Home Future payments Take the package or the monthly pension?

Take the package or the monthly pension?


Companies that have been severely affected by the pandemic have turned to early retirement offers in order to downsize. If your employer has a defined benefit pension plan, your offer may include the option to choose a monthly annuity paid throughout your life or a one-time lump sum distribution of approximately the same value. Employers generally prefer that workers receive lump sum payments to reduce the company’s future retirement obligations. But the choice for employees is not so clear.

I advise clients in this situation not to base their decision solely on financial considerations. There are also important emotional and behavioral factors to consider. To get to the heart of the matter, you need to ask yourself questions like the ones below and find honest answers.

1. Will I need the money right away to make money?

If you know you’ll need monthly retirement income beyond your Social Security benefits and income from your personal savings, a monthly pension can do the trick. With this option, your employer agrees to pay you the same amount of money per month for the rest of your life. Usually this monthly income is fixed and will not change which is a plus as it eliminates surprises. But there is also a downside: some pensions do not provide for any increase in the cost of living, which will help you preserve your purchasing power in the face of inflation.

While the combination of Social Security and individual savings will provide you with all the income you need, you could benefit more by transferring a lump sum directly into an IRA. A direct rollover allows you to continue investing the money on a tax-deferred basis, with the flexibility to use it when and if you need it. By holding growth-oriented investments within the IRA account, your nest egg has the potential to keep up with rising costs over decades of retirement.

2. Am I responsible for the money?

Do you dream of using that lump sum to pay off a mountain of credit card debt? Or to write checks to your children and grandchildren? If the answer is yes, then ask yourself if you really have the self-discipline to accept a flat-rate distribution.

If you are a proven saver (not a spender), you may be able to keep the money. But a lot of people who start with good intentions don’t succeed. A 2017 research study commissioned by MetLife

One study showed that 1 in 5 (21%) who took a lump sum from their workplace pension plan used up the money within 5.5 years.

3. Can I invest a lump sum wisely or do I know someone I trust who can help me?

Managing a successful flat-rate distribution requires a sophisticated investor. If you’re new to it, the DIY approach can be daunting, and the wrong choices can put your retirement security at risk.

If you don’t have the know-how yourself, you’ll need help from someone you trust. It is seldom wise to base important financial decisions on the advice of friends or family. Consider working with a professional financial advisor trained in retirement planning and experienced in working with pre-retirees like you.

Keep in mind that not all knowledge and skills are necessary qualifications for DIY enthusiasts. Creating and managing an investment portfolio requires a significant investment of time. While you may be up to the challenge right now, the demands can become a burden as you get older.

4. How will the decision impact the people I love?

Most pension payments cease after the death of the employee or the death of a surviving spouse, and there is no possibility of designating beneficiaries. If leaving a legacy is a priority for you, consider the benefits of a lump sum distribution with a direct rollover from the IRA. With an IRA, you can designate beneficiaries, including individuals or institutions, so that you dictate the allocation of your assets.

When making your decision, be aware that the promised duration and the amount of future payments depend on the solvency of the pension plan. If you have concerns about the financial stability of your employer’s plan, you’ll want to study the details thoroughly.

Here is another important point to remember: you cannot change your mind after submitting the required documents. The election is irrevocable, which means you only get one chance to get it right. Seeking professional financial advice early in the decision-making process can result in a confident choice.

KiplingerPensions: take a lump sum or not? | Kiplinger


MetLifeThe Risks of Receiving a Lump Sum Payment at Retirement The MetLife Blog

AARPLump sum or monthly payments: which is better?

To verify my website or some of my other work here.

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