1. Liz is retiring from the US Postal Service and will turn 70 next year. After 39 years of service, her monthly pension is $7,500. She does not qualify for Social Security. Liz has accumulated $700,000 in her thrift savings plan. The government requires that she convert it to an annuity or move it to a IRA. All of the money is pretax and tax can be avoided if it is moved to the IRA. The annuity will be calculated based on her life expectancy of 17.5 years after age 70. The current US Treasury long-term bond rate is 3 percent. How much will she get as an annuity monthly payment? Should Liz take the annuity or move the money to the IRA? The tax regulations require that she take out 4 percent of the amount each year.

The professor responded with the following to my answer below: Once you have that annuity calculation, you need to compare it to the IRA. The IRA will be invested so you need to apply a reasonable growth and then calculate the 4% withdrawal amounts. He followed it up with this: You need to calculate the IRA value using the 4% withdrawal and 6% growth to decide which is a better value.

How do I calculate the growth rate and compare? Thanks.

1. Monthly Pension = $7500

Savings =$700000

Life Expectancy = 17.5 years=210 months

Long Term Bond Rate = 3% Rate/12 months = 3/12= .25 monthly rate

Annuit Payment = =PMT(0.25%,210,-700000)=$4,288.62

IRA Mandatory 4% each year IRA growth of 6% per year

700000*4%=28,0000

Liz should choose the annuity at this age.