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Question for the Money Doctors

Question submitted on Oct 1, 2011.

Question

I am 60 i have choice of pension annuity($3000.00) or $485,000 lump sum. I have a very small bal on mortgage. should i retire and buy a new home. ? which should i take lump or annuity. will work another 5yrs. i think.?

Answer

This is a very good question and the answer is difficult.

If you took the lump sum and spent it, any part that is not rolled over into the IRA will be taxable to you.

I assume the pension is $3,000 per month? If so, that''s $36,000 per year for the rest of your life.

Choosing the pension annuity is a very important and irrevocable decision. Once you make your choice, you cannot change it.

You did not provide enough information here for a complete analysis. I would certainly recommend finding a CPA to run some numbers for you. Ideally find someone who is in the business of selling annuitites or investments. This will give you a more unbiased answer. You should pay for at least an hour consultation on this. Some employers will actually pay this.

When choosing a pension annuity, you generally have many choices. Single life, joint life, term certain, etc. Each of these amounts will have different payouts. When meeting the the CPA, you will need a print out that spells out these various options.

Taking a lump sum will assume you can invest the money wisely and beat the annuity payments. An analysis will need to be done to see if this is possible.

Let''s use your numbers. At age 60 with a life expectancy of 97 years (per the IRS tables) means you will receive $3,000 X 12 X 32 = $1,152,000. This will be more if you live beyond age 97. Compare this with taking the lump sum and investing it. Can it beat $1,152,000?

This is a very important decision, please consult a CPA on this.


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