My father, who worked in Group Insurance for 35 years, had the best rule of thumb for retirement planning…
He said that $1M at age 65 is worth $60K a year, indexed to inflation, for life.
So, work from there. The original question didn’t mention indexing, so you’ll have to figure that in. $100K in 50 years will probably be below the poverty line. Also, if not indexed, then the question is almost a simple question of math. The $100K is 5% of $2M, so if you can get a better return than that then the lump sum is better…QED.
If you are younger than 65 then the amount you can draw each year will be lower because you’ll need to stretch it out longer.
Let’s assume that the amount is indexed to inflation, because that makes the most sense (to me, at least). If you were, say, 30 years old, then the annual amount from the capitol might be as low as $20K in order to last your whole life. In that case you be better off with the annual amount.
If you are older, then it becomes more and more advantageous to take the lump sum, and the two amounts are probably equivalent at around age 60.
Finally, there’s risk. With a lump sum you are at the mercy of the markets and your investment decisions. With the annual amount, the risk is involved with the entity issuing that payout. If it’s a government entity, depending on the country, it might be way safer than some private company.
[Edit: Really bad error fixed. $1M at 65 is worth $60K/yr, not $100K/yr]
My father, who worked in Group Insurance for 35 years, had the best rule of thumb for retirement planning…
He said that $1M at age 65 is worth $60K a year, indexed to inflation, for life.
So, work from there. The original question didn’t mention indexing, so you’ll have to figure that in. $100K in 50 years will probably be below the poverty line. Also, if not indexed, then the question is almost a simple question of math. The $100K is 5% of $2M, so if you can get a better return than that then the lump sum is better…QED.
If you are younger than 65 then the amount you can draw each year will be lower because you’ll need to stretch it out longer.
Let’s assume that the amount is indexed to inflation, because that makes the most sense (to me, at least). If you were, say, 30 years old, then the annual amount from the capitol might be as low as $20K in order to last your whole life. In that case you be better off with the annual amount.
If you are older, then it becomes more and more advantageous to take the lump sum, and the two amounts are probably equivalent at around age 60.
Finally, there’s risk. With a lump sum you are at the mercy of the markets and your investment decisions. With the annual amount, the risk is involved with the entity issuing that payout. If it’s a government entity, depending on the country, it might be way safer than some private company.
[Edit: Really bad error fixed. $1M at 65 is worth $60K/yr, not $100K/yr]
They did the math! Good work
The typical estimate is 4% (1), meaning 1M USD is equivalent to 40k USD a year.
That’s why “at 65” comes into it. You don’t live forever, so you can afford to eat into the capital.
Yikes! My mistake, $60K/yr, not $100K/yr. Basically, what it would cost you to buy an annuity at that age.
Fixed my earlier comment.