So you’ve already made the decision to retire and now you’re faced with a very difficult choice regarding your company sponsored retirement plan. Should you take the traditional lifetime monthly pension payments from your employer, or opt out of them in favor of a one time lump sum distribution. As with many things in life both options have their pluses and minuses, and only after some careful consideration can an informed decision be made. We will discuss some of the pro’s and con’s of each option, and if taking your pension in a one time lump sum distribution is a wise decision for you.
Why take the monthly payment option.
Not every company offers the lump sum payout option for your pension. If this is the case then the decision has already been made for you. For other individuals who simply are not comfortable with market fluctuations, or don’t want the hassle of dealing with long term planning, monthly payments might be the better option for you and your family. This option is not subject to market risk as the lump sum option. However the monthly payments may be subject to inflation risk which we will discuss later.
Why take the lump sum option.
The largest potential benefit that comes with taking the lump sum option is that you will have greater control over your retirement assets, and how they get invested. If you take the monthly installment payments from your company these payments may not include any cost of living adjustments. This means that if you receive $2,000 a month from you pension plan in the first month after you retire in 10 years you will still be receiving $2,000. this provides a nice sense of security, but as we all know prices for the items we buy everyday do not remain flat over time. As inflation sets in and the price of everything gradually rises. According to the U.S department of labor the consumer price index (a measure of the prices of commonly purchased items) has risen roughly 3% annually for the past 20 years. Simply put this means that what you buy today for $1,000 will cost around $1,350 in 10 years. Over the same 20 year period the cost of healthcare has risen at a much faster rate of around 5.5% per year meaning that if you bought $1,000 worth of prescription drugs it will be about $1,700 10 years from now. It is important to consider if the monthly amount your company is offering you will be enough not only to cover your expenses today, but also 10, 20, or even 30 years down the road. You should make sure to ask if your plan includes cost of living adjustments.
By taking control of your retirement assets they can be invested as conservatively or aggressively as the individual see’s fit. Keep in mind that investments seeking higher rates of return generally involve a higher degree of risk of principal. Greater control of assets is one of the main reason that people choose a lump sum distribution. One lady I spoke to put it rather bluntly, she said “I’ve worked for the company for 37 years and I don’t want my monthly pay to be under their control in retirement like it was when I was working. I’m taking my money and running”.
A secondary reason that people might consider the lump sum option is that they are unsure as to how secure their pension actually is. Corporate pensions do not come with any explicit guarantees, and are based on the full faith and paying ability of each individual company administering that particular plan. Obviously it is very difficult to predict if and when your former employer will experience financial hardship in the future, but it is still a factor to consider. The Pension Benefit Guaranty Corporation (PBGC) is a government entity that collects insurance premiums from employers sponsoring insured plans. If your company is a PBGC participant and they end up defaulting on the plan you will not be left with nothing, but you most likely will not receive the total monthly payment that you were accustomed to.
Estate planning.
Company pension payments may stop as soon as you and/or your spouse pass away. If you elect to have your pension paid out in a lump sum you have the option to leave whatever assets are unused to the beneficiary of your choosing. If you choose the annuity payments from the company and something were to happen to you and your spouse a few years after your retirement all the money you have contributed in to the pension plan over the course of your career could end up staying with the company.
With all this being said the individual will have to take a long hard look at themselves to determine if having greater control over their retirement assets is something that is truly in their best interest. Unless you have won the lottery the lump sum distribution will most likely be by far the largest amount of money you have received at one time. When making the decision as to whether or not taking your pension as a lump sum is right for you the only real question you need to ask yourself is: How confident are you that you’ll make the right decisions to convert that lump sum into a sustainable stream of income that will last the rest of your life? If you’re the type who will be tempted to run out and buy a Porsche and two mink coats then the lump sum distribution might not be right for you. You will need to have discipline to build a plan around your needs.
To learn more about taking your pension as a lump sum, or any other topic please don’t hesitate to contact the Flagstone Retirement Consultants team toll free at 866-892-2080, or fell free to E-mail us at Info@flagstoneretirement.com
