Invest smaller lump sum vs investing (larger) monthly amount

Question

I am receiving monthly compensation for having to move due to the demolition of my apartment building. I have two choices for the compensation:

1. Take the compensation, at $755/month for the duration of the construction project for the new building. This will likely take five years. Total value: $45,300. If I factor in a 2% inflation rate, the total value (in today's dollars) is $43,524.

2. Take a lump sum payout, valued at three years' worth of compensation. Total value: $27,180.

At the moment I can't afford to purchase property so putting a lump sum towards a down payment is off the table.

The question is this: should I take the three-year lump sum and invest it up front? Or should I take the monthly amount, and invest it each month until the payments stop coming (estimated to be five years)?

The total value of the monthly amount over five years, even adjusted for inflation, is still more than the lump sum payment. But depending on how the market goes in the next five years, I could be loosing out on gains (or losses) by not having put $27,180 into the market at the outside.

If I did take the lump sum and invest it, I'd have to have earnings of 60% over five years in order to break even with the inflation-adjusted five-year amount of $43,524. Based on historical trends, 60% over five years doesn't seem crazy, but it is definitely optimistic.

What do y'all think?

Edit 1 to answer some questions from the thread:

• I would be investing for the long term. I have no plans at this point to cash in to buy a house or anything else.
• I already have a rainy day fund and I have no debts.
• I was renting in the building that is being demolished.
• Compensation is fixed and was calculated in 2021. It does not adjust with inflation.
• The compensation is intended to cover the difference in rent during the construction period. The reality is that rent is between $1,300 and $1,500 more per month than what I paid at the previous building, so $755 is not actually enough to cover the difference.
• With my salary I can cover the difference in rent. I'm looking at this as an opportunity to do something with the compensation beyond just subsidizing my rent, but the reality is that the increased rental cost is taking away from the monies I would otherwise have available to invest. That's a whole other topic.
• Whether I move back into the new building after construction is complete, is not related to the compensation in any way. They are not tied to each other.
• The company paying compensation is a large development company. I think it's unlikely they'll go belly up, but then there's Lehman Bros as the counter-example. I consider that that's just part of the risk I have to deal with.

Answer 1

You probably underestimate the return of the investment with a monthly contribution of $755:

With around 10% p.a. (which seems to be what you expect the lump sum to get to break even), monthly investments of $755 for 5 years at 10% would already be worth $58k, while the lump sum is at $44k.

Running the numbers, you would need an annual return rate of around 26% to break even at around $86k. Below that, the monthly investment is ahead (as you put in way more principal). 26% per year is probably more than what you should expect as a return, unless you know who the next nvidia is.

Nevertheless, there are some unknown factors and risks:

• The construction time might be much faster (or slower) then you expect. If they e.g. finish after 2 years, you lost out on a year's worth of monthly constributions (plus some interest of the lumb sum).
• Solvency of the company, as they might just stop existing (and paying you) after a year, or some other contractual problems you don't oversee yet.
• If you need the compensation to compensate for e.g. higher costs of living (they pay you a compensation for a reason), the math changes depending on how much of the $755 you need to take out. On the other hand, taking the monthly sum would limit your exposure to that risk - you get it as long as you have the higher costs of living (apart from inflation risk).

Answer 2

This is really tricky and expects you to know the future. None of us know the future. On the plus side, you are in pretty good shape you will get either 755/mo, or 27K.

Here are some questions for you:

• Will you need this money to live or is this found money?
• What is this company like? Solvent?
• Is there a contract for this?

Lets say you do not need this money to live, the company is sound, and there is a contract. In this case I would take the monthly and use it to improve my financial situation (investing, building a emergency fund, paying down debt, saving for a home, etc...).

Its unlikely that the construction project will be completed on time, let alone in three years and a few months which is your break even point.

If the company is not very solvent or there is no contract, you take the lump sum. Better to get the most while the company is flush and the conditions exists.

If you need the money to live while the apartment is being constructed, I am probably taking the monthly. That is if the extra money needed will not be the same after the apartment is completed.

Edit: Thank you for the clarification and the concise writing.

In the factoids you present I would take the monthly payment. Anyone doing renovations will tell you that five years does not turn into three and would far more likely turn into six or seven. With supply chain issues, weather, permitting and labor shortages this is about as sure as a bet that you can make.

Then just invest the money. The dollar cost averaging will work for you.

Answer 3

Using your two cases.

1. Compensation of X per month, for the Y duration of the construction project. X = $755, Y = ? (5 years?)

2. Compensation of Z up front. Z = $27,180

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First let's look at the raw amount of money this is for your investments. (inflation is up to you to consider, imho 2% seems optimistic)

• 1a. $755/month for 5 years = $45,300

• 1b. $755/month for 4 years = $36,240

• 1c. $755/month for 3 years = $27,180

• 2 . $27,180 immediately

Risk identified: Your monthly plan if it fails before 3 years will pay out less raw compensation. This is if the construction takes only 3 years or less, if the company ceases to exist, or basically if anything else goes wrong.

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Now the primary question is which option is better for long term investing?

I used the S&P 500 as a reasonably save traditional investment option for this example. (Please note, I skipped scenario "1b" intentionally below)

1a. $755 initially and then $755 each month from September 2019-2024 would be worth $57509.95, a gain of 24.87%

1c. $755 initially and then $755 each month from September 2019-2022, with no additional monthly investments from Sept.2022 to Sept.2024 would be worth $35,807.65, a gain of 31.74%

2 . $27180 invested from Sept.2019 to Sept.2024 would be worth $49508.68, a gain of 49.21%

All "gain percentages" are based on the total invested amount.

Risk thoughts: You have to decide how reliable that monthly compensation payment is to determine if the proper choice is to perform the lumpsum investment or do dollar averaging investment.

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You stated that you are willing to accept the estimated time as accurate and you believe that the monthly compensation will remain stable and reliable.

In that case, just using the S&P 500 as relatively safe investment example. You should invest the $755 each month over the 5 year period.

Obviously in what asset you are going to invest, is up to you. Unless something monumental occurs in the asset you invested in (Like if you bought nvidia before it dominated the market, or bought Solana in 2020 right after it launched), the dollar averaging method almost always outperforms initial lump sum, and has the advantage of being less risky.