$40 / mo for life or $700 / mo after age 67?

Question

Which is preferable - $40/mo for life or $700 for life after 67?

FACTS:
35 more yrs before the retirement.
Life expectancy is 90
Tentatively invest in stock mutual fund.
Pension is insured by PBGC insurance.

I am leaning towards getting monthly payments and put them in mutual funds. Although PBGC insures the pension payments, I still feel comfortable having control over the pension. How do I calculate which is preferable? Any inputs are greatly appreciated. THX!

Answer 1

Either I don't understand the question or there isn't enough information. How old are you? I'm guessing that since you say 35 years before retirement that you are 30. So we'll go with that.

The best way to look at this is to compute the present values of the two income streams. If we discount them back to today, at a conservative 6% discount rate, what I get is the $700/month stream for 23 years to be received 35 years in the future has a present value of $12,880 The $40/month for 60 years has a present value of $7,779

So the $700/month is a better way to go.

Answer 2

It is strange that you are being offered an immediate annuity, but not a lump sum option. Normally, the reason that companies offer the option of taking $40 a month when you are in your thirties is because they also offer a lump sum payout and the government requires that if a lump sum is offered, then an annuity must also be offered. So if you can take the lump sum, then do, and roll it over into an IRA.

But if you take the $40 a month, then it is considered taxable income. If you are working, then it will be taxed at your marginal rate (e.g. 25%). If you are taxed at 25%, then you're only really receiving $30 a month. And if you put the money into taxable mutual funds, any earnings will be taxed as well.

And don't put too much stock into your life expectancy. There is roughly a 60% probability of living past it. $700 at age 67 is probably your better deal.

Answer 3

I am not certain that I understand all the facts correctly. It is $40 a month beginning now? At age 30? Of course life expecancy is a somewhat iffy proposition. An the value of the dollar in 37 years is even more iffy. Is that $700 going to be indexed to inflation? Or is that it? $700 in dollars 37 years from now is only about $164 today. If that much.
And of course the $40 a month becomes worth about 4% less annually also.

If you assume that you can grow your $40 a month at 8% annually, then at age 67 you will have $97,473, which will be worth about $22,837 in todays money. Not a hell of a lot.

But that $97,473 will be earning you $7797.84 annually or about $649.82 a month. So the question becomes will you actually live to see 67.

Answer 4

I'd take the $700/mo at age 67..