Expert: Allen - 10/15/2004

Question
Thanks Allen. The single life annuity amount is correct at $168 per month but it starts now at age 42 until death. It is subject to normal withholding but not the extra 10% penalty.

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Followup To
Question -
I'm losing my job at the end of this month and they have sent me the pension paperwork to select a payout, rollover or annuity. I can roll $34K into my 401k or take an annuity of $168 per month till death (before taxes). I am 42 years old. I'm thinking the rollover would do better invested in mutual funds for 20 years than the 84K I'll get in annuity payments if I live to be about 80.  Do you agree?
Answer -
I think you may have misquoted the annuity amount in your question - I'm guessing the annuity is $468 a month not $168 or something around that amount. Let me know if I'm wrong.
To do an exact calculation, I'd need to know when the annuity starts (is it age 65) and what happens if you died before you started receiving monthly payments. But in any event, you are probably better off taking the lump sum and putting it in an IRA rollover PROVIDED you invest in high quality mutual funds and do not touch the money until you retire. The reason for this is that the interest rate built into the calculations for determining the lump sum is probably only 5% and you should be able to do better than this over the long term if you use good quality mutual funds. No matter what you do, don't take the lump sum and spend it. This is the worst choice.

Answer
A life annuity for $168 a month beginning at age 42 would cost $34,000 if the insurance company assumed they could earn 5% on the money. So on a purely theoretical basis you'd be better off taking the money and rolling it over if you could earn more than 5% on your investments.
More importantly, I'm assuming you can't live on $168 a month so you'd have to look for another job and hopefully you'll be able to find one. For this second reason, I'd opt for the rollover and let the money build up for when you actually retire.