A retiree faces a classic choice: take a $400,000 lump sum or $2,000 a month for the rest of your life. The answer depends on how long you expect to live, how well you invest, and whether you can resist spending the whole pile at once.
The question comes from a report by Mark Henricks, which walks through the math step by step. The numbers are simple to follow, even if the conclusion is not what you expect.
The Numbers Behind the Choice
Henricks assumes a 60-year-old man who can take the lump sum now or wait until age 65 for monthly payments. A woman of the same age would face the same trade-off, but with a longer expected lifespan.
According to Social Security’s life expectancy calculator, a 60-year-old man can expect to live until age 83. A woman of the same age would live until age 86.
The monthly payments add up quickly. A man who starts at 65 could collect 216 monthly payments, totaling $432,000 before taxes. A woman would collect 252 payments, totaling $504,000 before taxes.
The lump sum is another matter. Henricks assumes the retiree pays $100,000 in taxes upfront, leaving $300,000 to invest. With a 7% average return and $2,000 withdrawn each month, the remaining balance at age 83 would be about $91,000. Live to age 86, and the balance drops to around $32,000.
What the Advisor Adds
Henricks lists several factors that complicate the choice:
- Other income: Social Security, part-time work, or other earnings may let you withdraw less from your investments, making the lump sum more attractive.
- Inflation: High inflation erodes the value of monthly payments over time.
- Self-discipline: If you cannot resist spending a large sum, the monthly payments are safer.
These factors add uncertainty the source’s example does not fully capture. The monthly payments are simply worth more over a long enough timeline, but the source’s assumptions about lifespan and withdrawal rates mean the lump sum can exceed the payments under certain conditions.
Why the Report Recommends an Advisor
Henricks closes by saying a financial advisor can help you “after running calculations using a variety of assumptions and inputs.” The article’s own example performs a single set of assumptions — a fixed lifespan, a fixed tax bill, a fixed return rate — and the result is sensitive to those choices.
The recommendation to hire an advisor reflects that uncertainty. The source’s own numbers show the monthly payments exceed the lump sum if you live to around 87, but the advisor can run the numbers again with different assumptions about how long you will live, how much you earn elsewhere, and what inflation will do.
The advisor’s role is to account for variables the article’s example holds constant.
The Hard Numbers
- Lump sum: $400,000
- Monthly payment: $2,000
- Man’s life expectancy: 23 years to age 83
- Woman’s life expectancy: 26 years to age 86
- Tax cost on lump sum: $100,000, leaving $300,000
- Investment return assumed: 7% average annual
- Monthly payments for man: 216 payments, $432,000 total
- Monthly payments for woman: 252 payments, $504,000 total
- Remaining balance at age 83: $91,000
- Remaining balance at age 86: $32,000
The choice is yours. But the numbers speak for themselves.
Get the Notebook.
The day's best stories and every fresh verdict, in plain English, in your inbox by seven. One email a day, no more.