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Guarding Your Wealth for Senior Citizens
Taking Your Lumps When You Retire, Maybe or Maybe
Not
‘Keep the cow’ or receive the guaranteed monthly
stream of milk?
By Jeffrey D. Voudrie, CFP
 July
27, 2007 - When people retire, many face the biggest financial decision
of their lives. Do they keep their pension and its monthly payments or
do they take the lump sum? The pension provides security and peace of
mind, but having the lump sum would really be nice, too. Which should
you choose? Here’s a simple analogy that might make that decision
easier.
Steve, age 65, is retiring after 30 years of
working for the phone company. He logs on to the company benefits
website and sees that he has a decision to make. He can get a lump sum
payment from his pension of $300,000 or he can instead get $1,817.94 a
month guaranteed for the rest of his life.
Steve likes the thought of getting a onetime
$300,000 check, but his wife likes the security of a monthly guaranteed
payment. What should he do?
First, Steve (and you) need to understand the
underlying concepts involved in this decision. Either way, you have to
have monthly income to live on. Think of that monthly check as 10
gallons of milk. You have the choice of being guaranteed that you will
receive 10 gallons of milk a month for the rest of your life or, you can
take the cow that produces that milk instead.
For a moment, let’s look at it from the side of the
one guaranteeing that monthly supply of milk. They own the cow and know
it should produce 13 gallons of milk each month. (Don’t laugh farmers,
I’m a city boy!) In that situation, would they guarantee someone 13
gallons a month? Of course not.
They have the responsibility to care for and manage
the cow. If they don’t do that right, she (I do know that much…) may not
produce as much milk. Plus, they have to keep some of the milk for
themselves, or it’s not worth doing in the first place.
To decide what stream of milk to guarantee, they
start with what they know the cow will conservatively produce. Then they
subtract out the amount of milk they want to keep, and they see that
they should have 10 gallons left over each month. Thus, they guarantee
to deliver 10 gallons a month to you. It’s the same with the insurance
company; they won’t give you all the ‘milk’ the ‘cow’ produces.
Of course they own more than one cow, but they
aren’t going to put themselves in a position where they regularly have
to take the milk from another cow to make their guaranteed delivery to
you. In the same way, do you think an insurance company is going to
guarantee you so much in monthly payments that it might force them to
take money from somewhere else?
What if Steve decides to ‘keep his cow’ instead of
receiving the guaranteed monthly stream of milk? First, he and his wife
get all the milk. They might even breed the cow to get a calf. Second,
if Steve dies, his wife continues to get milk. Third, the cow can then
be passed on to their children when they both have passed away. Fourth,
if there’s an emergency and push comes to shove, they can sell the cow
and use the money for other things. None of these advantages exist if
all you get is the guaranteed stream of milk.
With ownership comes responsibility, though. The
cow has to be cared for so its milk production doesn’t decrease. The cow
has to be protected so it doesn’t run off or get stolen. If (like me)
you know nothing about caring for a cow, then you will need to hire
someone else to do it for you. And that hired hand might be more
concerned about his or her paycheck than your milk supply. Certainly the
amount of milk each month will fluctuate. By owning the cow, though, you
receive some milk and have the cow to boot.
Hopefully, this analogy will allow you to better
understand the decision you face. Receiving a lump sum allows you to
maintain control and maximize your returns. But if you know nothing
about investing, you may be a sheep waiting to get fleeced! Don’t
believe everything you hear and research every financial decision before
you make it. Feel free to contact me for help.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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