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February 16, 2012


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They are giving you a twelve year life expectancy. It is up to you to decide whether you think you have this amount of time (or not). It is a gamble either way.

You would also want to factor in your ability to make the lump sum last a certain amount of years, i.e. your level of financial discipline.

Good luck.

I'd go with the lump sum since you can actually be earning additional funds with the money and will have more flexibility to use it should an emergency does arise.

Get a quote for an immediate lifetime annuity of $336K and compare the monthly payout (they can take into account your health better than any of us can).

This is twice the inital income of 8% versus taking the money, investing and assuming you can draw 4%. But 4% withdraw assumes inflation increases and I assume that payment (given its so high) must not be inflation indexed.

If you are married, the decision changes dramatically. If I chose the monthly and died early I'm not exactly around to regret the financial loss, but if married my wife pays the price of not having that lump sum around. You could split the difference here and take the lump sum and then get a bid on an immediate fixed for a couple.

I'd also make sure the monthly has the same type of state insurance that regular immediate annuitites purchased from banks have, you don't want the failure of the company in 10 years to mean your payments stop.

Which you should chose depends more on your needs.

Do you need a safe guaranteed monthly income? If you need the $2300 income then I'd take the pension payments. If this is the only retirement savings you have then you should really go for the $2300 a month. Don't assume that the lump sum will last you.

But if you've got enough money to live on otherwise via other retirement income or savings then you might want to take the lump sum.

The pension is worth more financially if you assume average life expectancy. If you took the lump sum and tried to live off of it spending similar amount then you could easily run out of money. If you took the $336k and took out $2300 a month you could run out in around 18 years.

Keep in mind that a typical 65 year old woman lives 20 more years. You may be more or less than average of course but you ought to plan to live a while.

Does the pension payment have a cost of living adjustment? Does it go up annually based on inflation or is it fixed at $2300 forever? That makes a big difference too. Pensions with cost of living are worth around 25-30% more roughly than ones without.

I'll second the above comment to compare what you will get lump-sum versus monthly by looking at immediate annuity costs. A quick search of indicates that $336k turned into an immediate annuity for someone of your age and sex living in Illinois (I had to choose somewhere) is about $1,811 per month (and that is the best). So all else being equal, the monthly payment is a good deal. Of course how long you expect to live and what you wish to leave to any heirs will also affect your decision.

Jim hit on all the key questions above... but one more to ask is does the $2300 for life include a surviving spouse option?

If you have anyone that you want to leave this in an inheritance to, then take the lump sum. Otherwise, take the monthly payments.

One more consideration is the strength of the company. If there are any doubts of its survival over your lifetime, the lump sum is likely a better option because you're guaranteed your payout. And as someone pointed out above, because you can earn returns on the lump sum, unlike the monthly payments, it could be "inflation adjusted" as time goes on.

Jonathan brought up the strength of the company.

Generally pensions from private companies are insured and backed by the PBGC or Pension Benefit Guarantee Corp. PBGC is an independent agency of the US govt. vaguely similar to how the FDIC works). PBGC would cover the entire pension if the company went bankrupt. Some people get short changed if a pension defaults and the PBGC takes over but generally thats only if you retire early with a healthy benefit or if your pension is worth more than $55k a year. THe readers pension would be fully covered by the PBGC assuming its insured.

However, if you work for a city, state, or church group then you may not have that protection. PBGC doesn't cover those pensions.

Bottom line : check to see if the pension is PBGC insured (most non religious private campaniles would be). If it is you're safe.

If you take the lump sum you can take about 5.5%/year inflation adjusted if you are flexible and have reason to believe you won't live well into your 90s. By flexible I mean cutting back and not taking an inflation adjustment in down markets etc. This is about $10,000/year less than with the annuity. You could take a small amount and buy a deferred annuity that will pay you decently should you in fact live well into your 90s if that is a big concern.
Giving up control of the money as well as goals (desire to leave an inheritance etc.) as mentioned above are obviously important.
Be careful if you invite annuity sales guys in to get competing quotes.

Have a chat with your physician and see if he thinks you will live longer than 12 years. If he thinks you will then the monthly payments would seem the best, particularly since you didn't mention anything about a spouse, children, or grandchildren that you would like to leave money to.

my first reaction is take the lump sum, you can invest it the way you see fit, if the policy has a surviving spouse (if you're married) then depending on the spouse benefit and their health outlook I would go with the monthly pay-out

Definately lump sum since it is not taxed and it can grow tax free until you withdraw. Anything left over can be passed down to heirs.

I would take the lump sum because the interest you will gain on this money if you invest it with a yield of about 4%, which is about average will net you about 13K a year coupled this with the average Social security of $1200 a month and you should be at around the 2300 mark monthly. Then you will have the flexibility to do what you please with the money. Granted if your bills are more than 2300 a month then you will have to draw down from your principle lump sum investment which will reduce your interest income.

Take the lump sum now, go to vegas, put it all on red and you might double your money!

I'm curious as to how much diabetes impacts average life expectancy. I don't know much about it, but you may be able to find some resources. If, when properly managed, it doesn't have much effect on life expectancy then maybe the $2300 would be better, since 65 isn't that old and you could live decades. As others have noted, there isn't enough information here. Your answer is going to depend on:

1. How long you think you'll live based on your family history and current health issues.

2. Whether you are married or have anyone dependent on your income.

3. Whether you have any other retirement funds, or if this is all you'll be relying on.

Some people are saying she should take the lump sum. But what if this is her ONLY retirement? Or what if all she has is this and a $600 social security check? What if she has no heirs at all? There are some situations where the lump sum is better but there are also situations where the pension is the better choice.

The safe withdrawal rate to keep money from running out is 4% and that would only give her about $1100 a month. Even that 4% isn't totally safe and she could still run out of money.

People with diabetes can live a long time. My wife has a relative who had it and lived to age 91. I found one article that says the life expectancy for people with diabetes is about 4 years less then the average.

Try this life expectancy calculator:
It is based on some reasonable studies.
Talking to your physician with regard to life expectancy in diabetes is useless


I know the question refers to money, but you should want your remaining years to be as active as possible. Exercise is the closest thing we have to a fountain of youth. It won't keep us alive forever, but it keeps us in better shape than the alternative. Make an investment in yourself and try signing up for a 5k, a bike ride, or some other fun activity. Show your employers just how much life you have left!

Lump sum. No brainer.

"Show your employers just how much life you have left!"

I'm sure they'll appreciate it if a 65 year old woman runs a 5k fun run. But it won't impact her pension benefits.

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