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lancelotarnold

Pension Payments and Lump Sums

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Pension Payments and Lump Sums

Pension owners often hit a crossroads when they retire. Somewhere between ages 55 and 65, they’ll have to decide whether they want a lump sum payout, a series of payments or a combination of the two. Most companies default to a series of pension payments, requiring the employee to opt out of the plan before retirement if they want to receive a lump sum. Those who elect a lump sum may receive a check for the full amount or roll the total into an eligible tax-free or tax-deferred plan, such as an IRA.

Pros and Cons of lump sum pension annuity payouts
Pros
  • Access money for large purchases
  • Potential for putting cash toward high-yield investments
  • Prevent payments from losing value because of inflation
Cons
  • Money may not last long if spent all at once
  • Financial illiteracy may lead to poor investment of funds and loss of capital over time
Pros and Cons of pension annuity payments
Pros
  • Choosing an annuity provides security but less flexibility
  • Guaranteed income for life
  • Taxes spread out over time
Cons
  • Equal monthly payments may not account for an increased cost of living
  • Much of your pension is reliant on the financial health of your former employer’s pension fund
Pros of combination of lump sum and payments
  • Balance immediate and future expenses
  • Access a large portion of pension for medical bills and other needs
  • Reliable income over time

By law, a pension plan must provide a lifetime annuity option that pays benefits until you die or until a surviving beneficiary passes away. Your plan may offer a lump sum option in lieu of, or in addition to, a life annuity.

Some questions to consider while deciding how to accept the pension include:
  • How long will my spouse live? A lump sum may not last long enough if the pension recipient or their spouse has a high life expectancy.
  • How much can I afford to lose? Those without other wealth may benefit the most from payments rather than lump sum.
  • Can I skillfully invest the money? If you or your spouse is a savvy investor, taking a lump sum and investing it wisely could result in more accumulated wealth in the long run.

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