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Daunting One Question Financial Intelligence Quiz

by SMD 


This quiz has only one question…

“Which is more valuable, $14,000 now, or $100 a month for the rest of your life, beginning when you are 65 (in my case 20 years away)?”

Let me answer the quiz question with a real life story…

About 6 months ago I quit my well paid government job. This meant, since I’m far from retirement age, I was offered a buyout package for my pension.

Today I went down the the pension plan offices to sign the papers.

They take this stuff very seriously and even though I was clear, and had completely made up my mind, when they stuck the official form in front of me I began to experience a lot of anxiety and had second thoughts about my decision.

Here Are The Options

I had only been employed for 2 years so we’re not talking about a large amount of money, but enough to make a difference.

Basically it boiled down to a one time cash payment of about $14,000 or in about 20 years $100 a month for the rest of my life.

Which would you pick?

As I was about to sign the form requesting the cash, my mouth got dry and I started to realize that $100 a month, while not a lot, was the only pension that I currently had. All of a sudden it seemed substantial. Something like free gas for my entire retirement. It felt BIG to give it up.

Deep Breath

Then I thought about it for a moment and got out of the emotions of the perceived loss.

I was going to use the $14,000 to purchase a $200,000 condo.

Let’s do some math. These are really rough numbers, but you’ll get the idea.

$14,000 used to take control (possession) of a $200,000 condo, let’s fast forward 20 years and see what we have.

Asset value ~$300,000 (a very conservative guesstimate)

Assuming the mortgage is paid… monthly positive cash flow from rent ~$1000

Mmmmm….

That $100 a month isn’t looking too great anymore.

I signed the paper, felt sorry for the many people getting ripped off by these sorts of pension plans all over the country, and bolted out of the office.

If I live for 25 years after retirement the difference would be:

Pension Plan Value =   $30,000

Private Investment in one condo = $600,000 ($300k in equity + 300 monthly $1000 payments)

What’s really funny is that a lot of people where I worked, in ultra secure government jobs, stay in that job just for the lure of the pensions.

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