$47,000 cash now or $330 per month for life
$47,000 cash now or $330 per month for life
$47,000 cash now or $330 per month for life.
Those are the options for a 64 year old male in good health.
Which option is better in your opinion - and why?
Those are the options for a 64 year old male in good health.
Which option is better in your opinion - and why?
Re: $47,000 cash now or $330 per month for life
Price a SPIA and you will get a good answer.
I always wanted to be a procrastinator.
- pennstater2005
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Re: $47,000 cash now or $330 per month for life
If said male lives until 84 that is a little over $79000. So, is the money needed now? Is monthly cash flow needed? All depends on one's needs.
http://www.ssa.gov/planners/lifeexpectancy.htm
http://www.ssa.gov/planners/lifeexpectancy.htm
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson
Re: $47,000 cash now or $330 per month for life
If someone is making a promise, then you have to think about whether you can trust that person to keep the promise. If the person has little credibility, the cash is obviously preferable. But even if the person has a lot of credibility now, things can change, and you may have a long life. It gets complicated.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Re: $47,000 cash now or $330 per month for life
As a perpetuity, that's about an 8.5% return.
Not bad.
Not bad.
Re: $47,000 cash now or $330 per month for life
I sent you a Private Message, but I also want to publicly acknowledge that I appreciate your input.Sidney wrote:Price a SPIA and you will get a good answer.
Re: $47,000 cash now or $330 per month for life
Pennstater2005,pennstater2005 wrote:If said male lives until 84 that is a little over $79000. So, is the money needed now? Is monthly cash flow needed? All depends on one's needs.
http://www.ssa.gov/planners/lifeexpectancy.htm
I have always admired your posts. My inquiry involves the needs of a friend of longer than 50 years and I do not know all the specifics, nor do I believe I should inquire.
I hope to talk with him soon and I will try to provide better information.
Re: $47,000 cash now or $330 per month for life
I agree 100%. I'm asking this question for a life-long friend of mine.scone wrote:If someone is making a promise, then you have to think about whether you can trust that person to keep the promise. If the person has little credibility, the cash is obviously preferable. But even if the person has a lot of credibility now, things can change, and you may have a long life. It gets complicated.
I have received excellent investment advice from the members of this forum.
I just do not want to make a mistake in giving my friend financial advice.
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Re: $47,000 cash now or $330 per month for life
Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Best regards, -Op |
|
"In the middle of difficulty lies opportunity." Einstein
Re: $47,000 cash now or $330 per month for life
Thank you for your post. I sent you a Private Message and hope to hear from you when you have an opportunity to respond.Bacchus01 wrote:As a perpetuity, that's about an 8.5% return.
Not bad.
Ken
- nisiprius
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Re: $47,000 cash now or $330 per month for life
The exact details may vary depending on state, etc. but Vanguard's Income Solutions partner is showing three quotations with monthly payouts in the range of $255/month ± $5. Anyone with a Vanguard account can request these quotations but there's a bit of a song-and-dance about setting up an Income Solutions log-on to get them.Sidney wrote:Price a SPIA and you will get a good answer.
As a reality check, http://www.imediateannuities.com , for 64 years old, male, income starting ASAP, $47,000, is showing three quotes, $261, $256, $251 from "company A," "company B," and "company C."
$330 a month sounds pretty good, then. It's around 30% more than you could get by taking the lump sum and buying an annuity from an insurance company. Or, to put it another way, $330 a month is about a 30% better value than a $47,000 lump sum payment.
The problem now is to compare safety and financial strength. If the monthly income is in fact being provided by an insurance company, somebody ought to find out its name and check its financial strength ratings. If it's being provided in some other way, then I don't quite know what you do.
Nevertheless, given the choice personally I would probably opt for the monthly payments.
Annuitant's state of residence: PA
Product type: Immediate Income Annuity
Income timeframe: Begin receiving payments within the next 12 months.
Annuitant elected to begin receiving payments on (commencement date): 9/1/2014
Annuitant will be depositing: $47,000.00
Source of funds: Non-Qualified (after-tax) assets
Cost basis: $47,000.00
Annuity type: Single Life Only Annuity
Annuitant's birth date: 6/1/1950
Annuitant's gender: M
Annuitant's spouse is the sole beneficiary: N/A
Estimated deposit date: 8/8/2014
Annuitant elected not to be contacted by the service center.
Results: quotations from three companies, all around $255/month.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: $47,000 cash now or $330 per month for life
Nisi,nisiprius wrote:The exact details may vary depending on state, etc. but Vanguard's Income Solutions partner is showing three quotations with monthly payouts in the range of $255/month ± $5. Anyone with a Vanguard account can request these quotations but there's a bit of a song-and-dance about setting up an Income Solutions log-on to get them.Sidney wrote:Price a SPIA and you will get a good answer.
As a reality check, http://www.imediateannuities.com , for 64 years old, male, income starting ASAP, $47,000, is showing three quotes, $261, $256, $251 from "company A," "company B," and "company C."
$330 a month sounds pretty good. It's around 30% more than you could get by taking the lump sum and buying an annuity from an insurance company. Or, to put it another way, $330 a month is about a 30% better value than a $47,000 lump sum payment.
The problem now is to compare safety and financial strength. If the monthly income is in fact being provided by an insurance company, somebody ought to find out its name and check its financial strength ratings. If it's being provided in some other way, then I don't quite know what you do.
Nevertheless, I personally would probably opt for the monthly payments...
Annuitant's state of residence: PA
Product type: Immediate Income Annuity
Income timeframe: Begin receiving payments within the next 12 months.
Annuitant elected to begin receiving payments on (commencement date): 9/1/2014
Annuitant will be depositing: $47,000.00
Source of funds: Non-Qualified (after-tax) assets
Cost basis: $47,000.00
Annuity type: Single Life Only Annuity
Annuitant's birth date: 6/1/1950
Annuitant's gender: M
Annuitant's spouse is the sole beneficiary: N/A
Estimated deposit date: 8/8/2014
Annuitant elected not to be contacted by the service center.
Results: quotations from three companies, all around $255/month.
I am going to put this as bluntly as possible: You are an amazing human being!
All best,
Ken
Re: $47,000 cash now or $330 per month for life
I agree with above that taking the $330 annuity is best if using it for immediate cash flow needs, maybe that's assumption any way since we're talking 65 year old male (retiring or already retired presumably). If he doesn't need the money though, maybe wants to invest now and leave to heirs, it's a toss up. See calculations below for future value of lump sum vs monthly annuity over 19 years (life expectancy of 84). At around 5.50% return you can see the lump sum beats out.
Rate Lump Sum Annuity
2.00% $68,705.64 $91,440.78
2.50% $75,539.33 $96,183.63
3.00% $83,049.46 $101,245.28
3.50% $91,302.64 $106,649.51
4.00% $100,372.05 $112,421.97
4.50% $110,338.01 $118,590.32
5.00% $121,288.73 $125,184.42
5.50% $133,321.05 $132,236.50
6.00% $146,541.27 $139,781.35
6.50% $161,066.10 $147,856.55
7.00% $177,023.67 $156,502.66
7.50% $194,554.62 $165,763.49
8.00% $213,813.33 $175,686.38
8.50% $234,969.26 $186,322.47
9.00% $258,208.39 $197,727.01
9.50% $283,734.88 $209,959.72
10.00% $311,772.78 $223,085.15
10.50% $342,567.96 $237,173.07
11.00% $376,390.28 $252,298.94
Rate Lump Sum Annuity
2.00% $68,705.64 $91,440.78
2.50% $75,539.33 $96,183.63
3.00% $83,049.46 $101,245.28
3.50% $91,302.64 $106,649.51
4.00% $100,372.05 $112,421.97
4.50% $110,338.01 $118,590.32
5.00% $121,288.73 $125,184.42
5.50% $133,321.05 $132,236.50
6.00% $146,541.27 $139,781.35
6.50% $161,066.10 $147,856.55
7.00% $177,023.67 $156,502.66
7.50% $194,554.62 $165,763.49
8.00% $213,813.33 $175,686.38
8.50% $234,969.26 $186,322.47
9.00% $258,208.39 $197,727.01
9.50% $283,734.88 $209,959.72
10.00% $311,772.78 $223,085.15
10.50% $342,567.96 $237,173.07
11.00% $376,390.28 $252,298.94
Re: $47,000 cash now or $330 per month for life
Bacchus01 and Call_Me_Op, What function do you use (in Excel) to determine 8.4% return?Call_Me_Op wrote:Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Thanks
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"
Re: $47,000 cash now or $330 per month for life
i'm curious as to how 8.4% is calculated as well. thanks.Peterjens wrote:Bacchus01 and Call_Me_Op, What function do you use (in Excel) to determine 8.4% return?Call_Me_Op wrote:Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Thanks
Re: $47,000 cash now or $330 per month for life
It looks like he used the formula for the present value of a perpetuity - - (payment) / rate. Setting the present value of the annuity equal present value of the lump sum. So, you get ($330 / (rate/12)) = 47000. If you solve for rate, you get approx 8.4%.crozbee wrote:i'm curious as to how 8.4% is calculated as well. thanks.Peterjens wrote:Bacchus01 and Call_Me_Op, What function do you use (in Excel) to determine 8.4% return?Call_Me_Op wrote:Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Thanks
Re: $47,000 cash now or $330 per month for life
And 5.50% is much higher than the return on low-risk, long-term investments (10-year Treasuries yield 2.55%), which makes the $330 monthly payment a good deal even if you don't need the money now. With this guaranteed income, you can take more risk on your other investments.music_man wrote:I agree with above that taking the $330 annuity is best if using it for immediate cash flow needs, maybe that's assumption any way since we're talking 65 year old male (retiring or already retired presumably). If he doesn't need the money though, maybe wants to invest now and leave to heirs, it's a toss up. See calculations below for future value of lump sum vs monthly annuity over 19 years (life expectancy of 84). At around 5.50% return you can see the lump sum beats out.
Re: $47,000 cash now or $330 per month for life
Your formula crunches out as written. I tried to plug the numbers into PV and Rate functions but the numbers didn't appear to prove itself. Probably operator error on my part.music_man wrote:It looks like he used the formula for the present value of a perpetuity - - (payment) / rate. Setting the present value of the annuity equal present value of the lump sum. So, you get ($330 / (rate/12)) = 47000. If you solve for rate, you get approx 8.4%.crozbee wrote:i'm curious as to how 8.4% is calculated as well. thanks.Peterjens wrote:Bacchus01 and Call_Me_Op, What function do you use (in Excel) to determine 8.4% return?Call_Me_Op wrote:Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Thanks
Thanks
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"
Re: $47,000 cash now or $330 per month for life
Try this in Excel: =PV(0.084/12,2000*12,-330) - - NOTE, I put the number 2000 there for the number of years just as an arbitrarily large number. Since we're talking about a perpetuity, the present value converges on the approx 47000 value as the number of years approaches infinity. When I plug this into Excel I get $47,142.86 . It's not $47,000 exactly due to the 8.4% being rounded.Peterjens wrote:Your formula crunches out as written. I tried to plug the numbers into PV and Rate functions but the numbers didn't appear to prove itself. Probably operator error on my part.music_man wrote:It looks like he used the formula for the present value of a perpetuity - - (payment) / rate. Setting the present value of the annuity equal present value of the lump sum. So, you get ($330 / (rate/12)) = 47000. If you solve for rate, you get approx 8.4%.crozbee wrote:i'm curious as to how 8.4% is calculated as well. thanks.Peterjens wrote:Bacchus01 and Call_Me_Op, What function do you use (in Excel) to determine 8.4% return?Call_Me_Op wrote:Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Thanks
Thanks
Re: $47,000 cash now or $330 per month for life
Eureka! Thanks and sorry for the temporary hijack.music_man wrote:Try this in Excel: =PV(0.084/12,2000*12,-330) - - NOTE, I put the number 2000 there for the number of years just as an arbitrarily large number. Since we're talking about a perpetuity, the present value converges on the approx 47000 value as the number of years approaches infinity. When I plug this into Excel I get $47,142.86 . It's not $47,000 exactly due to the 8.4% being rounded.music_man wrote:It looks like he used the formula for the present value of a perpetuity - - (payment) / rate. Setting the present value of the annuity equal present value of the lump sum. So, you get ($330 / (rate/12)) = 47000. If you solve for rate, you get approx 8.4%.Peterjens wrote:Bacchus01 and Call_Me_Op, What function do you use (in Excel) to determine 8.4% return?Call_Me_Op wrote:Assuming that the credit rating of the guarantor is good and the individual's health is good, I'd take the $330 per month, as it is 8.4% per year.
Thanks
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"
Re: $47,000 cash now or $330 per month for life
if my math is correct (=330*((1/0.00479)-1/(0.00479*((1+0.00479)^240))))
Assuming 20 years of monthly payments(240) of $330/month with a PV of 47000 the ARP is 5.75%(0.479%*12) which is way better that the 20 treasury or investment grade corp bond!
Why is the question?!? TNSTAAFL!!
~Moshe
PS Am i missing something? Is this an annuity where payments end upon death or a perpetuity which will flow to heirs?
Assuming 20 years of monthly payments(240) of $330/month with a PV of 47000 the ARP is 5.75%(0.479%*12) which is way better that the 20 treasury or investment grade corp bond!
Why is the question?!? TNSTAAFL!!
~Moshe
PS Am i missing something? Is this an annuity where payments end upon death or a perpetuity which will flow to heirs?
My money has no emotions. ~Moshe |
|
I'm the world's greatest expert on my own opinion. ~Bruce Williams
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- Posts: 9881
- Joined: Mon Sep 07, 2009 2:57 pm
- Location: Milky Way
Re: $47,000 cash now or $330 per month for life
The math I used was extremely simplistic. $330/month = $3,960/yr. (3,960/47,000)X100 = 8.43%.
Best regards, -Op |
|
"In the middle of difficulty lies opportunity." Einstein
Re: $47,000 cash now or $330 per month for life
Definitely hard to come up with an argument NOT to take the $330 annuity, unless reasonable longevity is an issue. Even if one anticipates more normalized payout rates in the future, say 8.0% for a 65 year old male, the 8.4% payout available today at age 64 far outpaces that.
Re: $47,000 cash now or $330 per month for life
Moshe,moshe wrote:if my math is correct (=330*((1/0.00479)-1/(0.00479*((1+0.00479)^240))))
Assuming 20 years of monthly payments(240) of $330/month with a PV of 47000 the ARP is 5.75%(0.479%*12) which is way better that the 20 treasury or investment grade corp bond!
Why is the question?!? TNSTAAFL!!
~Moshe
PS Am i missing something? Is this an annuity where payments end upon death or a perpetuity which will flow to heirs?
I apologize. I do not know all the details. I am inquiring to try to help a long-time friend. I'll try to get more specifics.
Re: $47,000 cash now or $330 per month for life
It's also important to note, that 8.4% is really theoretical. The present value of a lump sum of $47,000 today is equivalent to $330 paid out monthly for eternity (say 1,000,000 years) if you were to invest that $330 each month and get a guaranteed 8.4% annually. However, since we're talking about real life with real people, the life expectancy of a 65 year old male is only about 19 years. So, the present value of that $330 monthly for only the next 19 years is closer to a guranteed rate closer to 5.50% (see my post earlier in the thread with the future values) when compared to $47,000 today, still not bad though. This is of course assuming payments cease when the individual dies and nothing goes to a beneficiary after.Frugal Al wrote:Definitely hard to come up with an argument NOT to take the $330 annuity, unless reasonable longevity is an issue. Even if one anticipates more normalized payout rates in the future, say 8.0% for a 65 year old male, the 8.4% payout available today at age 64 far outpaces that.
Re: $47,000 cash now or $330 per month for life
It's not at all theoretical; it's the annuity payout rate: $330*12/47000=0.084. Can't get simpler than that. I never said it was the IRR. As for the IRR over an average lifespan, 5.5% tests very nicely against historical average inflation rate + 2%. It's hard to argue against that on a low risk investment.music_man wrote:It's also important to note, that 8.4% is really theoretical.
Re: $47,000 cash now or $330 per month for life
No Need to apologize Kenner! Very interesting discussion so far! Thank you for the opportunity to dust off my PVA (present value of an annuity) formulas!kenner wrote: Moshe,
I apologize. I do not know all the details. I am inquiring to try to help a long-time friend. I'll try to get more specifics.
My question is important because it will give you a better idea which yield is correct for comparison sake 5.5% (assuming 19 years of payments) or 8.4% assuming the payment will go on forever, usually referred to as a perpetuity.
Also, i am curious as to the why this investment seems to offer above market rates as an individual investment grade 20 year corporate bond seems to offer YTM's (Yield to Maturity) of 4.5-4.6% currently and US treasuries seem to be about 3%.
~Moshe
My money has no emotions. ~Moshe |
|
I'm the world's greatest expert on my own opinion. ~Bruce Williams
Re: $47,000 cash now or $330 per month for life
Moshe,
Thanks for your response. I'll try to obtain more info and get back to you.
I continue to be amazed by the wisdom expressed on this forum.
All best,
Ken
Thanks for your response. I'll try to obtain more info and get back to you.
I continue to be amazed by the wisdom expressed on this forum.
All best,
Ken
Re: $47,000 cash now or $330 per month for life
According to the SSA Life Expectancy Calculator a male aged 64-1/2 (born 1/10/1950) can be expected to live another 19.7 years. So 20 years is a good round number to use.kenner in original post wrote:$47,000 cash now or $330 per month for life.
Those are the options for a 64 year old male in good health.
The 5.75% can be computed using Excel's RATE() function:moshe in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2116657#p2116657]this post[/url] wrote:if my math is correct (=330*((1/0.00479)-1/(0.00479*((1+0.00479)^240))))
Assuming 20 years of monthly payments(240) of $330/month with a PV of 47000 the [APR] is 5.75%(0.479%*12) ...
Code: Select all
5.75% =12 * RATE(240, 330, -47000, 0, 0)
Code: Select all
47000 =330 * ((1 / 0.00479) - 1/(0.00479 * ((1 + 0.00479) ^ 240))) is equivalent to
47000 =330 * (1 - 1 / 1.00479 ^ 240) / 0.00479
Re: $47,000 cash now or $330 per month for life
Good points on the longevity expectation, Cruncher. And given that the SSA life expectancy tables includes a necessarily broad demographic, we might even assume slightly better than average longevity since the subject 64 year-old is noted to be in good health. At just 22 years longevity, the IRR increases to 6.3%, making this decision even easier.
Assuming the subject in question has adequate liquidity, and barring runaway inflation, only suboptimal longevity (combined with a bequest motive) would make the annuity a poor choice.
Assuming the subject in question has adequate liquidity, and barring runaway inflation, only suboptimal longevity (combined with a bequest motive) would make the annuity a poor choice.
Re: $47,000 cash now or $330 per month for life
It's theoretical in the sense that you are calculating the value based on a never ending stream of payments (perpetuity), but in reality the stream of payments is finite (annuity) as it only goes to the end of ones life. Your calculation is correct for a perpetuity, but that is theoretical, because there is no such arrangement that truly exists in reality. The calculation is incorrect for calculating an annuity. With an annuity, you have to account for a finite number of payments.: =Cash Flow*((1-(1+(Rate/12))^-(Number of Payments))/(Rate/12)) or to use our $330 payout, 8.4% and 19 years (expected years left for 65 year old male), you get:Frugal Al wrote:It's not at all theoretical; it's the annuity payout rate: $330*12/47000=0.084. Can't get simpler than that. I never said it was the IRR. As for the IRR over an average lifespan, 5.5% tests very nicely against historical average inflation rate + 2%. It's hard to argue against that on a low risk investment.music_man wrote:It's also important to note, that 8.4% is really theoretical.
=330*((1-(1+(0.084/12))^-(19 * 12))/(0.084/12)). You'll see in this example that using an 8.4% rate, the present value of the annuity is really only $37,533. If you use 5.395%, you actually get right around $47,000. You can plug the formula with actual numbers into Excel to confirm.
Re: $47,000 cash now or $330 per month for life
Music_man, with all due respect, I think you are the only one calling it theoretical. I guess we can agree to disagree on what should be considered theoretical. There are many posts on the board about annuities and payout rates. I'm calling a "payout rate" exactly what it is. I know better than to conflate a payout rate with an IRR. Payout rates are simple and convenient when comparing annuities of like terms and conditions, as in the case above (courtesy of Nisi) when comparing payouts of alternative commercially available annuities, which have payout rates today of around 6.4% to 6.5% for a 64 year-old male, compared to a whopping 8.4% for the subject annuitized pension.music_man wrote:It's theoretical in the sense that you are calculating the value based on a never ending stream of payments (perpetuity), but in reality the stream of payments is finite (annuity) as it only goes to the end of ones life.
While payout rates are helpful for comparisons between annuities when some type of annuitization has been decided upon, the IRR calculation for the lump sum determination is more helpful. Where the real confusion arises is when neophytes confuse the rate of return with the payout rate. Whatever the measurement criteria, the annuitized pension above is a very good deal today.
Re: $47,000 cash now or $330 per month for life
I get what you are saying, I'm not denying that I'm calling it theoretical, but a perpetuity is in fact theory. There's no insurance company on the planet that's going to sell you a product that pays out $330 for the rest of human kinds existence. I'm all for simplifying things, I'm not trying to argue for argument's sake, but I'm arguing because the facts and details matter here. You are correct that if you are just comparing one annuity that pays out $330 and costs $47,000 vs another annuity that pays out $xxx and costs $yyyy, you can use a fairly simple calculation as you are doing. But that's not always the question being answered. I'm looking at an annuity and valuing it as such, you are looking at an annuity and valuing it as if it were a perpetuity. It's not the same thing. Consider this example where it does matter:Frugal Al wrote:Music_man, with all due respect, I think you are the only one calling it theoretical. I guess we can agree to disagree on what should be considered theoretical. There are many posts on the board about annuities and payout rates. I'm calling a "payout rate" exactly what it is. I know better than to conflate a payout rate with an IRR. Payout rates are simple and convenient when comparing annuities of like terms and conditions, as in the case above (courtesy of Nisi) when comparing payouts of alternative commercially available annuities, which have payout rates today of around 6.4% to 6.5% for a 64 year-old male, compared to a whopping 8.4% for the subject annuitized pension.music_man wrote:It's theoretical in the sense that you are calculating the value based on a never ending stream of payments (perpetuity), but in reality the stream of payments is finite (annuity) as it only goes to the end of ones life.
While payout rates are helpful for comparisons between annuities when some type of annuitization has been decided upon, the IRR calculation for the lump sum determination is more helpful. Where the real confusion arises is when neophytes confuse the rate of return with the payout rate. Whatever the measurement criteria, the annuitized pension above is a very good deal today.
Same numbers as before, OP has 2 options $47,000 lump sum now or $330 per month for remainder of his life, he's 65, and expects to live til 84. Let's say he says "I want to invest the funds, which is the best option". If he just goes by the 8.4% calculation and concludes that he should do an annuity, that's not necessarily the best decision. Consider if he takes the $47,000 today and invests it and we'll assume it grows 8.4% compounded annually for the next 19 years, you'll get $230,577. If you take the annuity option instead and invest, receiving $330 a month and investing it at an annualized rate of 8.4% a year for the next 19 years you get $184,135. Really, the rate he should have considered was the 5.395%, which is the rate that makes the $47,000 equal to the $330 monthly annuity over 19 years. If he invests and think he can get an annualized rate over 5.395% that makes the lump sum better while a rate less than 5.395% makes the annuity option better. If he hadn't considered the correct calculation, he may have made an entirely different decision.
All this said, I'm not saying taking the annuity is a bad idea here, depending on what he wants to do with the money. If he did say he wanted to invest it, I would actually consider the lump sum in fact though while if he needs it for spending, it sounds like a better deal to take the annuity since it's better than what he can get in the marketplace. We don't really know what the OP intent was for the money, but whatever his intent, its certainly better if he has all the relevant information about why one option might be better than another.
Re: $47,000 cash now or $330 per month for life
Really, the rate to be considered should, at a minimum, be the rate Cruncher pointed out, 5.75%, as the life expectancy per the SSA Life Expectancy tables indicates about 20 years for a 64 year old male. However, that data is comprised of the entire SS population, healthy and unhealthy. If we are talking about a healthy 64 year-old male, that would suggest an even longer duration: hence my suggestion for using 22 years resulting in the 6.3% noted in a prior post. After checking the "Annuity 2000" mortality table the average life expectancy for a healthy 64 year-old is 21.3 years, producing an IRR of about 6.1%. An excellent return for a low risk investment.music_man wrote:Really, the rate he should have considered was the 5.395%, which is the rate that makes the $47,000 equal to the $330 monthly annuity over 19 years.
Music_man, what part of the above sentence don't you understand? We are in agreement. You are preaching to (part of) the choir here. The two methodologies are for different purposes, and both have been discussed in this thread. Let's not lose sight of the OP's question. I don't intend to continue debating what you THINK is theoretical.Frugal Al wrote:While payout rates are helpful for comparisons between annuities when some type of annuitization has been decided upon, the IRR calculation for the lump sum determination is more helpful.