One reason we plan early is to ensure we have options. The same is true when it comes to retirement planning. The better prepared we are, the better the odds that we can get through any uncertainties that always seem to appear out of nowhere. One of the most important decisions you’ll make is whether to accept a lump sum retirement payout or pension payments.
Lump Sum Retirement Payout or Pension Payments
This is one of the first decisions you’ll face as you prepare to leave your job and head into retirement, so it’s important to know the pros and cons of each. The biggest thing you can do, though, is make your decision based on your needs, your lifestyle and your visions for what retirement looks like from your perspective. What worked for your neighbor may be the worst option for you.
One of the best first decisions you can make is to speak with your estate planning lawyer for guidance on tax considerations, what it might mean for your healthcare options, including Medicaid and Medicare, and ultimately, what it might mean for your heirs.
For those who select a lump sum distribution, the retiree has the money moved into an IRA, which provides versatility and freedom in ensuring his investment continues to grow. It can mean that his money continues to work for him years into retirement. That said, these choices aren’t without risk. Investments aren’t always as solid as we’d hoped. In fact, you could lose it all.
Typically, these are distributed via an annuity. These are typically safer options and for those who do select the payments, they don’t have the nagging thought in the back of their minds about the repercussions of choosing the lump sum payment. The potential problem in the payment selection is the loss of value on cash. What you can buy for $50 in ten years pales in comparison to what your $50 buys today. Again, though, good planning can help offset some of that.
Pros and Cons
It comes down to the lump sum’s versatility that allows you to shift your risks or the monthly payment that tends to be safer, but comes with the added risk of future value.
For some who will rely on their pension for basic living needs, the monthly route has historically been the better choice. For those who don’t mind the adrenaline rush every time the market shifts dramatically, they may find the lump sum good for their sense of adventure – provided they can afford it, of course. If it works, it could mean more for your heirs.
Finally, don’t underestimate the limitations of the Pension Benefit Guarantee Corporation. Pensions are covered only up to $59,318 annually. If the pension goes bankrupt, odds are, you lose everything. If your careful planning over the years resulted in higher pensions, it might be the lump sum better fits your needs.
If you’d like to learn more about these and other retirement considerations, we invite you to contact our offices today.