The decision of whether to take a lump sum is a big one. Getting the numbers and assumptions right is important. Your pension offer includes a number based on actuary calculations, including your current age, how long you are expected to live, and interest rates set by the IRS. But those estimates don’t account for your health or family medical history.
Longevity
The decision whether to take a lump sum in retirement or continue receiving pension payments is a one-time event that can impact your financial future. For instance, if you take a Boeing pension lump sum, the money is yours to spend or invest at will. That means you must consider ensuring that your investments will grow and last throughout your life. It also means that if you die, your spouse or other heirs will likely have no income.
Many companies offer retirees a choice of continuing monthly pension payments or taking a lump sum. These offers are typically based on several factors, including your current age, life expectancy, and interest rates set by the IRS. Companies sometimes need to provide the information to make sound decisions. In addition, mistakes can be made when calculating your lump sum offer.
Taxes
Taking a lump sum means you assume the investment risk, so any return on investments could increase or decrease your pension pot. If your lump sum is invested in volatile funds or doesn’t regularly review your investments and adjust them to reflect market conditions, you could run out of money or lose more than you invested.
Having a regular stream of payments can provide some stability. It also may include a death benefit for your spouse or surviving family members, depending on the terms of your pension plan.
However, your monthly pension payment amount is based on an actuarial calculation that doesn’t consider factors like your health or your family’s longevity. This means that it’s possible you could live longer than average and exhaust your pension. That’s why many retirees prefer the security of a lifetime income stream.
Investments
Many pension plans offer retirees the choice of a lump sum or an annuity. Those who choose to take a lump sum will have to invest the money they receive, which could make it vulnerable to market fluctuations and investment performance. In addition, they’ll need to ensure the investments they choose will last through retirement.
If they invest the money wisely, some participants may be able to do just as well as or better than the annuity option. But if they’re uncomfortable managing their investments, a lifetime stream of payments might be more attractive. Those who believe they’ll live longer than average might find annuity payments more appealing, as their monthly benefits continue until death or a specified period, depending on their plan options. They can also leave any assets remaining at their death to heirs. This can be particularly attractive to married participants. The financial advice they receive from a trusted adviser should help them make an informed choice.
Choices
Many retirees who receive a lump sum can roll the money into an IRA, which allows them to preserve their tax-deferred status. They may also use it to buy immediate annuities, which can provide a steady stream of income for life.
However, managing a lump sum takes skill and discipline. In addition, investors often pay fees and expenses when managing their investments or purchasing an annuity. Those costs can erode investment returns over time. Neither choice is right or wrong for everyone. It depends on your circumstances, goals and priorities, health and family longevity history, and money-management skills. Your choice should be informed by careful analysis and objective financial advice. The pension-versus-lump sum decision is life-changing, and it’s important to weigh your options carefully.
