HomerJ wrote: ↑Mon Aug 03, 2020 12:02 pm
Do you calculate how much that lump sum could grow between now and 2043? 23 years could be three doublings, or 8x.
$50,000 put 100% into SWPPX (low cost S&P 500 Mutual fund) in 1998 = $254,000 today
. So, that would yield 5x to use your frame. And to use the OP formula, $50,000 in 1998 dollars could yield $846
monthly to a retiree today.
To get that kind of result with your lump sum today going forward:
-You would have to stay 100% invested in SWPPX up till retirement
-The S&P 500 would need to match or exceed the returns of 1998-2020
-You would need to purchase an annuity in 2043 that would give you the $846 monthly in 2043 dollars, or, if you prefer, find a suitable investment for income in your retirement years and manage it.
Conversely, the $1,500 monthly income in 2043 promised by the pension = roughly $850 in today's dollars for life (no COLA). To get that a retiree would only need to do nothing
today. The pension simply needs to deliver on its promise.
Now, $50,000 in 1998 dollars would be $80,793 today
. So the lump sum today would have to be $80,793 today to begin to match the above conditions. We have never received a lump sum offer of $80,793, even in a "special window." And I doubt we will. The pension accountants are very smart. But I think I've spelled out the rough calculation so people can see it unpacked, especially the impact of inflation. I am very open to the idea that taking a lump sum could be the right choice for an investor who has looked at all sides of the question.
Now, if we're just going for multiples
$50,000 put 100% into AAPL in 1998 = $52,375,000
today. So, our farsighted investor secured 1,047x riding AAPL to retirement. That equals $175,833 in monthly income today.
$50,000 put 100% into Jack "Manager of the Century" Welch's GE in 1998 = $23,868 in 2020
. That's $79.56 per month. It's also .47x.
I don't think a Boglehead would make either investment as a replacement for their primary pension retirement income, but I do think that many average investors might consider something like it for their lump sum. (Or hire an expensive investment advisor with high fees.)
My take would be simple and along the lines of the OP, very little is as valuable as securing your basic income level in retirement. Personally, I am glad we stuck with the pension and did not use the lump sum to pay off debt. Social Security + Pension + Treasury Direct Savings Bonds + Boring Boglehead 401(k) investments are a cornerstone for our retirement peace of mind. They create a floor; and the more guaranteed income in that floor, the better.
I agree that some investments made today may someday have 8x returns, or, who knows, even better, but I would not lump sum our (admittedly small) pension in order to try to achieve that.