[danielpal]

You chose the wrong one. No matter what the article says, the $1M is more valuable. First, the safe withdrawal method of 4% is actually not safe - the safest method of withdrawal is called variable percentage withdrawal and not only takes into account the principle, but also the results year after year.

But more importantly, $1M lump vs $5,000 monthly annuity, always take $1M. Why? Because you are taking an asset class that can be converted into shares/bonds which has a higher expected returns than an annuity because it can compound.

What I mean is while the $5,000 annuity is guaranteed, it will remaing $5,000 year-over-year, which means it's actually decreasing in purchasing power year-over-year (unless there is deflation, which it's very unlikely). Wereas the $1M cash, if moved to bonds and shares, even if it performed at 5% annually, it will mean on the first year break even, but on the second year it will compound (unless you spend all the money). You could say you invest the monthly savings from the $5,000 but simply put it, $1M in shares has a much higher expected return than $5,000 monthly in perpetuity.

[twmahna]

There are a ton of flaws in this comment, and I don't understand why it's at the top of this chain.

"First, the safe withdrawal method of 4% is actually not safe - the safest method of withdrawal is called variable percentage withdrawal and not only takes into account the principle, but also the results year after year."

This is an argument for taking the annuity. When two options have the same expected value, volatility is a bad thing.

"Because you are taking an asset class that can be converted into shares/bonds which has a higher expected returns than an annuity because it can compound."

The author writes under the pretense that the $5K figure is EQUAL to the risk-adjusted rate of return on a $1M principal. Sure, there are asset classes that have higher expected returns than a guaranteed annuity, but that is because they are RISKIER. Obviously, people value risk differently, which is why in general, you can't say "always take $1M"

"Whereas the $1M cash, if moved to bonds and shares, even if it performed at 5% annually, it will mean on the first year break even, but on the second year it will compound (unless you spend all the money)."

The whole point of the $5K figure is that it is the same amount as the risk-adjusted return on a $1M investment. How the user chooses to spend that $5K monthly sum is up to them and they have the freedom to spend or invest that sum in the same manner regardless of which option he/she takes.

"You could say you invest the monthly savings from the $5,000 but simply put it, $1M in shares has a much higher expected return than $5,000 monthly in perpetuity."

Incorrect for the above reasons.

Assuming that $5K/month annuity is the expected rate of return on a $1M invested in a risk-free asset class (which is the assumption this article is written on) and you have the option to cancel the annuity and retrieve your principal at any time, it's pretty clear that the annuity is the better option because it has NO volatility.

[Spooky23]

You're making a lot of assumptions.

The reality is that an annuity comes with lower volitility and risk.

When you look at the risks for a retirement payout, you need to think carefully. How long will you live? How long will you retain your faculties to manageme investments? What protections do you have against dishonest or incompetent advisors?

Unless you're unlikely to live long, or have trustworthy children or other advisors, the annuity is probably the best scenario.

[danielpal]

No assumption here. The expected return of an asset class like shares and bonds is higher than the annuity, which is always $60,000 and nothing more - this is a fact.

But as you said just because the expected is higher doesnt mean the actual will be. But you still should always pick whatever has higher expected

[MR4D]

No, you shouldn't.

You're missing the problem of sequencing of returns. If you made that decision at 65 years old in December of 2007, you would quickly regret it unless you were one of the small percentage of people who can take the massive volatility that followed over the next 15 months.

You ABSOLUTELY MUST take into account the risk. Not doing so would get your sued as a financial planner. Frankly, this is where people lose so much of their savings is listening to hogwash like this.

Go spend some time and get your CFP or CIMA certification and then come back, and your answer will have changed.

And if I sound ticked off, it's be cause I am. you are totally ignoring Behavioral Finance, which is much, much more important than simple math.

[GenWintergreen]

We don't usually think about absolute return as much as we do return conditioned on an acceptable level of risk.

You can almost think of risk as currency, i.e. each addition unit of risk opens you to strategies with higher expected return. But you can also access strategies for which you're able to "pay" the risk (basically fits into your tolerances).

[Spooky23]

What's the risk adjusted expected portfolio performance accounting for a fund manager with undiagnosed dementia?

[mikelyons]

higher risk-adjusted expected?

[kmonsen]

That is only true for long term investments, but for a short term future the $5000 might outperform a lot.

Which is why it is smart to change the type of investment as you get closer to retirement.

[AstralStorm]

Problem is that this alleged short term can be half of your life.

[mywittyname]

> Because you are taking an asset class that can be converted into shares/bonds which has a higher expected returns than an annuity because it can compound.

The annuity can compound too, if you treat it like you would any other 6% dividend and reinvest it.

Once you see that, the two become almost functionally equivalent. It comes down to a liquid million dollars with market returns or an illiquid million dollars with a guaranteed 6% return.

Which is better comes down to luck. If its 2006 and stocks are at all-time highs, then the 5% guaranteed will definitely return more over 10 years, and maybe over 20 and 30 years. If it's 2009 and stocks have cratered, the liquid million in the market wins handily.

The liquid million has a slight edge in expected value, as 7% > 6%. But when you consider the 6% is a lower bound and the 7% is an average, it becomes clear that there are situations where the guaranteed income stream could win.

[exclusiv]

Exactly right. Although some people would probably be way too irresponsible with $1M so the financially less savvy option may be better for them haha.

[acchow]

5% = $50,000 = $4,166/mth

In any case, whereas 5% might be conservative in the long run, you could be totally screwed in the short term in a bubble.

[wycx]

Where may I find low risk real 5% return after tax?

[akvadrako]

In Europe you can get above 10% before tax with "peer to peer" lending at https://www.twino.eu. The company guarantees it and their financials looks healthy, but there is a risk of them being a scam or defaulting.

Personally, I would take your money for a guaranteed 5% and invest it in more risky funds, covering the losses or taking the excess gains.

[smallgovt]

Unfortunately, nowhere right now :). The premise is hypothetical.