## Lump Sum or Monthly Annuity? How to use a Time Value of Money Calculator to help you choose.

hey guys so your company has offered you

a lump sum as an alternative to a

monthly pension what should you do

which option should you take or consider

after considering some things such as is

the pension single life joint life

will there be Cola adjustments do you

have other assets income streams what

are the tax ramifications is the company

financially sound and solvent it really

boils down to a pretty simple question

what is the distribution yield on the

lump sum distribution yield it can be

found by simply dividing the yearly

pension amount by the lump sum for

example if your yearly pension is \$6,000

and the lump sum offered is \$100,000

then the calculation would be six

thousand divided by 100,000 resulting in

a yield of six percent as a rule of

thumb if the yield is above six percent

take the pension if below six percent

consider the lump sum if taking the lump

sum it's important to figure what the

internal rate of return is needed in

order to match or better yet beat the

distribution yield of the yearly pension

payout let's jump over to the desktop to

analyze this a little further using a

time value of money calculator

okay so we've jumped onto the desktop

and I am currently on a website it's

called FN calculator comm and we will be

using their time value of money

calculator located under the finance and

click on that brings us to the TVM

calculator page now what we're going to

be doing is we will be using the numbers

from the previous portion of the video

to determine what the internal rate of

return is needed in order to make an

accurate determination of whether or not

to accept the lump sum or to go ahead

and take the lifetime yearly annuity so

as you recall the options that were

given to us was a hundred thousand

dollar lump sum or the \$6,000 per year

lifetime annuity so in order to

determine what the internal rate of

return will be to to either match or

better yet beat what the company can do

we need to plug in some numbers so let's

get started

present value in the present value

column we will enter one hundred

thousand dollars that obviously equates

to the lump sum that we would be given

from the company and now we must invest

this on our own and and hopefully get a

return that can sustain us for our

lifetime the payment well if the company

was willing to pay a six hundred oh

excuse me six thousand dollars a year

which is five hundred dollars a month

well then I - and willing to pay myself

five hundred dollars a month six

thousand dollars a year right we want to

keep comparing apples to apples so the

five hundred dollar month payment

equates to six thousand dollars a year

future value future value we put in as

zero why well at the end of our lifetime

ideally we shouldn't have a bunch of

money left over and we shouldn't be a

shortfall either right we we should

be somewhere right next to zero we've

been drawn down on this money for our

entire lives if the math works out

ideally there shouldn't be a whole lot

left so let's just call it zero zero is

the future value the annual percentage

rate we don't know that's what we are

trying to determine and then the period

the period is found by looking at a

pulling this one from the Social

but let's hypothetically say that this

lump sum offer has been given to a male

who is 55 years old and according to

Social Security he will live another

twenty five point five two years let's

just call it twenty six okay so Social

Security says you know you're 55 years

old you're healthy you're gonna live

another 26 years great so we come back

to the calculator page we need to enter

that period in a monthly number so let's

jump onto a calculator real quick

twelve months times would we say 26

years equals three hundred and twelve

months so we're gonna go three hundred

and twelve months into the period field

okay so let's recap the present value

that's the hundred thousand dollars that

the company is prepared to hand over to

us if we walk away from the lifetime

annuity the payment that \$500 a month

payment we're still gonna pay ourselves

we want that income stream so that five

hundred dollars a month

equates to six thousand dollars a year

future value is zero because ideally we

don't want a bunch of money left over

when we die and then the period is three

hundred and twelve that equates to

twenty six years which is what the life

expectancy is for a male who is

currently aged 55 according to Social

Security and we click on the rate and

look at this according to our time value

of money calculator we need to earn

three point seven one percent

on this money in order to pay ourselves

\$500 a month for 26 years that's doable

three point seven one percent that's

that's pretty easy to do even even if

you're a conservative investor that's

pretty easy to do I would be tempted in

this case given these numbers to take

the lump sum and invest that myself now

let's try another example let's let's

say same yearly annuity but in this case

they were only going to offer us say

\$60,000 excuse me \$60,000 is a lump sum

buyout payment was going to stay the

same the future value would still be 0

our periods would still be the same

which was 312 which is 26 years let's

see what we need to earn now in order to

sustain that uh-huh

look at that nine point four zero four

percent that's a little steep do you

think you could earn nine point zero

four percent for 26 years to sustain

yourself on this offer I would say no

and this is where when you run the

distribution yield off the top of my

head that was 6,000 divided by 60,000

that's what ten percent right am I an

idiot but let's take a look

six divided by sixty equals ten percent

so yeah in that case ten percent that's

a ballpark estimate you'll run the

numbers and it comes out to nine percent

pretty close in this case I would

annuity I don't want to be trying to

earn nine percent on my money for the

rest of my life to sustain what the

company is going to do risk free now I'm

not a tax attorney I'm not a CPA I'm

a financial advisor although I did stay

at a Holiday Inn Express last night but

know this tool this is an invaluable

tool if you have recently been offered a

buyout how do you know what is a good

offer and what is a bad offer jump on to

a time value of money calculator and

it'll tell you exactly what you need to

know so I hope this video has helped you

out and and cleared some of the fog I

know and when I was presented with an

offer recently I I struggled I I kept

going back and forth you know on one

hand you know that lump sum that's

pretty tempting but you need to look you

need to look at the internal rate of

return what you need to earn for the

rest of your life to match that pension

that the company is willing to give you