Should I Take Payments or a Lump Sum for my Pension?
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Although many pensions have gone the way of the buggy whip, there are a surprising number of boomers who are in pension plans. Many will be offered either a lump-sum payout or the traditional monthly annuity payment. Let's take a look at the plusses and minuses of both.
The Monthly Payment Option
With a monthly payment you will be getting a fixed sum of money for the rest
of your life. This makes it easy to budget and you will avoid the ups and downs
of the financial markets. The arguments against this approach are:
- Payments are usually fixed and do not rise with inflation. This means that every year you will lose purchasing power and after 15 or 20 years this can be as much as 25-40% with inflation around 2%
- If you have an unexpected expense, want to take a cruise, or have some other need for money, these funds will not be available.
- Many pension funds have been underfunded. This could severely limit the amount you may receive should the Pension Benefit Guarantee Corporation need to bail out the pension plan. There are limits to the amount they will give you which can severely impact those with high paying pensions.
The Lump Sum Option
This option is more in favor today because of the risks involved with
underfunded pension accounts at many companies. Taking this option the responsibility
for managing the money falls on you. You will not be getting a regular monthly
check but can draw money from your accounts as needed. This requires some discipline
so as not to squander your account. Some benefits from the lump sum option are:
- You can use the tax laws to your favor
- You can access money in the event you need it for virtually anything.
- Once you have the money it is yours and you will not expose yourself to the possible insolvency of the pension fund.
Some cons to this approach however are:
- You can outlive your money. Pace yourself on the amount you take out. I recommend no more than 4% in any given year.
- Subpar returns on your investments. Realize that this is your nest egg and you need to take a very conservative position in the markets. Although the temptation is there to get the biggest return possible this is not the time to be in a growth portfolio.
Given the current state in the pension world it is wise to become knowledgeable about the state of your pension benefits and the pension fund itself. The landscape is always changing so make sure that you are choosing the right option to ensure a well financed retirement.
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