No. of Recommendations: 5
fhkuch, you asked:

<< My defined benefits pension plan is terminating and offering a 52 year old the following options:1. Lump sum distribution to my IRA of $121,170, 2. $673 per month annuity now, 3. $912 per month annuity at age 55 or 4. $1900 per month annuity at age 66. I have a 401 K and an IRA already active. Which option makes the most sense since I do not plan to retire for at least ten years and what type of investment would be prudent for someone who is an average risk taker? >>

Well, there's several ways to look at this. You might consider the present value of the annuity payments for comparison. For example at age 52, life expectancy might be about 27 years and at 4% the present value of $673 would be $133,656. Age 55, life expectancy of 23 years at the same rate would be a present value of $146,323. And at age 66, with a life expectancy of 15 years the present value would be $147,721. So, comparing the lump sum figure to the annuity figure would suggest that the annuity payments could be a better choice . . . particularly if you happened to live longer than these life expectancies. Depending on what you feel you might be able to do with the lump sum - if you can do better than 4% and stay within the life expectancies, then the lump sum might be a much better way to go. The advantage to the annuity side might be that you might live far beyond your life expectancy, which increases the present values above.

If you assume you can easily get an 8% return on investments, the $673 annuity payment at age 52 would have a present value of $89,819. And so, the $121,170 lump sum would certainly look better. For age 66 at this same rate, the $1900 per month would have a present value of $65,545. Generally speaking, if one is a good manager of their money, taking the lump sum can work out much better.

So, you see . . . a lot really depends on just what assumption(s) you want to make with regard to earnings, your life expectancy and what kind of risk tolerance you have over this period.

I hope you find this useful.
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