The decision to take a monthly pension payment at retirement or to receive a one-time lump sum after departing your company depends on a number of variables. Upon quick review, taking the lump sum can provide you with more flexibility whereas monthly payments will ensure you don’t outlive your money. There are, however, other considerations to take into account when preparing for this decision:
- Anticipated expenses you will face in retirement
- Retirement resources beyond your pension
- Your personal health and beneficiaries
- The financial strength of your company
When preparing for retirement, it is recommended to calculate anticipated expenses, separating out essential from discretionary spending. If you have enough monthly income to cover essential expenses from Social Security and other sources, you may want to consider taking a lump sum benefit. The lump sum option could allow you to plan your own investments and pay for larger expenses as needed.
For many people, monthly payments are a good resource of consistent income in retirement. However, when considering taking a lump sum verses a monthly payment it is important to compare additional financial investment options. For example, how would your monthly pension payments compare to the payments you would receive if you were to roll a lump sum into an IRA and purchase an immediate annuity?
Monthly payments are reassuring, knowing that you will have a continued income as long as you live. However, it is important to consider that your company payments will not continue to your beneficiaries, with the exception of a ‘joint life and survivor’ option where your spouse will receive payments. If your spouse predeceases you, your benefits will not pass on to your children. If you opt to take a lump sum and roll it into an IRA, it will become a part of your estate.
Lastly, it is important to consider the financial strength of the company you are leaving. If the company goes bankrupt, you could lose your entire pension. However, if the plan is PBGC insured, some of the benefits are protected but this amount is limited.
Choosing whether to take your pension benefits as a lump sum, or a monthly payment is an important decision that could greatly impact your retirement years. Review your options, and consult your financial planner or CPA before deciding what is right for you.