If you are fortunate enough to have a defined benefits pension plan at work, you may have a very important upcoming decision to make. The task of deciding between a lifetime monthly payment or a 7 figure one-time payment can be daunting, To compound the complexities, there are various different annuity options factoring in spousal payments and fixed term guaranteed payments.
Before stressing over the details, the first step is to understand the advantages and disadvantages of each option. The table below objectively compares the two:
|Annuity payments||Lump-sum payments|
|Your monthly income is fixed, you have no investment decisions, and your tax planning is straightforward||You’ll face tax issues in deciding how to take the lump sum, and you’ll have to make investment and estate planning decisions|
|You generally can’t transfer your money to another investment or postpone or accelerate payments if your health or financial situation changes||You control how your money is invested and how fast you spend it. You can roll the money over to a tax-deferred retirement account and have access to the money if needed for an emergency or an investment opportunity.|
|Most annuities pay a fixed monthly amount. At an inflation rate of 3.5% a year, a fixed income annuity would lose half of its purchasing power in 20 years||Your investments may earn higher returns than an annuity would offer and help you better keep pace with inflation|
|Your benefits don’t depend on your investment results, so declining interest rates or falling stock prices won’t reduce your income||If your investment perform poorly, you could end up with less money than if you’d taken a fixed monthly payment|
|You can’t outlive your money (although after inflation it may not meet all your needs)||You may outlive your money if you live long enough or you don’t make good investment or spending decisions|
|You must pay income taxes on your monthly distribution||If you roll over your lump sum to another tax-deferred plan (IRA), you’ll generally be taxed only as you withdraw the money. But, if you don’t roll over the lump sum, it’s taxable as income in the year you receive it.|
|Once you (and your beneficiary, if you choose a survivor option) die, all benefits cease and there is nothing for your heirs||The unspent portion of your lump sum can be left to your heirs when you die|
After understanding the basic concepts, the best way to look at the “Million Dollar Question” is to view the pension in terms of your overall portfolio.
Each of these questions will allow you to lean towards the best retirement choice for you. In summary, the age old wisdom of, “If you don’t know, ask!” perfectly applies to retirement questions. A financial planner can help sort through the noise and help you find the optimal solution.
Other articles filed under Retirement
February 7, 2018
Yesterday evening, Rockbridge's own Ethan Gilbert, CFA was featured on our local Spectrum news network. Check out the interview below where Ethan discusses the recent market shifts, how these swings can affect your retirement accounts, and how to protect your...
January 24, 2018
This past weekend, the New England Patriots did it again. Down 10 in the 4th, star quarterback Tom Brady orchestrated two scoring drives to pull off another comeback victory. In two weekends, the Pats will try to win their 3rd...
January 23, 2018
Stock Markets Returns from various stock market indices over several periods ending December 31, 2017 are shown below. The past quarter was good for stocks – REITs lagged. Over the past year, returns from stock indices, especially emerging markets, were...
January 19, 2018
Happy New Year! Now that 2017 is a wrap, one of the best presents you can bestow on yourself and your loved ones is the gift of proper preparation for the rest of the year. Want to get a jump-start...
January 16, 2018
As you are likely aware, Congress has recently passed significant changes to the tax law. These changes are effective beginning in tax year 2018, with many of the changes for individuals set to sunset after 2025. The summary below is...