Lump sum vs monthly payments - Pension Package

[klr650]

What is the name of your state?NY
I recently received a pension package from my former employer. This is the first one I have ever reviewed, and it has 20 pages which requires several signatures. In this example, let's say that I have about 25yrs until retirement, and am very healthy (let's assume I live an additional 20 yrs (85 years old)). I am having trouble finding an online calculator to see if I should take the monthly payment annuity (1) or lump sum (2). For example, if it said that I can take either a monthly $600 life annuity or lump sum of $200k, wouldn't the $200k be the obvious choice if I put it in an IRA with ~6% annual interest?

1) $600 * 12months/yr * (25+20yrs) = $324k over my lifetime
2) $200k w/ annual 6% interest over 25yrs = $893k at age 65yrs

Is there anything else I should look for in this pension package document? I heard that they can sometimes omit important information.

 

[LdiJ]

What is the name of your state?NY
I recently received a pension package from my former employer. This is the first one I have ever reviewed, and it has 20 pages which requires several signatures. In this example, let's say that I have about 25yrs until retirement, and am very healthy (let's assume I live an additional 20 yrs (85 years old)). I am having trouble finding an online calculator to see if I should take the monthly payment annuity (1) or lump sum (2). For example, if it said that I can take either a monthly $600 life annuity or lump sum of $200k, wouldn't the $200k be the obvious choice if I put it in an IRA with ~6% annual interest?

1) $600 * 12months/yr * (25+20yrs) = $324k over my lifetime
2) $200k w/ annual 6% interest over 25yrs = $893k at age 65yrs

Is there anything else I should look for in this pension package document? I heard that they can sometimes omit important information.

One thing that you are not taking into consideration is taxes. Between federal and state taxes you would be unlikely to have more than 60% of that 200k to actually invest, and the odds of getting a guaranteed 6% per year would be quite small.

 

[Chyvan]

1) $600 * 12months/yr * (25+20yrs) = $324k over my lifetime

I dispute your math here. To have this be the same as #2, you'd have to bank this money using the same 6% interest over the first 25 years. What you propose is to spend the $600/mo, and that unfairly makes option 2 look more attractive, but in option 2 you're not going to have $600 to spend each month and will have to draw it from another source or go hungry.

I think the math looks more like this:

Future value of $600/mo for 25 years to get you to 65 like in option #2 is $417,875.36
Then you have the present value to get you $600 for the next 20 years $84,167.21
That gets you to $502,042.57 so while option 2 looks still looks better, it doesn't look as good especially if you have to factor in that you might die and get nothing, your heirs get nothing, or you're being taxed at the highest marginal tax rates.

I think you need to do more math to make the best decision.