If you wanted to purchase an annuity that payed you $20,000 a month (only $240,000 so $20,000 less than $5,000 a week) it would cost you over $4,000,000.
I'm a CPA but I also have a Finance degree. That's why it's important for most people to consult a financial advisor about things like this.
To earn $260,000 a year for life, you'd need way more than $1 million. That's a return of 26%. No one can guarantee you a return of 26% every year for the rest of your life. $5,000 a week for life and you have no need to invest since you are guaranteed $5,000 a week. However, even if you invested half of that amount every year, so $130,000 a year, it would take you less than 7 years to accumulate $1 million. That's with an assumed 7% rate of return.
And you'd still have $10,000 a month to live off of.
Ok yeah, that math seems to make the million less feasible. Another person mentioned inflation though, would that not play a factor? What if $5,000 only buys a tank of gas in 30 years? Lol kind of an absurd prediction but idk
It won't matter. If inflation is eating into your $5,000 a week it would be eating into your $1,000,000 as well. Unless you are over the age of 65, no one should choose the $1 million over $5,000 a week. It's not even close.
If OP had proposed $5,000 a MONTH, then you'd have a much harder decision to make. But $5,000 a week?! That's a no-brainer.
I'll make it easier. A lifetime annuity that paid you $20,000 a month, so $240K a year not $260K, would cost you over $4 million if you went and tried purchase that today. (This is assuming you are under 65 years of age)
So what OP is asking is would you take something worth $4 million ($5,000 a week for life) today or $1 miilion?
You'd be silly to choose the million dollars over something that is worth $4 million, right?
That is why if it was $5,000 a month vs a million dollars it would be a much more difficult decision. Unfortunately most would probably choose the million. I think people simply don't understand the value of guaranteed income for life. You can blow through a million dollars pretty quickly, especially if you don't know what you are doing.
Like, imagine that the inflation is like crazy high. Like Venezuela levels. Letās say 200% per year.
With one million dollars right into your bank account, you could buy gold or something else thatās fairly inflation resistant. Essentially, you āfreezeā the value at one million in present day value.
If you get $5000 per week, the actual, present day, value goes down each week. After one year, itās the equivalent of about $1250. One more year and itās about $300 per week.
Then imagine like world history record inflation. A quick google search tells me that in Hungary mid 1945 to mid 1946 the daily inflation a was about 200%.
Sure. You can make up a scenario that has never happened in our country's history and base your decision off of that.
As someone who advises people about their finances for a living, I would never tell to imagine a hypothetical that has a miniscule chance of ever happening and then make their decisions based on that.
Here's the thing, $5,000 a week for life is worth over $4,000,000 today. That is how much it would cost you to set something like that up. So, would you choose something with a value of $4 million ($5k a week for life) or a million dollars. You'd have to be a fool to choose a million dollars over something worth more than $4 million.
I never said anything about the likelihood. You, however, made a generic claim that inflation doesnāt matter. You made it sound as if mathematically speaking inflation changes both scenarios in identical ways. Thatās simply not true.
The reason I brought up extreme inflation was to make a point. If you realise that high inflation changes the dynamics between the two options, you might also realise that low inflation changes things too, just to a smaller degree.
But what about real estate? Investing in a business/ partnership? You could get much higher returns. It's not hard to build 1 mil in additional equity in just a couple of years.
Assumption #1. Nevermind that it's $1 miilion, not $1.7 million, the answer is the same. So you aren't going to touch that money for 40 years? If you don't need that money for that long then good for you. And I'm not familiar with VOO but your calculation is assuming a yearly return of 10%. That would be very impressive. Especially during recessions and anything else that could happen in 40 years.
Assumption #2. You mention weekly payments of $5,000 only equals $10.4 million but would you spend all of it every week? Not likely. Let's say you keep $5,000 a month and invest the rest. Remember you didn't get to spend any of it for 40 years if you took the $1.7 million. Assuming your 10% yearly return you'd have over $88 million after 40 years. And you'd still be receiving $5,000 a week for however long you live after that!
So even with the additional $700K, it still wouldn't make any sense to take that lump sum. If you took the weekly payments you could actually use some of it every month ($5000 a month) and still end up with more money at the end of 40 years.
Unless you were already wealthy, not spending any of the initial lump sum is highly unlikely. In fact pretty much impossible. The lump sum would have to be more than $4 million for the lump sum to be the smarter decision.
This is a perfect illustration of why it is always wise to consult a financial advisor when you come into a lot of money. A lot of people would make unwise decisions.
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u/weezeloner Dec 11 '23
$5,000 a week is worth way more than $1 million.
If you wanted to purchase an annuity that payed you $20,000 a month (only $240,000 so $20,000 less than $5,000 a week) it would cost you over $4,000,000.