Retirement is an exciting time: full of choices to make and plans for the future. If you’re entitled to a pension, you’re fortunate. You also have more financial decisions to navigate. It’s time to decide if you should take your pension as a monthly payment, as a lump sum rollover, to elect survivor benefits and more. These are irrevocable decisions, so it’s important to make the right one for you and your loved ones. While everyone’s retirement circumstances and objectives are unique, there are some common considerations that can help you to evaluate what’s the best option for you.
How to Evaluate Your Options
Most employers don’t provide side-by-side comparisons of the choices available to you. Even if they do, the options are based upon today’s figures without any reference to what your decision may mean in the long term. Here’s a summary of the key questions you need to ask yourself as you consider the benefits of electing monthly pension payments versus choosing an IRA rollover: (For more, see: A Primer on Defined-Benefit Pension Plans.)
- Do you have all the figures you need to make this important decision and do you understand their relevance?
- Are you confident that you understand all the advantages and disadvantages of each choice?
- Is the lump sum value equal to the anticipated monthly payments over your estimated life expectancy?
- What’s your break-even point—i.e., at what point in the future would it be more advantageous to accept ongoing regular payments over a lump sum payout?
- “What happens if …?” Do you have the ability to absorb changes in your retirement plan if your pension is no longer adequate?
- Is your pension well-funded and protected, giving you an income source you can trust?
Advantages of Regular Monthly Pension Payments
Receive regular payments: The most common reason for choosing monthly pension checks is to ensure a steady income—both during your lifetime and, if you’re married, for your spouse later on if you elect a survivor benefit. (For more, see: Are Pension Buyout Offers a Good Deal?)
Guarantee income for a long, healthy life: If members of your family typically live into their 90s or beyond, regular payments may be more advantageous for you. A financial advisor can help you calculate your break-even point - i.e., the age at which your regular pension payment schedule will exceed the amount of any lump-sum payout.
Maintain health insurance coverage: Pension payments sometimes come with associated health insurance. This coverage could cease if you elect a lump sum payment, yielding extra expenses in your retirement budget.
Avoid anxiety: If you’re not inclined to work with an advisor managing money can become an issue for older investors due to ill health, especially if there’s a family history of degenerative conditions like Alzheimer’s or Parkinson’s Disease. Regular pension payments remove the worry of managing your assets yourself.
Consider your partner’s perspective: Furthermore, don’t just consider your own health and investment experience when deciding your pension payout options. You also need to consider you spouse’s needs and wishes. If you don’t have a trusted advisor with whom you both have a comfortable relationship, then regular pension payments might be a wise choice.
Resist temptations: For some people, a large savings or investment balance becomes a temptation. If you’re concerned that you may blow a lump sum on a new car, extravagant vacation or other luxuries, regular payments may be advisable.
Advantages of a Lump Sum IRA Rollover
Limit the impact of inflation: Pensions are rarely directly linked to inflation, and many don’t adjust at all. Over time, this can reduce the real value of a regular monthly check. If your pension payments fail to keep up, you’ll need to account for any shortfall as your expenses increase over time. (For more, see: How Much Should Retirees Withdraw from Accounts?)
Define your unique income and investment needs: A lump-sum payout allows you more control over your assets, how they’re invested and how and when you utilize them. You can take larger distribution in years when you need to and smaller distributions in years when you don’t. Furthermore, any remaining balance is yours to keep and pass on to your family and others you care about.
Minimize taxes: You can rollover a lump-sum pension payout into your IRA. This allows the funds to continue tax-deferred growth. Required distributions are usually lower than pension payments. This means you can reduce the amount of your taxable income in years when you need less income. Being in control of when and how you take distributions and pay tax can also be a big benefit when you start receiving Social Security and want to shelter taxable income.
Avoid the long-term impact of low interest rates: With many pension payment calculations based on prevailing interest rates, opting for a monthly check in a low interest environment like today’s sometimes means locking in that low rate of return for the rest of your life.
Create a legacy: Any remainder from a lump-sum payment can become a legacy for your loved ones. In contrast, pension payments stop once you (and, if you’re married, your spouse) die.
Safeguard the amount you’ve earned: Finally, if your employer experiences financial difficulties, you may not receive all your money if you opt for regular checks. This depends upon how well-funded your pension is and what guarantees it provides. The government’s Pension Benefit Guaranty Corporation guarantees some, but not all, pension fund assets. (For more, see: An Overview of the Pension Benefit Guarantee Corporation.)
The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This article is for informational purposes only. The views expressed are those of SageVest Wealth Management and should not be construed as investment advice. All expressions of opinions are subject to change and past performance is no guarantee of future results. SageVest Wealth Management does not render legal, tax, or accounting services. Accordingly, you, your attorneys and your accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein.
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