Lump Sum or Monthly Annuity Payments? How to Make the Best Choice for You
This article appeared in the March 2019 edition of Nevillewood Living
pension at work puts you in rarefied air.
According to CNBC, less than 13% of Americans are fortunate enough to
have a pension from their employer, down from 38% 25 years ago. The percentage of private sector workers with
a defined benefit pension is now 4%, down from 60% in the early 1980’s. You can see the trend. The pension was a benefit once afforded to
most American workers. The
responsibility of preparing for income in retirement continues to shift from
employer risk bearing plans to other plans, such as 401(K)’s, where the
employee bears the risk and for a variety of reasons that shift is likely to
If you are
fortunate to have a defined benefit plan, how you choose to receive your
pension can be a big decision. Why, once
you make a decision you can’t change your mind.
Your choice will affect your retirement income for the rest of your
companies require you receive your pension in the form of a monthly payment or
“annuity” for your lifetime. In some cases,
options that pensions offer will also include
benefits for a surviving spouse after the worker passes away. Making the best
choice for your own personal situation requires taking a close look at the
exact provisions of your own pension plan.
you are given the option of taking your pension in the form of a “Lump Sum”
rather than the annuity. In some cases,
you can take a partial lump sum and a partial annuity. Companies managing
pension plans take on considerable risk since they must pay you your monthly
check for your lifetime. Pension plans
must invest wisely so that the money they set aside to cover future pension
obligations would grow enough and be available to pay those future
payments. Otherwise, companies would
have to come up with additional cash to make those annuity payments. As a result of that risk, companies began to
seek ways to mitigate the risk.
So, how do
you determine which is best for you?
statistics offer that most people like the lump sum option. They have access to money to invest or spend
as they desire. In some cases, you may
be able to achieve similar income that the annuity provided, if properly
invested, and retain control of the principal.
Before electing the lump sum, consider the risks. Having access to the money makes it easy to
spend it quickly and if the money is not invested well, or the markets don’t
perform well, your money may run out.
from your pension can provide lifetime income and you have no principal risk
since you don’t have the responsibility for investing the money. However, if you have a large pension, a
portion of your annuity payments may be guaranteed by the financial stability
of your employer. Since most monthly
annuities are not inflation sensitive, your purchasing power is likely to erode
over time as the cost of goods and services rise and your monthly annuity
You must calculate the equivalent rates of return, consider the risks and make a decision. You owe it to yourself to make sure your pension works hard for you. By knowing your preferences about whether you want the responsibility for investing your retirement money or would rather leave it in the hands of the pension plan, you’ll be able to make a choice you can live with.
The opinions voiced in
this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. All performance
referenced is historical and is no guarantee of future results. All indices are
unmanaged and may not be invested into directly.