If you’re a Verizon employee considering retirement, one of the biggest decisions you can make is between pension annuity and lump sum payout options. In fact, if retirement is on your mind, you’ve probably been asking yourself about these options. Which one will best suit your needs? Let’s explore the pros and cons of both.
Annuity Payout Pros
Let’s start with the pros and cons of the annuity payout option. The first pro is that it’s considered a guaranteed source of income. No matter what the markets are doing, you are guaranteed a specific amount of income each month from Verizon, for your lifetime. As long as you are living, you are entitled to that monthly benefit from Verizon.
Another pro is that there are several payout options to choose from. The most straightforward is a single life payout option, which guarantees the monthly payment for your lifetime. But what if you’d like your spouse, or another beneficiary, to continue receiving the benefit if they outlive you? There are several Joint and Survivor options you can choose from, which will ensure they’re taken care of after you’re gone. However, keep in mind that if you choose one of these options, your monthly payment will be decreased, to adjust for a longer guaranteed pay period.
Annuity Payout Cons
This leads us into the cons of annuity payout options. The reduced monthly payment for Joint and Survivor options is one of them. Additionally, the beneficiary options are somewhat limited. You can only leave your benefit to one individual, typically your spouse or partner.
What this means is, if you were to leave a surviving benefit to your spouse, they would receive those monthly payments for their lifetime if they outlive you, but the payments would end with them. If you want to ensure, for example, that your children are taken care of as well, you would have to make other arrangements, outside of the Verizon annuity payout, as they wouldn’t be able to collect anything once you and your spouse are both gone.
One of the biggest cons is that there is no cost-of-living adjustment for your payments. Even as inflation rises, the amount you receive will remain the same, so in, say, five- or ten-years’ time, the money won’t go nearly as far as it does at the beginning.
The final issue to consider with annuity payments is that this monthly benefit is tied to the financial health of the company sponsoring it—in this case, Verizon. As long as Verizon is in good shape financially and can afford to continue to pay out this benefit, you will continue to receive it. However, if for some reason Verizon’s financial status were to change for the worse, then your pension annuity benefit could be in jeopardy. The Pension Benefit Guaranty Corporation would step in to take over the payment of this benefit, but it is unlikely that your full annuity payout would be covered by them, and your monthly benefits would probably be
Lump Sum Payout Pros
If you decide to take the Lump Sum payout option instead of the annuity, you receive your payment all at once, placed into an account in your name. One major advantage of this is that, once it’s distributed to you, the lump sum is now an asset on your balance sheet. You own it, and it’s not tied to Verizon in any way. That means you have complete control over how the funds are managed, when you want to take distributions, how much you can get, and much more. The trajectory and stability of that money is no longer tied to a separate company over which you have no control.
Another pro is the ability for this asset to grow over time. Since you control how the money is managed, you can create a customized investment game plan based on your specific income needs throughout your retirement. That investment game plan can revolve around long-term, sustainable growth, so that this benefit and the income you take from it can keep pace with inflation and the growing cost of living over time.
You also get to decide when to take out distributions, and how much you want to take. Unlike the annuity option, you can choose to adjust your distribution amount on a yearly basis, or even month-to-month. This can come in handy in the long run, when planning out different income sources for tax planning purposes. Maybe there’s a year where you choose to recognize more income in order to take advantage of a low tax bracket year, or vice versa.
You can also decide how often you want the distributions sent to you. It doesn’t necessarily have to be monthly. You can choose to receive them once a year, twice a year, or indeed any way that works best for you. Keep in mind that Required Minimum Distributions do apply starting in the year you turn 72, but you still have total flexibility over when, during the course of that particular year, you want to take those distributions. And if you want to take more than the minimum required amount at any time, you can do that too.
Another pro is legacy planning. As we've established, with the lump sum option, you are rolling over your benefit into your own account, under your name and ownership. With that freedom comes the ability to customize the beneficiaries in any way you wish. You can list as many beneficiaries as you want, spanning multiple generations if you so choose, in order to include your spouse, your children, or anyone else you want to receive the money, such as your favorite charity. The lump sum benefit can leave a lasting impact for the important people in your life - if you plan accordingly.
Lump Sum Payout Cons
Unfortunately, there’s one major con when it comes to the lump sum payment as well, which stems from the same factor that the pros do: your ownership of the asset. You can manage the money in whatever way you wish, but that means you’re also responsible for managing it wisely—and even if you do, a sudden, unexpected turn in the market could impact your asset.
If an investment doesn’t turn out the way you hope it will, you might end up losing some or even all of your payout. Unlike with the annuity payout, your income is not guaranteed. Additionally, if your spending habits exceed the optimal withdrawal rate of the benefit, you could run the risk of outliving your money.
Of course, you can mitigate this risk with the help of a financial advisor. They can play a crucial role in establishing and managing your investment game plan to help you maintain healthy withdrawals from the benefit over your lifetime.
If you’re interested in finding out more about annuity vs. lump sum payouts, or need help deciding which option is right for you, reach out to us. One of the advisors at Hapanowicz & Associates can create a complimentary, customized retirement income plan for you that examines both payout options carefully to determine which one might be the best fit for you.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Investing involves risk including loss of principal. No strategy assures success or protects against loss.
Neither Hapanowicz & Associates, Hapanowicz & Associates Wealth Management nor LPL Financial are affiliated nor endorsed by Verizon Communications Inc., Verizon Wireless, or any other subsidiary of Verizon. Neither Hapanowicz & Associates, Hapanowicz & Associates Wealth Management nor LPL Financial are affiliated with any of the other entities referenced on this website. This should not be construed as an endorsement of a particular firm by any CWA-Local including 13000/13500 as well as any IBEW-Local.