Dear Kim,
I’m retiring next year, and I’m lucky enough to have a pension through my employer. They’re giving me the choice between a monthly pension payment or a lump sum payout. How do I even begin to figure out which one is right for me?
Sincerely,
Puzzled Pensioner
Dear Pensioner,
You would want to consider a couple of things. First, do you want the guarantee of a monthly payment for the rest of your life? Or, would you be more comfortable managing the funds yourself and having them in your possession in case the company fails to meet it’s obligation to you? Do you have the discipline to not spend the funds too early?
Frequently, it comes down to control. When the bank I used to work for offered me a lump sum payout after I left their employ, I didn’t hesitate to take it. I felt sure (since this is what I do for a living) that I could manage the funds better than they would. That may have been arrogance on my part, but there it is. I still had 20 years left before I wanted to retire, and they would have likely invested the funds differently than I have.
Another consideration, a pension stops at your death, or the death of your spouse. Lump sum money can be passed down to your heirs.
Make sure if you choose the lump sum option to roll the funds into an IRA. Otherwise, it will be taxed in the year you receive it. Please do not make that mistake.
These are just some of the considerations to think about. Sitting down with a financial planner may be a good idea to make sure you consider all the pertinent points.
Good luck!
Kim
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