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Given a choice, should you take regular monthly pension payments or a lump sum?

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Michael1
Michael1
1 month ago

Another “it depends” is whether you have a significant portion of assets in taxable accounts. If so, taking the lump sum and thereby minimizing taxable income could enable taking long term capital gains at the zero percent federal tax rate. If most of your assets are in retirement accounts, not a significant consideration.

BenefitJack
BenefitJack
1 month ago

It depends. Do you already have more than adequate, guaranteed, inflation-indexed retirement income, say from a prior employer’s plan, a spouse’s employer’s plan, Social Security, etc.

It depends. Have you accumulated more than $5,000 in your employer sponsored plan? If so, there is a third choice, leave the money in the plan until normal retirement or the required beginning date / leverage fiduciary /bankruptcy protections.

it depends. Are you age 55 and separated from that employer, or age 59 1/2 or older? Are you planning to relocate? Are you going to have a period without any other income? Pay attention to taxes.

It depends? Would it make more cents, remember, it’s not what you get that counts, but what you get to keep after taxes, to lump sum, rollover and time ad-hoc payments from an IRA. Pay attention to taxes.

It depends. Did you compare the annuity in the plan with a rollover and annuity purchase via an IRA? Because the plan has to use unisex mortality, some might do better with sex distinct pricing. And, as interest rates rise, (I guess that is “if” and “when” the plan may be slower to react.

It depends. Did you compare the option of installment payments (either from the plan where permitted, or via an IRA after rollover), coupled with a qualified longevity annuity contract?

I could go on but here’s the last It depends. Did you consider using the money as needed to “buy” an added Social Security benefit – guaranteed, inflation indexed, retirement income? One positive about this option is that you can always change your mind before age 70 and start the SS benefit.

Ginger Williams
Ginger Williams
1 month ago

I’ll take the pension since my employer’s plan is fairly well funded. The prospect of cognitive decline makes that regular monthly deposit a comfort. I’m less concerned about maximizing wealth than about making it hard for people to scam older me and easier for me live without financial worries

David Draeger
David Draeger
3 months ago

Should this not be a strict financial decision? In my situation the monthly payout vs. the lump sum is not difficult decision. A calculation of the lump sum invested at an annual return of 5%, vs the monthly payment show I would need to live until I am 99 to break even. I understand the “comfort” of a monthly payment but this might not be in your best interest.

Lynne
Lynne
5 months ago

I had to make this decision recently, and went with monthly pension payments, starting soon. I like knowing that pension and social security, when I take it at 70, should cover my monthly bills. And very importantly to me, I have a family history of Alzheimer’s and fear cognitive decline. I’d rather have money coming in each month from pension and SS, and going out each month to pay bills than have a much larger portfolio I might mismanage or be scammed out of. Finally, my former company tried to make the lump sum sound enticing, and said once I made a decision, I’d never have the lump-sum option again. Then they sold the pension plan to an insurance company They offered me the lump-sum option again. If the lump-sum was to their advantage, I figured the opposite, a pension, is better for me.

Edwin Belen
Edwin Belen
3 months ago
Reply to  Lynne

I’m with you on preferring a pension that covers my monthly living expenses versus a larger nest egg. At some point I realized that money isn’t everything. Rather, security for me was much more important. I’ll be fortunate to have three pensions plus social security when I retire.

Rick Connor
Rick Connor
5 months ago

For the majority of people I think monthly pension payments is the way to go. It’s a complicated decision, but most pension administrators are better equipped to mange the investments and risk than the average citizen. I’ve had a chance to review three different pensions (large aerospace company, large insurance company, and national trade union) and each computed the lump sum in very different ways, You need to really understand the details before deciding.

R Quinn
R Quinn
5 months ago

With one exception, that’s a resounding take monthly pension payments.

That exception is if the plan sponsor has underfunded the pension plan or if the sponsor is not a fiscally sound organization. However, even then in 2021 at age 65 the PBGC will guarantee up to $6,034.09 per month for a single benefit and $5,430.68 per month for a 50% J&S pension.

While a large cash payment is enticing and many people use the logic that if they die early someone will always get the remaining money, I think the security of a regular monthly income far outweighs that for the vast majority of retirees.

Look at the debates about withdrawal rates, how much you need to retire, setting budgets and all that goes with managing a lump sum. To me it’s very clear that most people will be better off with a steady income over the risk and stress of managing a portfolio and all that goes with it.

When I was negotiating pension benefits the unions were strongly opposed to lump sum options because they knew what could happen if misused and they had experience with that in other employer plans.

If you want to leave cash to others buy life insurance or have non-retirement investments in addition to your pension.

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