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,
The good news is that you’re not living from paycheck to paycheck, nor will you be in retirement, so this lump sum or monthly payment won’t make you or break you, and you have done the one thing millions of Americans dream of doing: reducing their debt so it will be nonexistent by the time you retire. Your letter is the equivalent of a protein ball: It’s short, especially judging by many detailed letters I receive, but it’s packed with healthy news.
Your savings, pension and paid-off home when you retire will leave you with a lot of financial freedom in your 60s and beyond. For one person, $355 a month will give them the ability to put food on the table. For another person, it’s merely the price 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 you’ll get the money when you leave your job at 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 opt for the payment. But given your solid financial situation and risk tolerance, you would be better off taking the lump sum and investing it in the stock market rather than taking a $355 monthly payment.
The toll of inflation
Sure, you would have to wait until you were 79 before you would come out ahead with your $355-a-month income, but that doesn’t account for the toll inflation would have taken on those monthly payments. Are you prepared to wait that long? Over those 14 years, you would also be depriving yourself of the ability to invest that $61,000. Given that it takes 10% return for your investment to double every 7.2 years, you’d have roughly $122,000 at 72 and $244,000 at 79.
If you were to leave your job and take this money this year my answer would, more or less, be the same. It’s a case of the tortoise (compounding) beating the fox (monthly income). If you invested the lump sum now — and you’re getting 7%-10% interest on your principal investment and on the interest you earned on that principal — you’d have $200,000 when you retired. With the monthly payment, you’d have almost $77,000.
There are, of course, no guarantees if you invest. The market goes 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, 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
Over the last five years, we’ve had a worldwide pandemic that sent the stock market tumbling (although they returned to pre-COVID levels 10 months later), a new administration that has cut a swathe through the prior administration’s policies in just six months and charted a different course from all previous Republican and Democratic administrations in modern times by redefining the postwar Western alliance, and introduced sweeping tariffs.
The socio-economic outlook is currently uncertain. Others would call it volatile or highly unpredictable. Investors are anxiously, one presumes, waiting to see what action, if any, Iran takes after the U.S. bombed Iran’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 investment, but you can afford to let your money grow over time, while resisting the temptation to pull your investment when the going gets rough, as many people contemplated 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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