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Pension Payments – Annuity or Lump-Sum?

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I’m often asked by folks approaching retirement whether to take their pension as a lump-sum payment or as an annuity (a stream of monthly payments).  Investment News recently published this excellent piece on this topic which is worth reading.

As with much in the realm of financial planning the answer is that “it depends.”  Everybody’s situation is different.  Here are some factors to consider in deciding whether to take your pension payments as an annuity or as a lump-sum.

Factors to consider 

Among the factors to consider in determining whether to take your pension payments as an annuity or as a lump-sum are: 

  • What other retirement assets do you have?  These might include:
    • IRA accounts
    • 401(k) or 403(b) accounts
    • Taxable investments such as stocks, bonds, mutual funds, or others
    • Cash and CDs
  • Will you be eligible for Social Security?
  • Will the monthly pension payments be fixed or will they include cost of living increases?
  • Are you comfortable managing a lump-sum yourself and/or do you have a trusted financial advisor to help you?
  • What are your expectations for future inflation? 
  • What is your current tax situation and what are your expectations for the future?

Factors that favor taking payments as an annuity 

An annuity might be the right option for you if:

  • You have sufficient other retirement resources and are seeking to diversify your sources of income during retirement.
  • You are uncomfortable with managing a large lump sum distribution.
  • You are not eligible for Social Security.
  • Your pension payments have potential cost of living increases built-in (typical for public sector plans but not for private pensions).

Factors that favor taking payments as a lump-sum 

A lump-sum distribution might be the right option for you if:

  • You are comfortable managing your own investments and/or work with a financial advisor with whom you are comfortable.
  • You have doubts about the future solvency of the organization offering the pension.  This pertains to both a public entity (can you say Detroit?) and to a for-profit company.  In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC.  If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.
  • You are eligible for Social Security payments. 

The factors listed above favoring either the annuity or lump-sum options are not meant to be complete lists, but rather are intended to stimulate your thinking if you are fortunate enough to have a pension plan and the plan offers both payment options.  A full listing for each option would be much longer and might vary based upon your unique situation.

Moreover the decision as to how to take your pension payments should be made in the overall context of your retirement and financial planning efforts.  How does each payment method fit?

Lastly those evaluating these options should be aware of predatory financial advisors seeking to convince retirees from major corporations and other large organizations to roll their retirement plan distributions over to IRA accounts with their firm.  While this issue has seen a lot of recent press in terms of 401(k) plans it is also an issue for those eligible for a lump-sum pension distribution. If you are working with a trusted financial advisor an IRA rollover can be a viable option, but in some cases rollovers have been directed to questionable investment options putting many retirement investors at risk.

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Comments

  1. This reminds me of that commercial- “Cash Now” with the catchy song.

    • Roger Wohlner says:

      Thanks for your comment Michelle. I feel that anyone who has gotten to the point of considering the firm behind that jingle has some really serious issues.

  2. My mom prefers to have an annuity pension payment. I think she loves the idea of getting money every month.

    • Roger Wohlner says:

      Kate thanks for the comment. Your mom’s choice is valid if that works best for her and makes her the most comfortable.

  3. baby boomer scum says:

    You baby boomers are the most selfish generation to ever exist. You destroyed your own children’s and grandchildren’s future with your short-sighted selfishness and immaturity. And then you expect them to pay for your retirement????

    Can you baby boomers just hurry up and drop dead, please?

    • Roger Wohlner says:

      Just love comments from highly intellectual folks like yourself, thank you. Always admire folks with a distinct opinion who comment anonymously.

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  1. […] decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision.  A key question to ask yourself is whether you are equipped to manage […]

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