Wondering whether you’ll have enough money in retirement is a common worry in your working years. Perhaps you’re planning on traveling the world, or maybe you’re looking forward to spending more time with your family close to home. Whatever your dreams for the golden years involve, you want to know you’ll be able to meet your income needs. Understanding whether you should take a lump sum vs. pension payment from your employer is a key piece in the retirement puzzle.
In this article, we’ll break down the difference between a lump sum vs. pension payment to help you plan for your retirement with confidence.
Lump Sum Vs. Pension, Explained
Pensions have become less common in America over the past few decades. Today, 40% of Americans rely solely on Social Security income in retirement, while 25% of Americans have no retirement savings at all. If your employer offers a pension plan, it’s important to know how to use this valuable tool to your advantage.
What is a pension payment?
A pension payment is a monthly sum of money you receive from your employer’s pension plan after you retire. The sum is based on an actuarial calculation that considers your salary, number of years worked, and several other factors.
What is a lump sum payment?
A lump sum payment is a different way of receiving a pension benefit. When you take a lump sum payment, you receive the value of the above mentioned payments in one payment upfront, instead of over time.
For example, instead of receiving a monthly pension payment of $1,200 from your employer for the rest of your life, the company may offer you a one-time payment of $205,000. You can choose to put the funds into an individual retirement account or receive the lump sum outright.
How To Choose Between A Lump Sum Vs. Pension
You must consider multiple factors to help you choose the right pension benefit option for your family. You need to ask questions like “how long will I live?”, “will anyone else in my family need to rely on this income?”, “do I have other assets to rely on?”, and “will I need more income than what the pension offers?”
If you’ve worked at a company for 25 years and you’re eligible to receive $2,500 per month for the rest of your life as part of a single annuity payment option, you may be tempted to go this route. However, if you pass away unexpectedly, the payment will stop, and your spouse or other heirs will not receive any benefit.
A better option for married couples in situations where both spouses rely on pension income may be to opt for a survivor benefit. Instead of receiving a benefit of $2,500 per month as in the previous example, you may opt to receive a reduced amount of $2,000 per month to ensure ongoing benefits in the event of your premature death. Pension plans often provide options of 100%, 75%, 50%, or 25% survivor benefits. You typically need to make this choice when the benefit begins, and it cannot be changed afterward. Although the monthly payment amount you’ll receive is less than the single annuity payment offers, your spouse would continue to receive a benefit in the event of your death.
| Pro Tip: You should strongly consider a pension annuity payment if you’re worried about living a long time and running out of money, and if giving money to your heirs is not a major financial objective for you. |
In contrast, a lump sum pension payment may be your best bet if you want access to your funds in the short term, you’d like to pass wealth down to your heirs, you have medical conditions that may shorten your life expectancy, your spouse has income or assets you can rely on, and you have the ability and willingness to bear the investment risk of the lump sum you receive.
One way to determine if a lump sum payment is better than an annuity payment is to run a present value calculation using:
- assumptions on the return you’d receive if you invested your pension
- the monthly payment
- your life expectancy
Remember, if you receive a lump sum payment, the investment risk will be on your shoulders. If you invest the money and lose it, there will be no additional payment. Alternatively, If you select the annuity option, your company’s pension plan bears the investment risk.
If you don’t need the money, you could take the lump sum payment, invest it in a more aggressive manner for your children, and transfer a greater amount of value to your heirs.
Your personal financial situation and goals can help you determine whether or not to take a lump sum pension payment.
Trusted Advice For Your Retirement
At Curio Wealth, we understand that every family’s financial circumstances are unique. that’s why we begin every new client relationship by listening to your needs, so we can craft a financial plan tailored to your objectives.
we’ll help you understand your options when it comes to your pension and determine the best approach for you, whether that’s a lump sum vs. monthly pension payment or the other way around. If you’re looking for comprehensive financial advice from a team that believes the client is always the most important person in the room, schedule a call with us today.
