Lump-Sum vs. Monthly PensionSubmitted by ADS Financial LLC | Andy Schmitmeyer LPL Financial on February 20th, 2018
Weigh the tradeoffs before you make your decision.
Lifelong income or one large payment? Companies that sponsor traditional pension plans are starting to offer their workers this retirement choice. It’s not an easy choice, and it’s usually irreversible.
The case for the lump sum. All that money is yours now, ready to be used or invested as you wish. Your heirs may freely receive the money. However, your long-term challenge is to invest the lump sum, so that your return equals or surpasses your pension payment. That will take some estimation and calculation.1
The case for pension income. A predictable monthly income you can never outlive is outstanding. In contrast, you may run through a lump sum before you die, and receiving a lump sum may greatly increase the income taxes you owe. Taking a lump sum may also put your spouse at risk; if you die first, the lump sum (invested or not) may not provide the equivalent of survivor pension payments. Excessive withdrawals and a bad investment climate could quickly reduce the payout amount.
Why are corporations giving workers this choice? It really has to do with the bottom line. Lump-sum offers may prompt earlier retirements. Lump-sum payouts help companies lessen their pension liabilities. Accounting gains occur as fewer pension dollars are paid out each month, enhancing corporate income. In 2015, an IRS ruling stipulated that employers can only present current employees with a lump-sum payout option, not retirees.2
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1 chicagotribune.com/business/success/kiplinger/tca-pension-lump-sum-or-lifetime-payments-20161031-story.html [10/31/16]
2 forbes.com/sites/ashleaebeling/2015/07/14/treasury-curtails-lump-sum-payouts/ [7/14/15]