If you are retiring or leaving your current employer for whatever reason (laid off, quit, etc.) and you have a pension, you may have the option of either taking a lump sum payout or taking a monthly benefit (but not always – check if your pension allows for rollovers of lump sum amounts). Depending on your specific financial situation, it may make sense to go with either option. Let’s look at the important considerations regarding rolling over a pension lump sum to determine what would be best for your situation.
What to Consider
Where would I have more control over the money/investments?
For those who wouldn’t know the answer to this question, rolling a pension lump sum over to your own traditional IRA would typically give you more investment choices and flexibility (especially if you don’t just roll it over to a bank IRA certificate of deposit or a money market IRA). Plus, many pensions have been underfunded for years (not all, mind you) and would rather pay you out the lump sum than pay you out monthly benefits over time (i.e., annuity). If the pension can’t meet the payments for its plan members down the road (for whatever reason: poor investment decisions, too many people to pay out, etc.), you have no choice but to accept the decreased monthly benefit (if any payments are made at all). (For more, see: Save Money in Retirement With a More Efficient Plan.)
I have seen clients suffer in the past due to not having the option of rolling over a lump sum amount. Why would you want to roll the dice in that scenario? With the decline of pension benefits in recent years, it would typically be wiser to take the lump sum amount instead of the monthly benefit.
Which option would give me a better chance to deal with inflation, rising healthcare costs and other increasing expenses in retirement?
Ideally, a monthly pension payout would give you an option to increase your benefit over time to deal with increasing costs during retirement. However, most pensions only give you the fixed payout option. That can be a difficult pill to swallow, especially if you live 20+ years in retirement (purchasing power will be trimmed significantly). When you roll over your lump sum amount to a traditional IRA, you can formulate an investment planning strategy that will allow for you to give yourself a raise over time (with the appropriate combination of investments that makes the most sense for your specific financial situation). Obviously, if you’re not skilled enough in this area, please seek professional counsel with a financial advisor who works for an RIA firm and frequently helps craft retirement plans for clients.
Do you want to leave this money to someone special (spouse, children, relatives, institutions, etc.)?
If you want to leave the money to someone or an institution, you can accomplish this better in most cases by rolling over the lump sum. Pensions will often allow the spouse the option of continuing the full (or half of the benefit) after the spouse with the pension passes away, but this is not always the case. With a pension, you select the option before you start taking your monthly benefit so take the time to make the right decision. When you roll the pension lump sum to your own IRA, you can specify your beneficiaries and the exact amounts they would receive (and not worry whether the pension will have enough funds over time to continue paying that monthly benefit to your beneficiaries). Plus, you can change your beneficiaries and/or percentages for your own IRA at any time. Speaking with an experienced financial advisor (not a salesman) regarding your options in this scenario would be wise. (For related reading, see: 4 Mistakes to Avoid with Your Retirement Plan.)
Now that you’ve got an understanding of what you should do if or when you're presented with an annuity payout option, you can feel better prepared to make that decision if it comes time to consider it.
Find an experienced financial advisor who always operates in a fiduciary capacity, has experience in dealing with pension rollover options, works for an RIA firm, earns his/her money from fees (not commissions), believes in having an abundance of investment choices for clients and has the heart and demeanor of a teacher, not a salesman. If so, chances are you’ve found the right financial advisor to help you prepare and plan for your financial goals. (For related reading, see: How to Distinguish Advisors From Salespeople.)