
Would You Rather Have $1M or $5,000 Monthly in Retirement? - happy-go-lucky
https://www.wsj.com/articles/would-you-rather-have-1-million-or-5-000-monthly-in-retirement-1490582208
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pmiller2
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.

~~~
danielpal
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.

~~~
Spooky23
You're making a lot of assumptions.

The reality is that an annuity comes with lower volitility and risk.

When you look at the risks for a retirement payout, you need to think
carefully. How long will you live? How long will you retain your faculties to
manageme investments? What protections do you have against dishonest or
incompetent advisors?

Unless you're unlikely to live long, or have trustworthy children or other
advisors, the annuity is probably the best scenario.

~~~
danielpal
No assumption here. The expected return of an asset class like shares and
bonds is higher than the annuity, which is always $60,000 and nothing more -
this is a fact.

But as you said just because the expected is higher doesnt mean the actual
will be. But you still should always pick whatever has higher expected

~~~
MR4D
No, you shouldn't.

You're missing the problem of sequencing of returns. If you made that decision
at 65 years old in December of 2007, you would quickly regret it unless you
were one of the small percentage of people who can take the massive volatility
that followed over the next 15 months.

You ABSOLUTELY MUST take into account the risk. Not doing so would get your
sued as a financial planner. Frankly, this is where people lose so much of
their savings is listening to hogwash like this.

Go spend some time and get your CFP or CIMA certification and then come back,
and your answer will have changed.

And if I sound ticked off, it's be cause I am. you are totally ignoring
Behavioral Finance, which is much, much more important than simple math.

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RestlessMind
$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).

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danschumann
I 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"

~~~
JumpCrisscross
> _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)

~~~
theandrewbailey
How so? That site says the inflation since 2000 is 41%.

~~~
tehlike
3500 * 1.41 = 4935

It is close enough.

1/(1-0.29)=1.4

Depends on if you are going back or forward in time.

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franciscop
An 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_...](https://www.reddit.com/r/AskReddit/comments/24vzgl/you_just_won_a_656_million_dollar_lottery_what_do/chba4bf/)

~~~
djrogers
Your 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...

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bbarn
Though 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...](http://www.thesimpledollar.com/the-million-dollar-retirement-
question/)

------
skue
So 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
There 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.

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jampa
I 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.

~~~
GordonS
> Considering you retire at ~65

Is that really still true nowadays?

~~~
Spooky23
In some places.

I'll retire at 55 with a pretty good annuity payment. It's not zero risk, but
pretty secure.

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gfunk911
I 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....

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mesozoic
Strange 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.

~~~
djrogers
An annuity is pretty much the worst value you can get for your money...

~~~
mesozoic
That's a rule of thumb for people who don't care to do the math I suppose.

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tempestn
Somewhat 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)?

~~~
YCode
Hit F12 and throw a Math.random()*5000000 to find out if you made a mistake!

~~~
antisthenes
> 4968357.576506847

~~~
loco5niner
can't get much better than that

~~~
tempestn
Happy with mine too: 4557693.79

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bubbleRefuge
I 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
Soon to be the last generation that receives these benefits, if they aren't
already. And a city without a workable budget to boot.

~~~
antisthenes
In a few decades, all the municipal budgets like that will be underwater...not
unlike the rest of South Florida.

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sidlls
$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
Annuities 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
Yes, 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
Of 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.

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jressey
I 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.

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readhn
Retire at 35 and i'll take $5000/month ;)

~~~
phillc73
Perhaps 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
Depends 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
Not 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
You 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.

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antirez
5k 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
Doesn'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
Yes 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.

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NAHWheatCracker
Before 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
> 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
You 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.

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marssaxman
I'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.

------
systems
considering 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

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jdbrew
Rephrased: "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%.

------
detritus
I'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!

------
xyzzy4
It 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.

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TazeTSchnitzel
It'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.

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ThrustVectoring
Historically 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
Interesting, do you have a read more link?

~~~
ThrustVectoring
Not off hand, sorry. I read a _lot_ and then promptly forget where I've read
things.

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selectout
Depending on your life insurance plans, $1mm could be very nice if you aren't
already in great health.

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korzun
I would take $1M Monthly obviously..

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TheGrassyKnoll
I'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...

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dpflan
Do 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?

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lazyjones
1m 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.

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tequila_shot
considering the figures are after taxes, $5000 monthly.

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pdelbarba
Before or after taxes?

~~~
pc86
I 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.

