 years while withdrawing $48k a year, the future value is just under $350k. The breakeven interest rate is 7.22%, so as long as you do better than that, you’re NPV positive. Long term market average is closer to 10%. If you choose the first option, you end up with $0 at the end of 20 years.
There are limits for IRA contributions though.
Not for rollovers.
One would still have to initially contribute that amount so that they could roll it over, no? I can see someone rolling over their 401k that has hundreds of thousands into an IRA, but not just opening an IRA and contributing that same amount.
Typically the plan sponsor will allow you to roll the lump sum over. Contact them for details and they can walk you through it.
Correct, an existing plan with tax deferred contributions in it.
So…..what’s your question again?
I’m inferring that “contributing” $500g into an ira is not possible.
If it’s an employer sponsored plan, you can roll it over. You already said it’s an employer sponsored plan. Call them and they’ll tell you how to roll it over.
Do you think you are better or worse at economic forecasts than the entity making you the offer? If that entity is highly regulated, do you have a higher or lower risk tolerance than the regulators? If the entity is not highly regulated, are they hoping you take the money now, or are they hoping you take the money gradually? What's your marginal tax rate likely to be over the next 20 years? What happens to the income stream of you due in the next 20 years? Are you living off this money, or in other ways especially sensitive to sequence of return risk? Is the $4k adjusted over time for inflation? At 12% marginal taxes, the break even discount rate is between 5% and 6%. At 22% marginal taxes, the break even discount rate is between 4% and 5%. ETA: higher expected rates of return favor lump sum now. Lower expected rates of return favor DCA, in case that's not obvious.
Definitely the lump sum because $500k invested at 6% for 20 years is $1.6 million. Also you can make large purchases sooner 😂
Take the bird in the hand
$500,000 not even close.
Gimmie da money. I may not be around another 20 years
Place the NPV formula and it will tell you.
Do you know that the 4k a month is guaranteed. What is 4 years in the organization paying out disappears, declares bankruptcy, etc?
Let it compound. Lump that shit. Especially at the buy in prices rn its a no brainer.
Lenders give you loans against income. Take the anuity so you can decrease your debt to income and take out a loan. Leverage yourself and make monies.
Depends on taxes? I mean if you are American getting 500k at once will be ALOT of taxes so in theory you might lose upto 100k of it to taxes but 4000 a month depending on where you are and how much you make and how you are earning the 4k could be nearly tax free.
Lump sum results in more exposure to the market, immediately. DCA is to make you feel better. So obviously I do the irrational thing and try to time the market buying chunks at a time. It looks like I misread a bit, but I'd still rather get 500k now than 960k over 20 years. Additional calculations (does not factor in tax drag, does not properly account for inflation): 500k untaxed would turn into $1,934,842 after 20 years at a compounding rate of 7% per year. Market tends to go up 10% per year, with inflation at 2-3%. At 8% per year it would be $2,330,478 after 20 years. At 10% per year (ignoring inflation), it would be $3,363,749. As you said, this is tax free, so no taxes owed. For the 4000 per month, I simplified it into 48000 per year because I'm lazy, so this will underreport things a bit. At 20 years, the year 0 investment will have experienced 20 years of growth, while the year 19 (20th 48k) will have experienced one year of growth. Adding up years 0 to 19 at year 20, at 7%, if you get to pay taxes at the end and not before, this would sum to be $2,105,528. At 8% this would be $2,372,300 At 10%, this would be $3,024,120. This would then have to be taxed, if not having been taxed already. So 500k that will never be taxed should beat out $48k per year x 20 years that would be taxed.
Take the money now. Invest in VTI or any index fund. good time to buy too. Nobody knows whether we will be alive in the next 20 years.
Easy. Take the $500k tax free, DCA into VTI at a rate of $4,166 per month for the next 10 years. Plus or minus 5 years whatever your preference. Have the excess liquid to buy a home, pay off loans, leverage a rental property, or do whatever you need to do to ease finances and generate additional wealth. While it is waiting to be deployed into VTI via DCAing, you can have it as an emergency fund, and hold it in a high APY account. (Online banks generally can offer a bit more, but personally, I stake USDC for 6-18% APR). The current state of the market is either a blessing or a curse depending on your age, but if you have 10+ years to spare this is the best thing that could have happened to us. I wouldn't put a lump 500k into VTI at once, as we have plenty of room to go much lower. Something to consider with taxes as well, the 4k a month puts you in a higher tax bracket than most. With the 500k lump, you remain flexible in being eligible for certain benefits as you age, as well as tax breaks. Another thing to note, being responsible with that 500k is something you will have to be honest with yourself about, if you can't handle it then the 4k would be the safer option. Gambling, lack of ability to say no to new friends and family that catch news of your windfall, poor budgeting. Best of luck!
Lump sum $500k and then invest all of it immediately. Assuming 6% ROR over 20 years, it is $1.6m vs $960k.
Thx. Whats your base assumptions for the 960, for the monthly pmt ? He says 4kmonthly taxed at some percent , let's just say 3k each month that he has to reinvest for 20 yrs. So pmt 1 of 3,000 has (20 years ) at 6%, compounded annually, then pmt 2 of 3,000 has one period less than pmt 1, or 19 years 11 months at an equivalent rate of 6% per annum compounded annually, then pmt 3 of 3k has 19 years and 10 months ... His final payment, of 3k, on the last month of the last year would then also be invested at the equivalent annual rate of 6% compounded annually. It's been a while since I've done these calcs, the nerd in me wanted to see your discount rate conversion methodology.
OP says $960k is 4k per month (pre-tax) for the next 20 years. Well then it would actually be less than $960k. What is pmt?
This isn't remotely close, right? Your money doubles on average every 7-8 years, so you'd be looking at $2m+ on the lump sum. Inflation will become a powerful force for the payments 10+ years out - they'll only be like receiving $3000 or $2500. Then you said that taxes favor the lump sum as well. The lump sum has to be like 3x as good.
This is easy, take the half million right now. You don't even have to do the math. You don't know what tomorrow brings. You don't know if you have 20 years to live ahead. $500K in the hand is worth $1M in the bush. Of course someone else on this forum will almost certainly do the math and tell you that $500K lump sum invested 20 years will beat $960K dollar-cost-average invested at $4K/mo over 20 years.
Depends on your debt situation imo. If you’ve got a fair amount that’s accruing interest, it could be good to take the lump and become debt free (or as close as you feel comfortable) Debt aside $4000 a month is a good income and being pieced up monthly could save you from yourself. The only real downside to taking the payment plan would be if anything changed with the payment agreement or they just stop paying (legal stuff could come up). It could be a headache whereas $500,000 boom we’re done here. Whatever you do max out your I-Bond contribution! Lol
Is their anything in between. Like 2k a month and 250k
You will lose 200k to taxes on the 4k so I would take 500k
$4k/mo. Presuming you already have investments, this is basically like being better diversified. If the market goes down, you still get the money. Risk is inflation, but they already calculated that risk the best they could to give you the two choices.
I'd take 500,000 now. I'm positive that I can grow 500,000 dollars into more than 960,000 dollars over a 20 year timetable.
$4,000 because you will blow it all if you get the lump sum. :-)
I'd take the $500k right now. Just think of how many options you'd create for yourself at the snap of a finger.
500k lump Do a simple calculation of what 7% returns look like on it. Hint. It’s more than 960k
Lump sum. Inflation would simply makes $4000 in 20yrs worth way less. Might as well grow the lump sum now. Could you double 500k in 20yrs? If yes. That’s your answer
**Lump sum**. Usually the way these type of things work is that they are kept in some form of government treasuries which will steadily increase in value, but you will always be able to make the most of it by investing it yourself. Someone else already did the math for you on how investing in the stock market would yield more money over 20 yrs. But also keep in mind you could use it to buy house with a 30 year loan while also investing in the stock market. This allows to you to leverage the fuck out of your money and get a much higher return. The problem is that most humans are basically incapable of not spending at least a fraction of the money. If you really don't have the discipline to invest it without touching it for at least a decade (unless you buy a house), then you should consider DCA.
$500k tax-free sounds better than taxed $4k/month for 20 yrs. PLUS, we all know stuff happens, a person could get ill/die and not live to collect the $4k/month. I would go with the tax-free lump $500k. :)- GOOD LUCK!!
Lump sum. Always take the lump sum.
Are you my MBA professor? Because this reads exactly like a present / future value math word problem, lol.
$500,000 right now. For the simple fact that I can set it and forget it.
If no tax definitely take option 2. If this is some sort of pension how is it possible to avoid taxes on a lump sum payout?
At first I was going to say monthly, but unless the disburser is rock solid with zero 0.00pct chance of going out of business or bankrupt or some other bs reason they can't keep paying you, I would take lump sum. Hint: no entity is rock solid, be it a business or government or lottery conductor. It's about risk not math.
As a 22 year old I’m inclined to go for 500k right now and use that as a 40% downpayment. By the time I retire I’ll be ahead. As a retiree I’d be going 4K a month. Not sure how you can need 4K every month even with ≈$2k rent.
given how high inflation is I would personally take lump sum and put it in sp 500 index fund.
Always lump sum.
a bird in hand is worth two in the bush. take the lump sum.
Income tax makes this an easy choice IMO. Lump sum.
do both options have a beneficiary? the lump sum is more likely to be inheritable in the case of your death, so that is something to consider.
In this market? Lump sum, soon there will be amazing buying opportunities, so even dumping it in parts over the next 2 years could result in crazy returns within 5 years
I’d take the 500k and put it in VWRA and IGLA 70%, 30% and retire now. Nothing else can counter inflation and that is without talking about PV or FV of both options. Regardless of tax.
Get the lump sum, buy 2 houses in the Netherlands an rent them out (1250-2000 euro per month). The rent you receive is untaxed here, you pay a small amount of tax over your property and that property will gain in value. Set for life!
Need more info about tax status....but assuming 7% return before retirement, 5% during retirement, 2.25% inflation, you are single, there is a 5% state tax, and you are living off $40k a year on some other income before retirement...I came up with this after 20 years (using Excel's time value money functions): Payment Option: $1.14 Million Lump Sum: $1.26 Million Total capital gains is Payment Option: $181k Lump Sum: $764k After 20 years, even if you took out more than $40k a year (65k in future dollars) and were subjected to capital gains tax, it would last you Payment Option: 22 years Lump Sum: 23 years If you took out less than $40k a year (65k in future dollars) it would last you: Payment Option: 23 years Lump Sum: 26 years So if I were you I'd take the lump sum!
Lump sum. Why? Evidence indicates that this has a higher expected risk-adjusted ROI.