Most people aren’t lucky enough to get a pension. But if you’re one of the few Americans who is offered one through a private employer or the federal government, you have a decision to make. Should you take your pension in monthly installments—or withdraw it in a lump sum? Here are a few factors that could affect your decision.
The health of the company
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Not everyone gets a choice between a lump sum and a pension. Lump sums are often offered on the cusp of a major change in a company’s retirement plan—like eliminating a pension system entirely.
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How much your lump sum is worth
If your company offers you a lump sum, do some calculations. How much is that lump sum, exactly, compared with the amount your regular monthly payments would be worth over your projected life expectancy—usually thirty to forty years—as well as any interest it could generate if it were reinvested? Often, the lump sum is worth less than the monthly payment overall.
The fine print
Tax rates can vary depending on whether you have a lump sum or a regular pension. In addition, some pensions are payable to your spouse after your death—and some aren’t. With a lump sum, you’re likely to have more control. Check the fine print to find out what the terms are on your pension and whether they could affect your decision.
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Your health
People with serious health issues, who are not projected to live thirty to forty years after retirement, may be better served in taking the lump sum. Some pension payments are not transferable to a spouse after the original recipient dies, and you will get less money over the short term with a monthly payment plan than you would if you take the lump sum.
Your tolerance for risk
With a pension, a financial professional manages your investments. And the payments are generally stable and not strongly affected by the state of the stock market. With a lump sum, you’re in charge of how it’s used and invested. You could stand to earn much more over the long term if you’re comfortable managing your own investments. However, you’re also more vulnerable to market fluctuations. This is why a pension is often a better choice for those who have more of a conservative investment strategy—it provides more stability and safety.
Another thing that makes pensions more secure than lump sum payments is the Pension Benefit Guaranty Corporation, a government organization that ensures private-sector pensions. If your pension plan fails, the government will pay benefits to you up to a certain point. However, most lump sum payments lose their coverage. Private retirements are backed by State Guaranty Funds instead—and their protections are usually much more limited.
Your ability to manage spending
If you take the lump sum, you’ll have to portion it out to last, basically, the rest of your life. That’s a tall order even for the most careful budgeter. A pension is doled out over time, making it easier for you to manage your monthly spending. In addition, the payment usually continues for the rest of your life—one reason the pension could result in more money over the long term than a lump sum—so you don’t run the risk of running out.
Not everyone gets a choice between a lump sum and a pension. Lump sums are often offered on the cusp of a major change in a company’s retirement plan—like eliminating a pension system entirely. It’s in your best interest to talk to a financial advisor in addition to considering the above questions—in order to ensure you’re making the right decision for your retirement.
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