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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75669  
Subject: Re: Lump Sum vs Pension Annuity Date: 3/21/2011 9:57 PM
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I was wondering if you wouldn't mind explaining this a little further?

The pension works kind of like a mortgage--designed to make payments of the promised amount for your life expectancy (with the insurance company taking the risk that those who live longer than their life expectancy will be balanced by people who live shorter than expected.)

As with a mortgage, the first payment you receive is almost all interest on that lump sum cash and the last payment (at life expectancy) is almost all principle.

The pension plan defines the monthly amount to be paid. As market interest rates change, the lump sum value changes to compensate.
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