Annuity or Lump Sum

[LineTamer+]

Assumptions: 61 yr old male
poor health, but should live 10 more years.

2 Options:
1. $400/week payment starting now until death, no inflation adjustment, no beneficuiary
2. A lump sum payment. How much would it take in the form of a lump sum to have you choose this option?

True story, car accident settlement, offer on table is the $400 per week for life or a yet to be determined lump sum.

What factors need to be considered?

life expectency of a 61 year old male from Social security website is 19 more years.

$400 x 52 weeks = $20,800 x 19 yrs = $395,200

Thanks for insights.

 

[FatTony]

Never mind. I read your post wrong.

 

[LineTamer+]

Assuming a flat 5% rate of return, and 988 weekly payments (19 yrs), the lump sum would be $255,287 (PV) i think?

So what would you do....$400 a week guaranteed for life or the one time payout?

I think payout would be better for numerous reasons, but would like to hear thoughts, suggestions etc.

Also, no lump sum offer has been made or negotiated yet, so I would think the above number is only a break even or starting point for any discussion, as his life expectency is 19 years from social security tables.

Thanks.

 

[heart222]

i think you need to see someone who can figure out the discounted value of money so you can judge correctly. by theway life expectancy of 19 years 1 person can live 1 year and another 37 and you wind up with a 19 year expectancy. the issue becomes what can you turn the lump sum into on a monthly basis. pretty easy to get between 5 and 9% in todays markets. so do the math. if you have a lawyer he or she should have a stock brokerto help you out with the whole thing. best heart222

 

[SpaceMountain]

Simple answer.............

..............take the lump sum and BET IT ALL with..............YOUR SOURCE.......................STU FEINER!!!!!!!!!!!!!

 

[levistep]

Assumptions: 61 yr old male
poor health, but should live 10 more years.

2 Options:
1. $400/week payment starting now until death, no inflation adjustment, no beneficuiary
2. A lump sum payment. How much would it take in the form of a lump sum to have you choose this option?

True story, car accident settlement, offer on table is the $400 per week for life or a yet to be determined lump sum.

Assuming 6.5% interest, the present value of that annuity over 10 years is $152,993.64. So basically, that annuity is essentially the same as $152,993.64 lump sum, assuming that 6.5% interest. If they offer $152k+, i'd take it. If you think you can get 9% a year, then $137k would be the required offer. For 7.5%, $146k+. I'm thinking 6.5%-7.5% may be the most realistic because you aren't going to be investing in risky companies the during your retirement.

What factors need to be considered?

life expectency of a 61 year old male from Social security website is 19 more years.

$400 x 52 weeks = $20,800 x 19 yrs = $395,200

Thanks for insights.

How is this important to you? It is important to the insurance company because they have to decide how much to give you, but you are planning on 10 more years, so that's what concerns you. Maybe i'm overlooking something, i could be wrong.

 

[LineTamer+]

Thanks for the responses...

The 10 yr number is merely a guess....the only true basis one can use are the ones actuarilary (sp) determined. And the social security admin puts that at 19 yrs. The health of this 61 year old, is far from the healthest.

Assuming this person lives the 19 yrs and dies at that point, the total payout would have been $395,200. For him to live another 19 years, given current health condition, would be a stretch. So assume he lives only 10 yrs, total payout would be $208,000, with nothing for the remaining 9 years that he was "expected" to live. That would be leaving alot of money on the table sort to speak.

5% rate of return was used because that is current rate on T-Bills and what one could get as a guarantee if a fixed annuity was purchased (and still participate in the market upside)

If he takes the lumpsum payout, of approximately $255,200 and takes the same $400 a week, the money would run out in exactly 19 years. If he dies early, he can name a beneficiuary for the remaining money. Downside, he beats the odds and lives to 90 or 100 and the money is gone.

 

[levistep]

Thanks for the responses...

The 10 yr number is merely a guess....the only true basis one can use are the ones actuarilary (sp) determined. And the social security admin puts that at 19 yrs. The health of this 61 year old, is far from the healthest.

Assuming this person lives the 19 yrs and dies at that point, the total payout would have been $395,200. For him to live another 19 years, given current health condition, would be a stretch. So assume he lives only 10 yrs, total payout would be $208,000, with nothing for the remaining 9 years that he was "expected" to live. That would be leaving alot of money on the table sort to speak.

5% rate of return was used because that is current rate on T-Bills and what one could get as a guarantee if a fixed annuity was purchased (and still participate in the market upside)

If he takes the lumpsum payout, of approximately $255,200 and takes the same $400 a week, the money would run out in exactly 19 years. If he dies early, he can name a beneficiuary for the remaining money. Downside, he beats the odds and lives to 90 or 100 and the money is gone.

$255k was the lump sum offer? Figuring 19 years, the present value of that annuity, at 5%, is $257k. I like the lump sum option.

 

[ComputerGuru]

If this is their first offer, do not accept it. Have your lawyer counter offer with $400 per week + 7% annual increases or a lump sum amount of about $500,000.

Don't let the insurance company push you around.

 

[levistep]

If this is their first offer, do not accept it. Have your lawyer counter offer with $400 per week + 7% annual increases or a lump sum amount of about $500,000.

Don't let the insurance company push you around.

Rejecting the first offer is probably a decent idea, but 500k lump sum is so out of the question.

 

[ComputerGuru]

Rejecting the first offer is probably a decent idea, but 500k lump sum is so out of the question.

$400 per week + 7% annual increases for
10 Years = $287,000
19 Years = $777,000

I don't see where $500k is out of the question. Seems to fall right in the middle.

 

[LineTamer+]

The annual increases would be nice....original offer at $400/week is a set number. So with no annual increase this same $400 is worthless 10 years from now.

There was no original lump sum offer made to date, just the $400/week.

That number will more than likely be rejected for a lumpsum payment for which a counter offer will be presented.

Thanks again,
TAmer

 

[ComputerGuru]

It has become very obvious to me that you have never negotiated anything in your life.

The first number(s) an insurance company is going to offer you is going to be their lowest. You make a high counter and you work from there.

Don't settle for their first offer and don't be bullied!