Lump sum or traditional pension?
Many older workers with a pension are faced with a difficult decision: whether to take retirement benefits in monthly payments or a lump sum.
The decision is usually irrevocable, so weighing the pros and cons of each option is critical. Your choice should be based on these personal factors:
Marital status. If you’re married and choose to take a pension with a jointand-survivor payout, payments will continue for as long as one spouse is alive. This is a valuable benefit you shouldn’t overlook, financial planners say. Even if you don’t expect to live well into your 90s, your spouse might. Taking a traditional pension will guarantee that he or she won’t run out of money.
Your employer’s financial health.
Many workers opt for a lump sum because they’re afraid their employer will go down the tubes and take their pension with it. But you do have some protections. The Pension Benefit Guaranty Corp. guarantees your pension in the event your employer files for bankruptcy, but only up to a specific amount. In 2020, the maximum guarantee for a 62-year-old with a single-life annuity is $55,104 a year; $49,596 for a joint-andsurvivor annuity.
Before deciding, ask your employer to provide you with a report showing the funding level of its pension, says Thomas McCarthy, a certified financial planner in Marysville, Ohio. If the report shows that the company’s pension obligations are nearly funded 100%, you should feel comfortable choosing that option if it’s right for you, he says.
Other sources of income. Not everyone needs a guaranteed stream of income. Barbara Ristow, a CFP in Fairfax, Virginia, says she recently advised a client whose wife was several years younger, still working and eligible for her own pension. Because the couple could count on her income, they decided to take the lump sum and invest it, allowing the money to continue to grow until they need it.
Your tolerance for risk. If you roll your lump sum into an IRA or your former employer’s 401(k), you can defer taxes until you start taking withdrawals. Once you’ve rolled over the funds, you can invest the money and possibly earn higher returns than you’d get from a pension. Plus, you can leave any money you don’t spend to your heirs — which isn’t an option with a traditional pension.
With the pension, the investment risk “is borne by the employer,” McCarthy says. However, taking the monthly payments now, when interest rates are super low, will mean lower payouts for the rest of your life. At the same time, investing your lump sum to provide reliable, safe income is challenging because low rates have kneecapped returns from bonds and other low-risk investments. Over the long term, stocks have provided higher returns, but they also expose you to more risk of loss in a downturn.