Monthly payout or lump sum? Ask a pro
Dear Liz: I need advice on choosing between a lump sum retirement benefit and a monthly payout till death (with a cost of living adjustment). The monthly payout option also includes health insurance benefits but the lump sum option does not.
Answer: It’s hard to imagine a better option than a guaranteed, inflation-adjusted stream of income for life — particularly if that option includes retiree health insurance benefits, which are increasingly rare.
If you take the lump sum, you’ll be responsible for investing the money with no guarantees that you’ll get as much as if you’d picked the payment option. A bad market or bad investments could dramatically reduce your nest egg, as could fraud or improvident spending.
Even if you’re a good investor now, there’s no guarantee you’ll remain so. Our financial decisionmaking abilities tend to decline with age, although our confidence in those abilities often remains high — a truly scary combination.
The devil’s always in the details, though, so take the paperwork describing these options to a fee-only, fiduciary planner so you can get customized advice based on your situation.
You can get referrals to fiduciary planners from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the Garrett Planning Network and the XY Planning Network. The Garrett network represents advisors willing to charge by the hour; XY Planning Network advisors offer the option of paying a retainer fee.
Be absolutely sure you’re dealing with a fiduciary financial planner — one who agrees, in writing, to put your best interests first.
Most advisors are held to a lower “suitability” standard that allows them to recommend investments and strategies that pay them more, rather than those that may be the best fit for you. An advisor held to this lower standard may urge you to take the lump sum not because it’s in your best interest but because they can earn commissions by selling you various investments.
Getting a small estate transferred
Dear Liz: My brother passed away three years ago leaving no will. All of his bills have been paid. I am unable to transfer his stocks and retirement account to my name. I have repeatedly checked the unclaimed properties list to no avail. No probate was required because the estate was too small. Will you please assist me with the steps I need to file to make this transaction occur?
Answer: Each state has its own laws for small estates and how to transfer assets, said Jennifer Sawday, an estate planning attorney in Long Beach.
In California, for example, a small estate is one with $166,250 or less in assets. If your brother’s estate was under this amount, you can complete a form that’s commonly referred to as a small estate affidavit and present it to the financial institutions or a stock transfer agent to start the transfer process. You can search online for a sample form or ask an attorney for help.
The windfall elimination rule
Dear Liz: I just read your answer regarding the windfall elimination provision question. I receive a pension after having retired from law enforcement. I was fortunate to be able to retire at 46. Then I landed a great job with excellent pay. I expect to pay into Social Security for a total of 17 years and I’ve been contributing the maximum for the last six. How will this affect my benefits? Will I still be penalized?
Answer: The only way the windfall elimination provision wouldn’t affect you is if you paid into Social Security for 30 years or more. If you pay Social Security taxes for 20 years or less, you’ll face the full impact of this provision, which affects those who get pensions from jobs that didn’t pay into Social Security. Starting at year 21, the effect lessens until it disappears at year 30.
You can learn more about what to expect on Social Security’s site. Some of the paid Social Security claiming strategy sites, including Maximize My Social Security and Social Security Solutions, can incorporate the windfall elimination provision into their calculations if you want to model how different retirement dates might affect your benefits.