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I 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 refere

I 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 ago
It'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 ago
  Is 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 ago
    In 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 ago
The 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 ago
https://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.
- 09bjb 10y ago
  There are two guaranteed downsides to annuities: 1) they generally fall into the "insurance" category, and as we know insurance companies can get in trouble and even go under, and 2) there is a 0% chance that your annuity will outlive you. If you had $1M and withdrew roughly 4% for the rest of your life, there's a decent chance it would be worth MORE than a $1M when all is said and done. The annuity takes advantage of that fact. Like other forms of insurance, they're probably going to make money on you. Unlike health/car insurance, this type isn't legally required or usually a good idea.
  - glutamate 10y ago
    That's why annuity rates are higher than interest rates.
  - bryanlarsen 10y ago
    1) In Canada, annuities are covered by Assuris, so that's not a concern. I imagine that Europe has similar protections. 2) Is balanced by the upside risk that I live to 117 and run out of money. And frankly, I'm much more worried about that than I am about stiffing my heirs (at least once college is paid for). 3) If you had $1M and withdrew roughly 4% for the rest of your life, there's also a decent chance it would be worth a lot less than $1M when all is said and done and you're eating capital. Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses. I'm firmly of the belief that annuities are one of the best types of insurance you can buy.
    - AstralStorm 10y ago
      Canada might default too, or withdraw the protections.
    - junker37 10y ago
      > Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses I don't know about you, but most people in my social circle intend to retire between 55-60 and that leaves 25-30 years of retirement, so definitely still in the long term investing range. When I retire, I don't plan to adjust my investments until I get past 80.
Programmatic 10y ago
I was thinking the opposite - the safe withdrawal rate accounts for a 3% inflation rate for your 7% safe investment figure, so your nest egg grows over time for the same equivalent $3,333 in perpetuity no matter the year. The $5,000 would get progressively worse over time.
- AstralStorm 10y ago
  Additionally whoever is paying the annuity might default. This may include countries. With that 1M in hand you can spread that risk.
dasmoop 10y ago
They are probably assuming you are investing this $1M and getting some return on it.
deleted 10y ago
[deleted]
danielpal 10y ago
You chose the wrong one. No matter what the article says, the $1M is more valuable. First, the safe withdrawal method of 4% is actually not safe - the safest method of withdrawal is called variable percentage withdrawal and not only takes into account the principle, but also the results year after year. But more importantly, $1M lump vs $5,000 monthly annuity, always take $1M. Why? Because you are taking an asset class that can be converted into shares/bonds which has a higher expected returns than an annuity because it can compound. What I mean is while the $5,000 annuity is guaranteed, it will remaing $5,000 year-over-year, which means it's actually decreasing in purchasing power year-over-year (unless there is deflation, which it's very unlikely). Wereas the $1M cash, if moved to bonds and shares, even if it performed at 5% annually, it will mean on the first year break even, but on the second year it will compound (unless you spend all the money). You could say you invest the monthly savings from the $5,000 but simply put it, $1M in shares has a much higher expected return than $5,000 monthly in perpetuity.
- exclusiv 10y ago
  Exactly right. Although some people would probably be way too irresponsible with $1M so the financially less savvy option may be better for them haha.
- kmonsen 10y ago
  That is only true for long term investments, but for a short term future the $5000 might outperform a lot. Which is why it is smart to change the type of investment as you get closer to retirement.
  - AstralStorm 10y ago
    Problem is that this alleged short term can be half of your life.
- acchow 10y ago
  5% = $50,000 = $4,166/mth In any case, whereas 5% might be conservative in the long run, you could be totally screwed in the short term in a bubble.
dbjacobs 10y ago
The $5K is NOT inflation adjusted. The 4% rule assumes inflation adjustment. So you are not comparing the same thing. Today, immediateannuities.com is quoting around $5300 for 65yr old woman and $5665 for a 65yr old man for a $1 mil purchase.

sushisource 10y ago

It'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 ago
Is 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 ago
  In 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 ago

The 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 ago

https://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.

09bjb 10y ago
There are two guaranteed downsides to annuities: 1) they generally fall into the "insurance" category, and as we know insurance companies can get in trouble and even go under, and 2) there is a 0% chance that your annuity will outlive you. If you had $1M and withdrew roughly 4% for the rest of your life, there's a decent chance it would be worth MORE than a $1M when all is said and done. The annuity takes advantage of that fact. Like other forms of insurance, they're probably going to make money on you. Unlike health/car insurance, this type isn't legally required or usually a good idea.
- glutamate 10y ago
  That's why annuity rates are higher than interest rates.
- bryanlarsen 10y ago
  1) In Canada, annuities are covered by Assuris, so that's not a concern. I imagine that Europe has similar protections. 2) Is balanced by the upside risk that I live to 117 and run out of money. And frankly, I'm much more worried about that than I am about stiffing my heirs (at least once college is paid for). 3) If you had $1M and withdrew roughly 4% for the rest of your life, there's also a decent chance it would be worth a lot less than $1M when all is said and done and you're eating capital. Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses. I'm firmly of the belief that annuities are one of the best types of insurance you can buy.
  - AstralStorm 10y ago
    Canada might default too, or withdraw the protections.
  - junker37 10y ago
    > Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses I don't know about you, but most people in my social circle intend to retire between 55-60 and that leaves 25-30 years of retirement, so definitely still in the long term investing range. When I retire, I don't plan to adjust my investments until I get past 80.

Programmatic 10y ago

I was thinking the opposite - the safe withdrawal rate accounts for a 3% inflation rate for your 7% safe investment figure, so your nest egg grows over time for the same equivalent $3,333 in perpetuity no matter the year. The $5,000 would get progressively worse over time.

AstralStorm 10y ago
Additionally whoever is paying the annuity might default. This may include countries. With that 1M in hand you can spread that risk.

dasmoop 10y ago

They are probably assuming you are investing this $1M and getting some return on it.

deleted 10y ago

[deleted]

danielpal 10y ago

You chose the wrong one. No matter what the article says, the $1M is more valuable. First, the safe withdrawal method of 4% is actually not safe - the safest method of withdrawal is called variable percentage withdrawal and not only takes into account the principle, but also the results year after year. But more importantly, $1M lump vs $5,000 monthly annuity, always take $1M. Why? Because you are taking an asset class that can be converted into shares/bonds which has a higher expected returns than an annuity because it can compound. What I mean is while the $5,000 annuity is guaranteed, it will remaing $5,000 year-over-year, which means it's actually decreasing in purchasing power year-over-year (unless there is deflation, which it's very unlikely). Wereas the $1M cash, if moved to bonds and shares, even if it performed at 5% annually, it will mean on the first year break even, but on the second year it will compound (unless you spend all the money). You could say you invest the monthly savings from the $5,000 but simply put it, $1M in shares has a much higher expected return than $5,000 monthly in perpetuity.

exclusiv 10y ago
Exactly right. Although some people would probably be way too irresponsible with $1M so the financially less savvy option may be better for them haha.
kmonsen 10y ago
That is only true for long term investments, but for a short term future the $5000 might outperform a lot. Which is why it is smart to change the type of investment as you get closer to retirement.
- AstralStorm 10y ago
  Problem is that this alleged short term can be half of your life.
acchow 10y ago
5% = $50,000 = $4,166/mth In any case, whereas 5% might be conservative in the long run, you could be totally screwed in the short term in a bubble.

dbjacobs 10y ago

The $5K is NOT inflation adjusted. The 4% rule assumes inflation adjustment. So you are not comparing the same thing. Today, immediateannuities.com is quoting around $5300 for 65yr old woman and $5665 for a 65yr old man for a $1 mil purchase.