"PeterL" <po.ning@[EMAIL PROTECTED]
> wrote in message
news:0962ecb7-9bcb-41ed-bdf5-f97a3af66a6c@[EMAIL PROTECTED]
> On Mar 20, 10:50 am, iarwain <iarwai...@[EMAIL PROTECTED]
> wrote:
>> 1) Put it toward your government pension? Leaving that amount in
>> when you retire gets you an extra $400 per month for the rest of your
>> life.
>> 2) Put it in your 401k? That amount would give you $60,000 in eight
>> years, IF you get 10% interest during that time (which may well be
>> debatable at this point).
>>
>> Which do you think is the better deal?
>
> That extra $4,800 from the government pension is guaranteed and does
> not fluctuate. If you were able to get $60,000 from your $400 a month
> investment into the 401K (as you say, debatable), you'd then have to
> earn 8% from that $60,000 to match the guaranteed government pension
> payout.
>
> The winner: government pension.
This assumes that one lives forever (the income stream of $400/month is in
perpetuity). If not, then we need to see what discount rate reduces the
income stream for N years to a present value of $60K.
An income stream of $400/month, over 30 years (if N = 30) has a present
value of $60K with a discount rate of about .585%/month, or about
7%/year.
This means that if you expect to draw the pension payments for 30 years,
then you'd have to earn 7% to exhaust your $60K in the same 30 years. If
you earned more, then you *might* come out ahead. (The might is due to
the
fact that your earnings can fluctuate; if you start out earning little,
then
you couldn't draw the extra $400 initially, even if, over time, the
earnings
averaged 7%.)
If you expect to draw payments for 40 years, then the break-even discount
rate becomes .634%/month, meaning that you'd have to earn better than 7.6%
to do better with the $60K. If you expect to draw payments for "merely"
20
years, then the discount rate becomes .426%/month, meaning that you'd
"just"
have to earn better than 5.1% to do better with the $60K.
Being too lazy to really think this through, I just plugged numbers into
an
annuity calculator: http://www.investopedia.com/calculator/AnnuityPV.aspx;
I
used payment of $400, and number of periods of 240 (20 years), 360, and
480.
Keep in mind that aside from earnings fluctuations possibly making it
harder
to beat the pension, the pension is also guaranteed not to run out. So no
matter what discount rate (or longevity) you target, the pension provides
insurance in case you guessed wrong. (How much that guarantee is worth
depends on how much you need the extra income stream.)
Mark Freeland
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