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Your Pension Lump-Sum Payment... Pros and Cons Thumbnail

Your Pension Lump-Sum Payment... Pros and Cons

Lump-Sum Payment Pros and Cons

A lump-sum distribution of your pension may be another option when you're ready to decide on a defined benefit payout. In this case, your employer will either make a cash payment or transfer the amount to an IRA. Your employer calculates the amount you receive based on:

  • what the plan would have paid you as an annuity over your projected life expectancy; and
  • the current interest rate, which determines what the plan would have earned on the lump sum if it had been paid out in increments over your lifetime.

The lump-sum amount will vary with the prevailing interest rates. If interest rates are high, you'll receive a smaller lump sum than you would if rates were low.

Taking a lump sum could be a good choice if your spouse is significantly younger or you want to decide how to invest the money you get. You also have the option of working with a trusted and experienced investment professional. You'll get control over your assets—which could be important if you're concerned that the plan could be underfunded or that your employer could be acquired. A change in the ownership of your employer could result in major changes to the plan and to the pension you might qualify for after the acquisition. If you choose to have your lump sum pension distribution rolled over into an IRA, you can continue to defer taxes until you withdraw money later on.

Here's a quick comparison of annuities and lump-sum withdrawals:

Fixed annuity
  • Regular income on a regular schedule for life
  • No responsibility for making investment decisions
  • Protection against termination of plan or sale of employer
  • Income may be vulnerable to inflation
  • Income dependent on financial health of annuity provider
Lump-sum withdrawal
  • Opportunity to make investment decisions
  • Ability to control assets
  • Continued tax deferral with rollover to IRA
  • Possibility of outpacing inflation
  • Protection against termination of plan or sale of employer
  • Responsibility for providing lifetime income
  • Taxes due immediately on cash-payouts and annual tax on investment earnings
  • Danger of spending assets too fast
  • Danger of significant investment losses

Consider your pension payout options carefully. Once you have made your choice, you usually cannot change your mind.

If you're on the fence about what choice to make, please contact 80/20 Financial Services today. We charge absolutely zero for a second opinion.

You Need A Plan

A goal of retiring - without a plan to get there - is simply a plan to never retire. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing, click here.

Thanks for reading!

Brian Coleman/Retirement Income & Investment Planner

80/20 Financial Services is an independent Registered Investment Advisory Firm. We help clients age 50 and over plan their retirement income and investment strategies. Contact us today for help with your retirement needs.