**TITLE: ANNUAL PENSION vs. LUMP SUM WORKSHEET**

**PURPOSE: CHOOSING WHICH IS BEST FOR YOU**

**SCOPE**: This worksheet focuses on annual pension versus lump sum calculations taking into consideration the rate of return your investments could earn, your life expectancy, and how strongly you feel the pension benefits will continue to be paid as long as you live.

**LIFE STAGE**: You are required by your employer or regulation to choose between taking accrued retirement benefits as an annual pension or as a lump sum.

* The steps for the calculation provided below assume the annual pension and lump sum would start at the same time. If the lump sum would be received now, but the annual pension would start in the future, then additional calculations are required.*

**INTRODUCTION**: This calculation employs one step. Example data is used below. Your data will be different.

Step 1 is to calculate the annual value of the lump sum amount for 30 years, then compare that to the annual pension amount.

**CALCULATIONS:**

__Step 1__: Suppose you assume the following:

Lump Sum Amount | $220,000 |

Annual Pension Amount | $15,000 |

% Increase in Pension Amount | 0% |

Years of Annual Pension | 30 |

Rate of Return on Lump Sum | 5% |

To calculate the first year withdrawal (spending) provided by the lump sum for it to last 30 years, using the Choosing Wealth™ Calculator do the following:

1. Enter 220000, the lump sum, and select | |

2. Enter 0, because the pension is assumed to be fixed, and select | |

3. Enter 30, the assumed pension period, and select | |

4. Enter 5, the assumed investment rate of return, and select | |

5. Select |

The value displayed, $13,629.82, is the first year withdrawal the lump sum would provide and is the same for all 30 years since the pension is assumed to be a fixed amount per year, based on the assumptions above.

In this case, based on these assumptions, the **annual pension** would be the wealthy choice.

To illustrate how the accuracy of your assumptions can be critical, the following calculation uses the same annual pension and lump sum amounts but changes the years to 25 and changes the assumed rate of return on investments from 5% to 6%. With these changes in assumptions, using the Choosing Wealth™ Calculator do the following:

1. Enter 220000, the lump sum, and select | |

2. Enter 0, because the pension is assumed to be fixed, and select | |

3. Enter 25, the assumed pension period, and select | |

4. Enter 6, the assumed investment rate of return, and select | |

5. Select |

Based on these changes in assumptions, the value displayed, $16,235.73, is the first year withdrawal the lump sum would provide and is the same for all 25 years since the pension is assumed to be a fixed amount per year.

Since the annual pension amount is $15,000 a year, based on these assumptions, the **lump sum** would be the wealthy choice.

No one can accurately predict inflation rates, tax rates, life expectancy or investment returns. However, everyone can learn and do wealthy choices. We believe that if you make the assumptions and do the calculations your wealthy choices will improve your financial, lifestyle and retirement success.

We also believe that being conservative in your assumptions can leave you better prepared for funding your lifestyle or retirement rather than being out of money with years left to live.

TEST YOURSELF

Using the Choosing Wealth™ Calculator calculate the first year withdrawal. (NOTE: The first question assumes a fixed pension. The second assumes a 2% per year increase. Notice the difference in first year withdrawal.)

TEST WITH FIXED PENSION ASSUMED

- $500,000 lump sum
- 20 years of retirement
- inflation / withdrawal increases per year 0%
- investment return 4%

Put your answer here:

First year withdrawal: _______________________________

First year withdrawal with FIXED pension: $35,375.84

TEST WITH INCREASED PENSION ASSUMED

- ONLY CHANGE: inflation / withdrawal increases per year 2%

Put your answer here:

First year withdrawal: _______________________________

First year withdrawal with INCREASING pension: $29,876.93