When I leave my job, would I be better off taking a $61,000 lump sum to roll over into an existing IRA or, instead, take $355 a month for life? I’m 49 and have no debt except for a mortgage with $56,000, and I’m currently working full-time and receiving a $2,400-per-month military pension. My current net worth (assets minus liabilities) is $350,000. My S&P 500 investments have roughly doubled every seven years. What should I do?
Dear Planning,
Your letter is like a protein ball: tightly packed with healthy news.
The good news is that you’re not living from paycheck to paycheck, nor will you be in retirement, so this money, whether it comes in a lump sum or a monthly payment at the end of your tenure at your workplace, won’t make you or break you. You have done the one thing that millions of Americans dream of doing by reducing your debt so it will be effectively nonexistent by the time you retire.
Your savings, pension and nearly paid-off home will give you a lot of financial freedom in your 60s and beyond. For some people, $355 a month would mean the ability to put food on the table. For others, it’s merely the cost of a high-end gym in Manhattan. Put more bluntly, one person’s full stomach is another person’s toned abs. Given your savings and $2,400-per-month military pension, you probably belong to the latter category.
I’m assuming that if you opted for the monthly payments, you’d start getting them at age 65. If you were looking at a retirement where you needed every last penny and you were unwilling to take any risk, you would probably choose this option. But given your solid financial situation and risk tolerance, you would probably be better off taking the lump sum and investing it in the stock market.
The toll of inflation
For your $61,000 to double in seven years, you would need to generate returns of 10% on your investment. That is the average annual return for the S&P 500 over 30 years. If you took that lump sum at age 65, you’d have roughly $122,000 at 72 and $244,000 at 79. If you left the company and got a lump sum now, at age 49, and you did achieve 10% returns, you’d be looking at similar rates of return in seven and 14 years’ time.
If you instead decided to take the $355 monthly payment, it would take more than 14 years for the monthly payments to reach $61,000, excluding interest. And of course, that payment would remain the same while inflation causes the cost of living to rise. So you’re really better off taking the lump sum when you leave the company and investing it, whether you do it now or at age 65. It’s a case of the tortoise (compounding) beating the hare (monthly income).
There are, of course, no guarantees. The market tends to go up over time, but it is unpredictable, as we have seen over the last 50 years. The S&P 500 SPX fell 18% in 2022, gained 26% in 2023 and rose another 25% in 2024. It took more than five years for the market to recover from the 2008 financial crisis, which was caused in part by predatory and subprime lending in the mortgage market and lax financial regulation.
Markets are unpredictable
In recent years, we’ve had a worldwide pandemic that sent stocks tumbling (although they returned to prepandemic levels 10 months later), a new administration that has cut a swath through the prior administration’s policies in under six months, charted a different course from all previous Republican and Democratic governments in modern times with its stance toward the postwar Western alliance, and introduced sweeping tariffs.
The socioeconomic outlook is uncertain. Others would call it volatile. Investors are waiting to see what action, if any, Iran takes after the U.S. bombed that country’s nuclear sites over the weekend. There is a war in Ukraine and increasing instability in the Middle East, and economists continue to debate the effect of President Donald Trump’s tariffs on U.S. prices and the broader economy.
You’d have less ability to access your $61,000 if you rolled it into your IRA, but you can afford to let your money grow over time while resisting the temptation to pull your investment out when the going gets rough, as many people contemplated doing during the market turmoil in April. You can also afford to wait to collect your Social Security benefits until you reach the age of 70, thereby maximizing your benefits.
You’re looking at a bigger payday than a monthly gym membership.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
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