Author: Nick Maggiulli
Source: Of Dollars and Data (
In the book Coffee Can Investing, co-authored by our colleagues Saurabh Mukherjea and Rakshit Ranjan, they highlight the gross under-provision for retirement amongst middle class Indian families, not just because of the sub-optimal asset allocation (often skewed towards real estate) but exacerbated by rising life expectancy i.e, the very real possibility that people could outlive or outspend their savings. In a country with no meaningful social security, this is likely to be an endemic challenge. “…as William Sharpe, the Nobel Laureate, notes, retirement is the “nastiest, hardest problem in finance.”……With the multiple layers of uncertainty (inflation, life expectancy, returns, and lifestyle choices) the problem is not solvable in the strict sense” says Nick Maggiulli of Ritholtz Wealth Management in this piece as he discusses one such relevant dilemma which many people face as they approach their retirement age: “Lump Sum vs. Annuity decision”. Whilst he acknowledges there is no one-size fits all solution, he does provide a framework to resolve the dilemma based on one’s specific circumstances.
At some point in our life we will have to choose between two options – 1) Lump Sum: Receive $XXX today of qualified money, or 2) Annuity: Receive $XX a month for life starting X years from today (this is when you would reach age 60-62)
On the face of it the problem might look simple with a simple solution – find the present value of the future payout and compare it with the lumpsum amount. But if you consider various other variables in the equation (like inflation, life expectancy, spending rate, returns etc), the problem becomes challenging.
The risk you take in both situations are:

  • With the Lump Sum there is the risk of outliving your money either due to long life or subpar investment returns.
  • With the Annuity there is the risk of dying before retirement age and the risk of seeing your income lose its purchasing power due to inflation

There is no one single correct answer and it all depends what risk do you want to take.

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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