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Would You Rather Have $1M or $5,000 Monthly in Retirement?
- pdelbarba 10y agoBefore or after taxes?
- pc86 10y agoI don't think the author knows. They say "to spend" which implies net, but other phraseology in the article indicates it's the total amount. You'd almost certainly have to pay taxes on it. Other criticisms are mentioned elsewhere in the thread; overall a pretty sloppy and incoherent article.
- readhn 10y agoRetire at 35 and i'll take $5000/month ;)
- phillc73 10y agoPerhaps a frivolous comment, but I'd still rather take the $1M, and especially at 35. I'm a few years older and would still prefer the $1M now, even if it was clear this is my entire retirement contribution. I'd back myself over the next 20 years to turn that $1M into something worth considerably more. If I made a mess of it, I'd still hopefully have enough productive years left to salvage the situation. Whereas $5,000 per month is $5,000 per month forever. Unless you can live substantially under that amount and save a good chunk each month, you're never going to have capital to really grow.
- tempestn 10y agoDepends how you look at it. With the $5000/month you wouldn't have to work for money, so you could devote 100% of your time to whatever it was you wanted to start. Even if you needed capital, you should be able to get a loan relatively easily given your guaranteed 5k/month lifetime income.
- AstralStorm 10y agoNot a high loan of course. Banks do expect a risk of default over time on those. While with 1M as a collateral they might feel more venturesome.
- tempestn 10y agoYou would think so, but you might be surprised. A couple years back I was looking to get a mortgage. I own a profitable company that pays me a comfortable 6-figure salary and has for years, as well as having liquid savings greater than the total value of the house I was buying. Most of the savings are in a holding company though, so it made sense to get a mortgage rather than taking the tax hit of withdrawing the funds. While I did eventually get a mortgage, it was actually quite difficult, because my income was not "guaranteed". One lender even said something along the lines of, "Yes, you have that money saved, but there's no guarantee you won't spend it." And somehow the fact that I owned the company paying my salary made that income less reliable than if I was dependent on a separate employer. Even though by any logical metric I was far less of a risk than someone living paycheck to paycheck, the situation was outside of their regular mold, so they considered it risky.
- readhn 10y agoIll take that 5000K per month, move to cheap state and reinvest 1.5K every month at 7%/year (ill find a way). In 23 years (58yo) i will save another million + will have spent 1million at 3.5K/month.
- AstralStorm 10y agoI'd you did the same with 1M you'd gain more due to big investment discounts and you may be able to diversify more easily.
- readhn 10y agobut then id have to work for income since that 1 mil would be fully invested....
- loeg 10y agoIf you already have some savings, the $5,000/mo guaranteed may make retirement feasible. Sure, eventually it'll be inflated to be worth less, but by then your other savings should have grown too. Also, Social Security kicks in at some point.
- tequila_shot 10y agoconsidering the figures are after taxes, $5000 monthly.
- TazeTSchnitzel 10y agoIt's not the actual question being posed, but I'd rather have the latter, given I don't know how many years I'll stay alive.
- danschumann 10y agoI recognized them the same, but $5,000 a month is $5,000 a month, even if the market tanks the first few years of retirement. My retirement strategy will use SOME annuities, but not all, though if I had to choose all or nothing, an annuity ensures I will NEVER be broke, I will always have $5,000/mo. Old and broke is a combination I don't want to try. Read Tony Robbins "Money"
- cortesoft 10y agoEven an annuity is not guaranteed; the issuing company could go out of business, or we could have rampant inflation that wipes out the value. Of course, those things might have a very low probability of happening, but there is also a low probability of a well-diversified portfolio from being wiped out.
- PavleMiha 10y agoThen again, taking the 1,000,000 and taking out some slightly lower annuity leaves you the million at the end to give away to family.
- finnh 10y agoNo, because the "slightly lower annuity" will cost you only "slightly less" than one million dollars.
- JumpCrisscross 10y ago> if I had to choose all or nothing, an annuity ensures I will NEVER be broke, I will always have $5,000/mo $1 million is 16⅔ years of $5,000 a month. The cumulative rate of inflation since 2000 has been -29% [1]. That $5,000 would buy today what $3,500 bought then. Also, keep in mind that someone is paying you that $5,000 a month. They could go bankrupt one month into their obligation to you. Inflation risk, foreign exchange risk, counterparty risk and tax consequences are just some of the risks one would need to consider when weighing lump sums versus annuities. [1] http://www.usinflationcalculator.com http://www.usinflationcalculator.com
- 10y ago
- bbarn 10y agoThough just 20 years comes up over a million, signs point to taking the million and investing it being the smart move: http://www.thesimpledollar.com/the-million-dollar-retirement-question/ http://www.thesimpledollar.com/the-million-dollar-retirement...
- systems 10y agoconsidering you need 16.6 years to deplete the 1000 000 I'd say lot could happen in 16.6 years plus if we consider inflation 1000 000 on day 1, worth a lot more than in 16 years So I would say ... take the 1M
- selectout 10y agoDepending on your life insurance plans, $1mm could be very nice if you aren't already in great health.
- pmiller2 10y agoI would take the $5000/month, because $1M is only $3333/month according to the 4% safe withdrawal rule. Where do they get these annuity equivalent number referenced in the article, anyway? I might make a different choice if it was between the two amounts with no strings attached (i.e not necessarily for retirement), so I could invest a bit more aggressively and keep working.
- sushisource 10y agoIt's also nonsense because it doesn't factor in the fact that if you live past 81, the 5k a month is worth more even ignoring the safe withdrawal rule. A pretty poorly constructed example for WSJ I think
- AstralStorm 10y agoIs it really? Consider even one medical event, likelihood of which is high... Unless you have a sterling medical coverage you might get into medical debt or be unable to perform procedures.
- Spooky23 10y agoIn the US, acute events are usually covered by Medicare. Your risk in that scenario is long term care needs. That will drain your savings until you're poor enough to move to Medicaid. Another good reason to take the $5,000
- Retric 10y agoThe safe withdrawal rule changes as you age. At 60 taking 3% is safe. At 95 or when diagnosed with some diseases you can be more greedy. However, if your below 70 and in very good health the 5k/month is probably a much better bet.
- mabbo 10y agohttps://en.wikipedia.org/wiki/Life_annuity https://en.wikipedia.org/wiki/Life_annuity A life annuity is one where up front you pay $X, and for the rest of your life you get $Y at regular intervals. They're comparing what someone would pay out on a $1,000,000 life annuity. This is different than the 4% safe withdrawal idea because you're drawing from the principal all the time not just the interest. Companies offer this because they expect you to die long before the principal runs out and then they get to keep what's left of it. Or, maybe you live longer than that and they have to pay more than what the initial investment earned them.
- jressey 10y agoI think I've lived too hard in my youth to make $1m via the $5k a month count before I kick it. Plus I'm a gambler so I'd take the $1m up front, considering my bet is that I'll die before I collect.
- deleted 10y ago[deleted]
- mesozoic 10y agoStrange how you are suffering from an illusion either way. From quoted annuity prices I've seen the $5000 is actually worth a bit more than $1MM in net present value.
- bubbleRefuge 10y agoI know a cop in south florida who's is getting 5800 a month pension after 20 years of service with health insurance included. Not bad if you start working at say 25 after a few years in the service. The packages some of these municipal employee's get for retirement are amazing.
- vwcx 10y agoSoon to be the last generation that receives these benefits, if they aren't already. And a city without a workable budget to boot.
- antisthenes 10y agoIn a few decades, all the municipal budgets like that will be underwater...not unlike the rest of South Florida.
- sidlls 10y ago$1M buys a lot of (mostly) safe dividend paying stocks, bonds, and real estate. $5k/month worth, net? Perhaps not, but certainly one could position himself better than $5k/mo on an annuity with a fairly small effort or higher risk tolerance.
- ThrustVectoring 10y agoAnnuities have an advantage because it effectively transfers wealth from people who die early to people who live longer. If you're only around to enjoy the annuity for a decade, you overpaid for the income stream. If you're around for five, you've underpaid. It's a vaguely similar advantage to taking out a reverse mortgage.
- sidlls 10y agoYes, I understand that, but my point is that there are better investments than an annuity, so the "$1M or $5k/mo" comparison falls a little flat. The aren't really the same.
- ThrustVectoring 10y agoOf course there are - that's why people offer annuities. Other investment options don't let you consume other people's inheritances when you live longer than them, though.
- NAHWheatCracker 10y agoBefore reading the article I just calculated that they would probably be similar, I would probably be inclined to take the monthly $5K because I don't have as much faith in the market delivering 6% returns over the long term. However; there are so many factors that could push me to decide that $1M would be better. I don't think it would help me personally to see a Monthly projections on my retirement accounts. In fact, I trust monthly projects less because I've seen my 401K projecting a huge per month number when I was contributing a miserly amount of my pay check. I wonder whether they were straight up lying or assuming my salary and contributions would increase. The thing about projections is that there are so many factors that the investment companies don't know about me or my plans. They don't know when I'm planning to retire, what my budget is, what other investments I have, what I expect to make in the future, or what risks I'm planning for. If people have as much information as there exists today and they make bad decisions, changing it to monthly projections won't solve their problems. It might create more.
- djrogers 10y ago> don't have as much faith in the market delivering 6% returns over the long term A 6% return is not equivalent, because a 6% return would still leave you with $1m at the end of the day (or your life). An equivalent return for a 25 year period would be about 4%, and I defy you to find a diversified portfolio that can't return 4% over 25 years...
- NAHWheatCracker 10y agoYou bring up a good point, I never really thought about the fact that you'd still have the base amount after. Thanks for the insight.
- jampa 10y agoI would take the $1M: with that money you can reinvest part of it in a diversified portfolio and in the real state market having money and an income. Also due to inflation $5000 today might be worthless in 10 years, so it would take more than 16 years to get the same ammount of cash. Considering you retire at ~65 would be one more reason in favoring the $1M.
- ThrustVectoring 10y agoHistorically speaking, income streams are worth 20 to 25 times their annual payment. Like, there's examples of this ratio from France in the 1400s, IIRC. So $5k/mo = $60k/y = $1200k. Granted, this doesn't take into account how annuities generally don't pay to a recipient's heirs, so there's an actuarial table discount to take the ratio down.
- thyselius 10y agoInteresting, do you have a read more link?
- ThrustVectoring 10y agoNot off hand, sorry. I read a lot and then promptly forget where I've read things.
- xyzzy4 10y agoIt depends on how good you are at investing. For example, if Warren Buffett was starting over again, he would probably make better use of the $1 million.
- revmoo 10y agoThis is pretty obvious if you consider the time value of money
- detritus 10y agoI'd take the $mil and develop some of the productive ideas i have, not worrying so much if they don't quite deliver. Also, I had a dream when I was younger that I'll die when I'm 73 and my lifestyle generally points to the sense in not assuming too many years beyond retirement age, which here in Blighty might hit 70 by when my time comes around. - ed I'm not 40 yet, so waiting for literal decades before some speculative pay off seems like too hard-headed a form of sense to fit my character!
- tempestn 10y agoSomewhat similar thought experiment I like to ask: if you could have either a guaranteed $1M or a random amount between 0 and $5M, which would you choose (and why)? Then, what would the high end of the second range need to be to get you to change your mind (assuming the low end is fixed at zero)?
- rezashirazian 10y agoI would pick random number between 0 - 5M I'm not in need of that much money, so the 1 million guarantee is not valuable enough to me to offset the fact that I would have 50%+ chance of getting something more than 2.5 million. high end of $2,100,000 on the second case is enough for me to switch to the second one.
- MengerSponge 10y agoWhat's your "sure bet" threshold? That is to say, either X guaranteed dollars or random(0,5M)? 500K? 100K?
- tempestn 10y agoBased on your parent's response, one would think $2.5M
- MengerSponge 10y agoReading comprehension is hard :p
- LeoPanthera 10y agoThe answer to this probably depends on how much money you already have. If you're poor, you probably wouldn't want the risk and would choose the 1M. If you're already comfortable, the random amount has a better expected return.
- tempestn 10y ago
- antirez 10y ago5k month does not pose risks about having the 1M somewhere and potentially having to invest it in order to avoid losing ability to buy things for the money. Moreover you can't do a silly thing with 5k/m while you can do plenty with 1M. It's interesting to note that it's easy to turn 1M into 5k month btw, by purchasing a a few houses in strategic places, while the contrary is a bit more complex.
- bmh_ca 10y agoDoesn't the monthly risk depend on the reliability of the provider? There are a lot of Dallas Firefighters and GM employees and many, many others that took that bet and it came up short. Nobody is insulated from risk.
- antirez 10y agoYes sure, I'm reasoning in Italian terms where the retirement is always handled by the government, so for you not getting the retirement at all the whole country must fail, which is not impossible in the case of Italy... but well, if it happens, you are likely to have issues anyway. To clarify, even if you work for a private company or you are a self-employed person, you give money every year in order to have your retirement. The money is provided directly to the government, that will later handle your retirement sending you monthly checks. So it does not matter what happens to your original company, IF you provided money during your work-life, you'll get the money back in form of "pension" check. Btw with this system, you cannot retire when you wish, there are age limits and number of years of work limits.
- dpflan 10y agoDo we need to throw into the discussion some more behavioral economics concepts like hyperbolic discounting and present bias and present versus future value of money?
- gfunk911 10y agoI did not read thoroughly, but isn't the equivalence between 5k/month and $1mil only in terms of the amount you can take out each point to maintain your principal? Assuming that's the case, when you die you'd still have $1Mil in the lump sum scenario, as opposed to zero in the other....
- lazyjones 10y ago1m of course... Especially in a country where healthcare can be expensive and I might need a large amount suddenly for a life-threatening health issue.
- franciscop 10y agoAn important concept here is to note here is where you can change the outcomes. IMHO If you are good at investing you should probably take the 1M; if you live frugally and want to really retire take the monthly pay. Let's assume that it's all post-taxes money (both the 1M and the 5k/month) and let's calculate how good of an investor you'd have to be to take the 1M. For this, every month you should get more money than you spend. Assuming a cost of life of $5000 this would yield: 1,000,000 * (1 + x) > 5,000 => x > 0.005 => x > 0.5% Which in turn is ~6% anually (we can approximate it since 5000 / 1.000.000 ~ 0). So if you spend $5000/month, you'd need to get a return of investment larger than 6% annually. Now let's say that you move to a cheap but nice country and you get expenses down to $1000/month. After 1 year you'll have saved $48.000, which in turn you can start to re-invest. Of course this is totally theoretical, and many people would just take the 1M, overspend it and then complain. Apparently many lottery winners are dead or bankrupt: https://www.reddit.com/r/AskReddit/comments/24vzgl/you_just_won_a_656_million_dollar_lottery_what_do/chba4bf/ https://www.reddit.com/r/AskReddit/comments/24vzgl/you_just_...
- djrogers 10y agoYour 6% calculation would still leave your heirs with a $1M inheritance - that's the return you'd need to avoid touching your original capital. It's hard to find a decent investment portfolio that wouldn't be able to average 6% over 25-30 years, but even if you think that's optimistic you could make that $1m last 25 years with only a 4% return...
- korzun 10y agoI would take $1M Monthly obviously..
- icantdrive55 10y agoIf you have the opportunity to live to 65, take the million dollars. Why--men die so dam young. I probably shouldn't share this, but here goes. Years ago, I was Union Electrician in the Bay Area. A very good union. I believe the guys are making over $100hr. now. I was misserable though, for a lot of reasons. I was planning on leaving, but couldn't leave the money. One day, I happened to see the retirement fund details. Retired electricians were collecting 3-4 months worth of monthly retirement. WTF? I then verified that with a union teacher I knew. He said, "The wives collect 1/2 of the monthy check. The guys just--die when they retire." I thought at least the wives benefit from all that work. I left, and never looked back. I never wanted to know if that figure was right. A lot can be taken for this story. Electricians years ago were big smokers, and big drinkers. They detested anything like healthy food. I have a real soft spot for electricians. In the beginning, only the Irish would work with electricity. Guys were dying weekly. My father was an Irish Electrician, but died too early. And yes--I took on some of his bad habits. You can also blame the deaths on retirement itself. So many older guys were their jobs. Thank god--that has changed--in some circles. It's a game though. You might be the lucky guy who lives to 80? Live to 80=(5000 X 12 X 15)=$900,000 Retire at 65=1 million. Life begins today. I just had two guys I know die exactly at 65. One was suprised he lived that long. He did enjoy his life. The other was always saying, "My dad lived until 95." He was always putting off good times. I just need my company to take off. I can't go river rafting with you guys. In January, he get heartburn. Goes to the doctor. Dies 12 days later. If you have the opportunity to live to 65, take the million dollars. Why--men die so dam young.
- deleted 10y ago[deleted]
- marssaxman 10y agoI'll take the million bucks now, of course, because the idea of a "20- to 30-year retirement" is an absurd fantasy. I don't intend to retire, nor do I expect it will ever be a realistic option. Besides, if the pitch is "wait 25 years and then some organization will pay you $5,000 per month", then we have to assume that this organization will still exist in its current form that far into the future, that it will still be capable of making good on the $5,000 commitment, and that it will still be willing to do so, and won't have gotten acquired or gone bankrupt or otherwise restructured itself in a way that frees it from its previous obligations. Political and economical environments are always changing, so I would definitely rather have real money now than hypothetical future money which depends on someone else's future organizational continuity.
- skue 10y agoSo many comments about the economics. Why is no one considering major medical issues from a quality of life standpoint? Terminal cancer and hospice by 70? How do you want to spend those last 6 months, and what's the value in having an active role in directing what would be inheritance towards those people and causes that matter most to you? Major unexpected medical issue with a spouse or loved one that requires support beyond basic govt coverage? Maybe you want the option to tighten your belt a bit more that last decade so you can make a difference now. Have a positive experience with parents or grandparents at end of life? Or an unnecessarily difficult one? How about the economic situation of other family members and cultural expectations and family history when it comes to caring for elders? Sure, every financial possibility can be offset by another, and maybe annuity pricing equates $1M lump sum to $5k/mo. But reducing all the personal values that go into someone choosing one vs. another as an illusion of wealth or poverty seems so absurdly academic and out of touch with the basic humanity we each have.
- amalag 10y agoThere are long term care insurance products with good companies. They behave by using your policy value as a deductible. I saw numbers for a 58 yr old male. Pay $75k, get $122k death benefit and another $122k as LTCI pool. If you get disabled (cannot do 2 of 6 daily functions), you can draw from the death benefit, when the death benefit is exhausted you can draw from the LTCI pool. So if you have money saved up, it makes sense to use some money to get protection. Otherwise disability at old age can use up a lot of money. If you don't use it there is cash value that can be used (it grows along with the death benefit) or passed on.
- RestlessMind 10y ago$1M today for sure. Why? Because otherwise I have to trust some entity to keep paying me $5000 perpetually in my retirement. Thats hard to do with any entity involved - government, my employer, financial companies... virtually any entity can face a downturn 3-4 decades from now and decide to default on their obligations. Better to pocket $1M and invest it myself. There is less chance of prudent investments going wrong over 3-4 decades or any entity seizing those assets (because if any of that were to happen, I would have much bigger problems).
- TheGrassyKnoll 10y agoI'd take the $million, then go spend about $150,000 on a new dick-mobile. Then I'd go to Vegas, find some hotties, and do some sports gambling... And in about three weeks I'd be right back here in mom's basement...
- jdbrew 10y agoRephrased: "do you prefer 6% risk free, or investing with higher risk but potential for higher return?" Given the choice today, I would take the first. It's such a high spread over today's US actual risk free rate (10 yr UST as proxy) that you'd have to guarantee generating the same ~3% spread over historical broad market returns (I.e. 9% or so) to justify passing up the 6%.
- jdbrew 10y agoRephrased: "do you prefer 6% risk free, or investing with higher risk but potential for higher return?" Given the choice today, I would take the first. It's such a high spread over today's US actual risk free rate (10 yr UST as proxy) that you'd have to guarantee generating the same ~3% spread over historical broad market returns (I.e. 9% or so) to justify passing up the 6%.