Pension Decision #1 – Lump Sum or Monthly Payments?

Written by , April 24, 2014

Pension Decision 1 – Lump Sum or Monthly PaymentsIf you have a pension that you’ll be able to draw upon during retirement, then there’s a good chance that you’re in a better financial position with respect to retirement than many others. The more sources you have to draw upon for retirement income; not just pensions, but also Social Security benefits, as well as your IRA and 401(k) accounts; the better.

But many pensions provide their beneficiaries with a choice on how to receive their benefits: either to receive monthly payments for the rest of their lives, or to receive a single lump sum as soon as they retire.

Here’s some retirement advice if you’re faced with this choice, how do you decide what’s right for you?

  • Do You Have a Plan for a Lump Sum Distribution? The prospect of being able to take a large lump sum payment might sound great, but what’s the next step? In other words, if you were to receive a large amount of money all at once, what would you do with it? Remember that this pension exists in order to help you with funding your retirement.
    • Unless you have a plan for how you can take that large sum and make it work for you, or if you’re concerned that you may not be able to stop yourself from spending it all too quickly, then you may wish to take your pension as monthly payments.
  • How Financially Fit is Your Pension? Of course, the ability to feel comfortable and confident in choosing to receive monthly payments from your pension depends on how well funded your pension is. This means not just the solvency of the pension itself, but also whether there is a financial entity or government agency that guarantees it.
    • In light of some of the developments that have occurred over the past few years with respect to city and state pensions for some governments, as well as many private company pensions, your pension’s health is something to pay close attention to.
  • What Are Your Financial Needs? Your current financial situation and needs can play a big role in determining whether it’s more appropriate to take a lump sum or monthly payments from your pension. For example, if you have other retirement accounts with large balances, then you might not need the monthly income from your pension, so you may wish to take a lump sum payment and use those funds for a large purchase (such as to purchase a retirement home or pay down your existing mortgage.)
    • On the other hand, if your retirement nest egg is relatively small then you might want to choose a monthly payout so that you can be more comfortable that your living expenses are more likely to be covered each month.

    The decision of whether to take a pension payout as a lump sum or as a monthly income stream will depend on your individual situation. By taking an honest look at your needs and your other financial assets you’re more likely to make the right decision for you.

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    One Response to “Pension Decision #1 – Lump Sum or Monthly Payments?”

    1. […] you have employed a financial consultant and you feel that you can benefit a lot by investing in a lump sum instead of anticipating payments on a monthly basis. If the cash is properly invested, there’s a […]

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