$1 Million Now vs. $50,000 a Year for Life: Which Is Better?

Would you take $1 million today or $50,000 every year for the rest of your life? In this episode, Ryan uses that thought experiment to unpack one of the most useful ideas in retirement planning: the trade-off between a lump sum and guaranteed lifetime income.

He and Aaron talk through how to actually reason about the choice, including how long you might live, what return the lump sum would need to earn, and how much certainty is worth to you. It is the same decision real retirees face with pensions and annuities. This is education, not personal advice, so the right answer depends on your own numbers and goals.

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And, as always, Stay the Course!

Transcript

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Welcome And The Big Question

SPEAKER_00 0:05

Jonathan C2 is Mr. Town with the founder of Alchemy Wealth Management and author of your physical physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:34

Welcome everybody to this week's episode of the Fiscal Physical Podcast. My name is Aaron. I am here with Ryan Nelson, my cohort here with uh the Fiscal Physical Podcast. Appreciate you guys having you know tuning in this uh lovely day wherever you're getting your podcast uh checking us out. Ryan, what's uh what's new with you, dude? How are you how are things?

SPEAKER_01 0:52

Yeah, not too much new is new. I'm doing really well. How about yourself?

Aaron Hoisington 0:55

Hey, not too bad. Not too bad. Living the dream over here, some might say. So some might say. Yeah. But uh tonight we're gonna we're gonna jump into our our topic for today.

Million Today Or Income Forever

Aaron Hoisington 1:05

We're gonna talk about the this is a fun. I almost thought about doing this one as a personal question. I don't know if we've we've kind of covered it similarly like this before, but i I I was hanging out on social media the other day and I was like, you know, watching this thing that talked about like, oh, like would you you know choose you know fifty thousand dollars like uh or one would you rather have one million dollars right now or fifty thousand dollars for the rest of your or for every year for the rest of your life? And I was like, okay, interesting. Like that could be a fun topic to talk about here because uh I I almost love fantasizing if I get money. Yeah. Like about that. So I'm curious to do hear your breakdown on this about uh you know what you what you what what's the right answer, I suppose, the spreadsheet answer. Maybe the uh the real life answer will overlap those and such too. So I'll go ahead and uh pause there and then let me know let me know your thoughts on this here.

Ryan Nelson 1:55

Yeah, so in and so make sure I understand it correctly. You're either getting one million dollars today or fifty thousand dollars a year every year for the rest of your life.

Aaron Hoisington 2:03

Exactly. Yes, that's the that's the case. Also, a little caveat there, the money is tax-free too. So that that just comes into your bank account naturally. Yeah, he is a nice, nice piece of it. I always like to throw that that in there. Whenever anybody like says, like, oh, what would you do if you had like you got six million dollars? I was like, is this before or after taxes? Because that makes a big difference when it comes to that, because that's gonna put me my buckets. If you ever listen to our episodes on the how the progressive taxes and work, it's gonna fill up a few more buckets with that there. So yeah.

Ryan Nelson 2:31

Anyway, yes, and so that is interesting. It kind of changes that dynamic a little bit of it being tax-free, honestly. You know, if if you were to because because it does affect your tax brackets, right? Right, sure. Um, if you're getting fifty thousand dollars every year for the rest of your life, that's gonna put you in higher tax brackets later in life, maybe make things like Roth conversions more challenging. But if you get a million dollars now, you're gonna be in a really big tax bracket all in one year. So there's different pros and cons, right? But so we're saying, hey, we get a million tax-free or fifty thousand a year tax-free.

Aaron Hoisington 2:56

So like you said, well, first it probably depends on your age too. I'd probably preface that. Oh, sorry, you're you're you're diving in. Sorry, sorry. That's a big variable, absolutely.

Ryan Nelson 3:05

Yeah, so so we'll we'll touch on that one here real quick. But yeah, I mean, if you're a hundred years old, you know, do you want fifty thousand dollars a year every year for the rest of your life? You you know, even if you live another five years, you're only making two hundred and fifty thousand. Exactly. Whereas if you're, you know, eighteen years old, you got a

The 4% Rule Quick Math

Ryan Nelson 3:20

lot of years left, right? So kind of the my first thought would be to kind of do some quick math. So back in episode 33, we we talked about what was called the 4% rule. Do you remember that rule at all?

unknown 3:31

Nope.

Ryan Nelson 3:31

Yep.

Aaron Hoisington 3:33

But that's why I have you. Yeah, I was gonna say, that's all right.

Ryan Nelson 3:36

You can go back and re-listen to episode 33. I I should actually.

Aaron Hoisington 3:38

I'll listen out on the way home.

Ryan Nelson 3:39

Yeah. So episode 33 was about the 4% rule. What the 4% rule is, is like if you had a hundred thousand, if if somebody had a hundred thousand dollars, how much could they safely take out of their account every year, in theory, without running out of money? Like it's a general rule of thumb. It's actually a rule of thumb I don't love that much because it's too general, but it's useful in quick contexts like this. So if you had $100,000 saved, in theory, you could spend $4,000 a year out of that, every year for like the rest of your life. So if we were to apply that logic here and we said, well, what if we were to take the lump sum of a million dollars? That would kind of tell us, hey, we could take out four percent of that or forty thousand dollars a year every year for the rest of our life and never touch that million dollar principle. So that'd be interesting. So if you just took the 40,000 lump sum, in theory, you invest appropriately, you could take out four thousand forty thousand dollars every year for the rest of your life, or you could get fifty thousand dollars every year for the rest of your life, right? Now, again, there's a lot of issues with the four percent rule. So again, it's a really general rule of thumb. That's why I don't really love it. And you know, if you go back and listen to that episode, you're actually more likely with a four percent rule that your million dollars like doubles then goes to zero. Yeah, right. I like that. I like those odds. Yeah, right. But so that'd be something to pay attention to. But you know, if we were just to use that as a general rule of thumb to start off with, as like sort of our first level of analysis, you know, you could make an argument that from just that first level of analysis that getting the fifty thousand dollars a year every year for the rest of your life wins out over taking the lump sum and spending forty thousand a year every year for the rest of your life. So that'd be kind of my first thought.

Aaron Hoisington 5:10

Yeah, no, I think it's important to uh to to to think about those different things of uh like okay, because immediately like my my thought it's kind of one I can't remember who it said like there's there's also an analogy, maybe we talked about like you get like a penny every second or something. Like there's there's some there's some sort of thing that we've done, like, oh, would you rather take a million dollars or a penny every second for like a year? I can't remember what it says. But it was it was funny to kind of think about like you know, you think about if you get the million dollars for myself, I'm automatically like that's that could really help me out, like right now, I suppose. Like, but is it what would what would I do with that money, I suppose? And that's kind of the thing that everybody everybody will really think about, like, but uh how like you said, how long will you live?

Compounding And The Penny Example

Aaron Hoisington 5:55

Like what's the what what's what's what's the thought process on that?

Ryan Nelson 5:58

Yep. So I think what you were talking about, I just re-looked this up because I couldn't remember exactly off the top of my head as well. It's like, would you rather if you would you rather have a million dollars up front or a penny and have that penny double every day for a month? That's what it is.

Aaron Hoisington 6:12

A penny double every day for a month.

Ryan Nelson 6:14

So it would go from one cent the next day, two cent to four cents to eight cents to sixteen cents. And so it's crazy, it's like, of course, the million, right? But what's so absurd is you know it starts growing so small, only one to two to four to eight to sixteen cents to thirty-two cents to sixty-four cents to a dollar twenty. So you're like a week in, you got like a dollar, right? And then it's two dollars, four dollars, eight dollars. But that's the effects of compounding. And if this is correct, this says the the penny growing every day at the end of 30 days, doubling every day at the end of 30 days would be a little over five million dollars. So a lot more than the million, right? Definitely. Um, so yeah, there's this effect of compounding, and that is part of this equation. So if you get the million dollars up front, you can start investing it right away, right? Right. So imagine I took the million dollars up front, I started investing it right away, and I don't plan on even touching it until I retire. I'll I give that thing 30 years to double, then quadruple, and then eight tuple or whatever over 30 years. You know, that one million might turn into eight million by the time my retirement comes around 30 years from now, and I could be in a pretty good spot, right? Whereas you could do a similar thing with your 50,000 a year coming in, you could still be investing it, but you'd have less upfront to invest, right?

Aaron Hoisington 7:22

Right. Yeah, you'd kind of have to wait for that. It's almost like, hey, do you want like that big pile of money to start out with to or do you want that like steady check, I suppose? Yeah, like which is just an interesting piece of like I don't know. I think you also think about like if somebody wins the lottery, they offer like a lump sum or like the the annual payouts or something like what it is to it. That's almost the debate. Like, what do you do with that? Like, do you pay the taxes on this?

Annuities Make It A Real Choice

Aaron Hoisington 7:45

But like it depends on what you're gonna do with that money, I suppose. But I think that really depends on like guessing how long you're gonna live.

Ryan Nelson 7:51

Like that's I mean, that's a that's definitely a big piece of it. So again, that 100-year-old probably doesn't make sense for them to take the $50,000 a year, and the 18-year-old might be more incentivized to take the $50,000 a year, right? So definitely sort of estimating your life. I I think this is really this is similar to a question of like an annuity or a pension. And so same thing. If there could be a client listening or a you know, a listener listening who has a million dollars right now who are considering taking that million dollars and buying an annuity. And if they buy that annuity, that annuity might kick off $50,000 a year for them. So this could be a real question for somebody right now. Do you want to just keep your million dollars or do you want to trade your million dollars in for an annuity that's gonna pay you fifty thousand dollars a year every year for the rest of your life? Right? So it may not be as hypothetical as you think for a lot of a lot of listeners up there. Interesting. Interesting. And so it really, you know, these these kind of lottery-based questions, like they become sort of real-world questions for more people than you think through the lens of like annuities. And the math works out where like this is maybe a semi-reasonable trade-off. And then the reality is like these annuity companies, they've calculated this in such a way where kind of the you know, mathematically, it's more or less a trade-off if you keep the money up front or you take the monthly payments or the annual payments. And so the reality is I think a lot of times these questions end up you you mentioned it at the top of the recording, but like is

Values, Flexibility, And Risk Horizon

Ryan Nelson 9:10

there's a spreadsheet answer and there's your answer, right? Yeah, oh yeah. And a lot of times this comes just down to a value decision. It's like the math comes out to be pretty similar. There's unknowns we don't know. If you live to be 200 years old, yeah, we wish we had the monthly payments or the monthly or annual payments. Right. If you pass away next month, yeah, we wish we wish we would have taken the lump sum. We just don't have that decision. Like we just it's impossible for us to have that information on the front end when we make the decision. So the reality is a lot of times I feel like it just comes down to a value decision and like a risk versus reward and getting the getting the million dollars up front, you're trading off some longevity, but you have all million dollars up front, you have flexibility to spend it now. If you pass away next month or next year or in two years, you can pass that money on to your you know, kids or spouse or whatever. So I feel like honestly, these questions always or not always often come back to like a value space decision. And when you look at like the spreadsheet answer, it's oftentimes almost a toss-up. It's it's it's pretty close. Again, assuming you're not 99 or 18, like for most of the time, these style of questions come down to being a very similar like trade-off from a spreadsheet answer. And so it really comes down to the your answer, your values. So I'd be curious, like which one would you gravitate towards?

Aaron Hoisington 10:23

Yeah, immediately I I I think right off the bat, like uh I think I would take the million dollars. I think I I would because like you mentioned, like you the the compound inter and and the just growth over time. I mean, I'm not getting any younger, first off, and uh I think that if I can I could get that, I could you know pay off some debt or whatever it might be. I also think it'd be nice to I feel like with the 50,000, I'd be like waiting every year for that to hit my bank account and be like, okay, cool, cool, cool. We can do we've we've bought this new car because we know we can build, like do this like 50,000. Versus if I was like take that million dollars and be like, cool, all right, let's put a little aside for a fun trip and let's like be smart with this other piece of it, and then really make that work for me. Yeah, I suppose. I I I just feel like that would probably be the way I would go. But then again, I'm like, if I'm gonna live to be for another 30 years, like, you know, what's the value of like I guess 50,000 in 30 years every day? So I I don't know. I but I would lean towards a lump sum. What about yourself?

Ryan Nelson 11:23

Like I I would definitely take the lump sum. I think that it and it comes back to like I think depending on your decisions, right? So you gotta take all these variables into account. And then for me, this I think the spreadsheet answer for me starts becoming a it starts leaning a lot more heavily towards that million dollars. And so I that's why I would probably go that way. But so like if I if I so so imagine I got the million dollars. When we talked about the 4% rule, this is like applying it to like a retiree-ish, right? So somebody who it needs to be investing semi-conservatively has to be cognizant of not running out of money, right? They have to be aware of um what are called sequence of return risks, and so they're investing kind of conservatively, so they might be getting four or five percent returns. That's why you could spend four percent a year, right? For somebody like myself, let's say I don't need the money tomorrow or the next month or the next year or the next five years. I have a career right now, I'm living off of the money I earn from my career. If I take the million dollars, I could afford, I've now bought the ability to be more aggressive with the money. So now I could take that money, invest it more aggressively in line with my now risk risk tolerance and risk horizon. And so now I might get 7% returns. Well, 7% of a million dollars, $70,000 a year. So I might be compounding it $70,000 a year as opposed to $50,000 a year. So I might start with a million and grow at $70,000 a year, as opposed to start with zero and grow at $50,000 a year. Yeah. Right. So the fact that I'm not already in retirement, I have the ability to not spend the money, let it sit and grow. And if the stock market drops 20% and my million drops to 800,000, hey, no harm, no foul. I wasn't taking distributions from it anyways. That ability, so since I'm still working, that ability buys me the flexibility of being more aggressive, which I think in my case would be a no-brainer. I'd definitely want to take the million. So yeah, that'd be my two cents for myself.

Aaron Hoisington 13:10

No, I think that that's important. I I think you hit on a couple of different pieces there, you know, age, risk tolerance, risk horizon, these different things that honestly I always think of this, this would be a great problem to have. Oh, it'd be a fun problem to have. These are my I'm not a a huge math guy, but these are my kind of math problems. I'm like suddenly like my you know somebody's asking me to like do make change out of a ten dollar bill, and I'm like, I don't know. But somebody asked me, like, oh, would you rather what would you do with a million dollars? And like I I start the wheels start cooking in there. I'm like, well, I'd take 30,000 here, that would leave me with 970,000. And I'm like, wow, I just become like a real uh, I don't know, a famous mathematician's name. So Archimedes or something. I don't know if he was a mathematician, but we'll go with that. Yeah. But awesome, Ryan. Well, I appreciate it, man. That's uh I just I I like to throw in a fun little fun little palate cleanser here. We do talk about some, I don't want to call it boring stuff because I never find this stuff. Well, it's funny. I do find some of this stuff just everyday life. If somebody was to come up and start a conversation with me and like ask me, you know, like what my what's my like 401k balance or do certain things, I'd probably be like, okay, sure, yeah. I can he's like, what's what are you invested in? I'm like, I'm fine having that conversation, but I love having these conversations with like when somebody's like can break it down and like form me. And I think that that's what's important. Like hopefully what this podcast does for people too is it like makes it a little bit more fun versus it it I don't want to say it wettens up the dry stuff, sure. Like if you will a little bit too. So I do think it's uh we do cover some of those topics that hopefully we we we keep fun and stuff. But this was a pretty relatable one for our listeners out there that hopefully everybody's now the wheels are turning when it comes to those. For sure. Everybody wants that million dollars or fifty thousand dollars, I have to say. So we'll see, whatever your preference is. But awesome, Ryan. Well, we'll go ahead and uh take a quick pause

Rich People Behavior Growing Up

Aaron Hoisington 14:55

here. We'll be back on the other side of this. Uh everybody hang tight.

SPEAKER_00 14:58

And now to put the personal in personal finance.

Aaron Hoisington 15:05

Welcome back to this side of the physical physical podcast. I'm still here with Mr. Ryan Nelson. And uh uh Ryan, I got a question here that uh uh actually feeds into the conversation we were just talking about, the the one million or fifty thousand for a year. So hopefully everybody uh stuck around for this uh this piece of it here. So my question to you, Ryan, is is what's something that you used to think, maybe when you were growing up that was rich people behavior or something you saw, something you're like, oh, they're rich, like kind of piece of it. Like I I'm really just interested. I think we probably all have a memory of sorts with that kind of piece of it. But what what do you got there?

Ryan Nelson 15:40

Yeah, I mean there's probably lots, I guess, like you know, like certain like sports or car or like yeah, like even just like golf, I like I think pictured like a rich man's game, which probably still is to some degree. But anyways, I would say like even just like going out to eat, not like going out to eat ever, but like yeah, go just like going out to eat felt like an experience or something like valuable, and not to be taken lightly, I guess. And so that's something that certainly I something I grew up picturing, like to go to a nice restaurant, you'd have to be like quite wealthy to like be able to go to like a steakhouse or something. Um now it's something I find myself doing, which is probably a testament to like my parents and like the fact that I think most parents want to set their children up uh to be in a better like financial spot than they were. And like the cool thing is like they helped pay for my college and stuff, or they did pay for my undergraduate, right? And so like it's helped position me and lever put me in a spot where yeah, I can you know go out to eat and go to some nice restaurants, and that's something I used to perceive as maybe unattainable. The other thing is like I I still kind of argue this is, but like buying a new car. Oh, yeah. Um I'd say this is never a smart decision. Right. Uh do as I say, not as I do. But I bought a new, so I bought a forerunner back in 2018 and it was new from Toyota. And you know, that is something that again is not a smart financial decision. You shouldn't buy a new car, you should buy a used car financially speaking. We've talked about that a few times, yeah. Oh yeah, yeah. Like I said, do as I say, not as I do. But anyway, so I you know, I I bought this car, and that's something that I always thought like growing up, like buying a new car was like, you know, a rich person thing, and that's just not like what we do. And you know, I did, and it wasn't a smart financial decision. That said, that being said, it's now uh eight years old. I still have the same car, it's running great, and it'll probably last me another 20 years. So, you know, knock on wood, hopefully it'll end up panning out to work out okay in my on my behalf. But certainly, certainly I'll say buying a new car seems like maybe rich people behavior that uh now I I guess I did do. So what about yourself?

Aaron Hoisington 17:37

Yeah, no, you you hit red on the the car piece of it. Like we never had like a or w my parents brought one new car, and I remember I was thinking I was like six years old. We bought this big old Ford Aerostar van. Oh, nice fresh off the lot. Heck yeah, like it the the green, it's like the green forest screen or something like that. It was kind of an ugly looking vehicle for being honest, but it got us around. We had six people in that car or whatever, and so that thing ran until it had like 320,000 miles on it. It was just crazy, it lasted forever. Like, and uh um, but I remember the that feeling of like, oh, we have a new car. Like that was like something I you see in like the movies kind of piece of it. Um, the other one growing up, and this is like how it's funny how things kind of change, is you remember those TVs that had like the big like box behind it kind of piece of it? Like big screen TVs, big screen TVs that were like on this like thick thing, and it took like six people to move them. And I remember like if I went to somebody's house and they had one of those, I was like, oh, you must be doing okay. Yeah, yeah. Like nowadays, like I'm like, oh, like you have like something you try to like hide, you it's TV screen, like blends into the wall kind of piece of it that beat. If it's thinner than paper, you're poor.

Ryan Nelson 18:42

Exactly. Yeah, kind of thing.

Aaron Hoisington 18:43

If it's thicker than paper, you're thicker than yeah, it's like, oh man, like you see a boxy one of those and you're like, oh wow, would you get that off of you know, find on the side of the street or something like that? But that used to be one of the things when somebody had like a big screen TV that was like not even mounted on the wall, just like they couldn't.

Ryan Nelson 18:58

It would have torn the house, it would have pulled the house down.

Aaron Hoisington 19:00

It pulled off the drywall there for sure. But I remember some of my friends growing up had that, and I was like, oh wow, that's wild. Like nowadays, I and I also think that like the price of TVs is still like very reasonable. Like right now, like I feel like that's one of the things that like really hasn't like skyrocketed. So I'm also like, I don't know what the price were was back then for something like that, but I mean just the manpower to get it somewhere. I was like, wow, you must have friends who can help you move this to you're well off. That's awesome. Yeah, it's good stuff. So I'm curious to hear the listeners out there what their what their thought process was growing up. I think is as we're we're younger, we think that you know things are of a greater magnitude sometimes than they are. So I'm interested to see what you guys uh what you guys think uh was a rich person behavior, quote unquote, and how your opinion has changed. So awesome, Ryan. Well, thanks so much for the time here, my man. We'll go ahead and wrap this

Listener Prompt And Wrap Up

Aaron Hoisington 19:50

one up and uh I will let you have the uh final say. As always, stay the course.

SPEAKER_00 19:57

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the channel. For more resources, you can visit Alchemy Wealth Management website at www.alchemywealth.com or find your physical physical book on Amazon. We'd be remiss if we didn't mention the personal finances just too. First of all, please don't take anything we say as advised. The printed content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.