Lump-sum or Pension payout: Which option is best?

Which option is best? Taking the lump-sum or the pension payout?

Choosing between the two can be a tough decision. It is not always black and white.

A pension can make up the biggest source of income for retirees. If you have a pension are nearing retirement, this is a video you don’t want to miss.

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Full Transcript:

Anthony: A pension can make up one of the biggest sources of income for retirees. If you have a pension and you’re getting ready to retire you’ll want to stay tuned.

Lump-Sum or Monthly Benefit?

Anthony: Okay Alex for those that are retirees out there today we want to talk about the pensions and the decisions that come with that. Most common is whether to take a lump sum and create the income yourself or to take the pension or the annuity or whatever you want to call it as a monthly income stream. So we’re going to talk about the pros and cons that come along with that.

Two Key Consideration When Considering a Lump Sum Option:

1. No or Low Cost of Living Adjustments

Anthony: First off when we talk about taking the lump sum option there are several things to consider. The first one is that there are no if there are no or only small cost of living adjustments that may be a factor towards the lump sum. Tell us more.

Alex: That’s right, so again to clarify if you have a pension option like a monthly pension option and that pension option either has “no cost of living adjustments” or “very small cost of living adjustments” this could be an argument or a reason to take the lump sum. Again, cost of living adjustments is something that would allow your monthly income to increase over time to keep up with the pace of inflation. So inflation is the cost of goods around us going up over time and that’s one of the sneaky risks in retirement. Everything around me is getting more expensive and if my income doesn’t keep up with those increased prices really what I have is a real loss of purchasing power. My dollars don’t go as far today as they did in the past because of inflation.

So again to recap if your pension options either have no cost of living adjustments or it’s very small it’s minute. The lump-sum is a good choice to look at.

Anthony: Yeah and too often we see people not pay attention to those cost of living adjustments they only look at. that initial income, but that doesn’t tell the whole story.

2. You Desire Greater Flexibility

Anthony: So the other advantage of a lump sum is if someone desires flexibility.

Alex: Exactly, so what this means is someone who desires the ability to increase their income, and it might seem counterintuitive, but also the ability to lower your income. There might be some years where you have an influx in income and it makes sense to be able to control how much income you’re getting. With a lump-sum, you can control that, you could lower your income for those high-income tax years. So this becomes especially important for retirees, one because taxes can become one of your biggest expenses in retirement, but two it has a ripple effect an impact on other things such as Medicare premiums, which no one likes to pay, no one likes to see that increase. That letter that they get that says “We’re going to be increasing your Medicare premiums” that’s not a fun pill to swallow. So with a lump sum you have more control and flexibility should you need to increase income or take a larger sum of money out or you can decrease the income.

Anthony: That flexibility is really important especially from a tax planning standpoint.

Two Key Consideration When Considering The Pension/Annuity Option:

1. The Pension Offers a Strong Cost of Living Adjustment or High Monthly Payout

Anthony: So now let’s talk about two key considerations to take the pension option or the annuity option. Number one is if that pension option involves a strong cost of living adjustment and or a high monthly payout.

Alex: The lump sum option doesn’t always make sense and we’ll often see this with teachers in California. That’s one that we see very often, I know Anthony you see that a lot. Their pension plans very often skew in the favor of taking the monthly pension option and that’s typical because there’s a decent or a pretty strong cost of living adjustment on there, but secondarily the monthly payout is just it’s strong. It’s a high payout, the rate of return that you would need to generate on a lump sum of money if you take that lump sum and invest it to take income it’s just too high. The math, the numbers, it makes sense to take the monthly income from the pension, but you have to analyze that, it’s not something you can just look at and make a decision. You have to get a spreadsheet out and start digging into the details.

Anthony: Yeah that comparison is really important.

2. You desire stability over optimization.

Anthony: The second thing is that if someone desires stability over you know the optimization of a lump sum.

Alex: This is something that with the first bullet point we talked about “digging into the numbers” this is less about the numbers, this is more about the soft side of things. People who desire stability, desire knowing this is my guaranteed monthly income. It might be more optimized to take the lump sum, I may not have as high of cost of living adjustments, but the peace of mind knowing that I’m just going to have that monthly income stream coming in. I don’t have to think about it and I don’t want to outsource to an advisor to help me create that income stream, that’s something to consider. That’s that can often be a reason why people will take the pension income option.

Anthony: Yeah and it’s not an easy decision. It’s not always black and white, there are other factors to consider. For example, if you’re married, you have to consider the survivorship issues, things like that. They do require that in-depth analysis because this type of decision it’s a once-in-a-lifetime decision. It’s something that you’re going to live with for the next 20, 30, 40, years. Getting it right, at least what’s most appropriate for you. Do you have other stable sources of income? What is your preference for risk? All these things need to be considered. Alex, you’ve written a great blog post explaining this in more detail. We’ll go ahead and post that in the show notes as well.

So if you are a retiree or if you’re getting ready to retire, you have a pension option, and you desire to have that type of analysis done, these are the types of things that we help people with through the financial planning process. If you’d like to talk to us more about it we’d love to hear from you go to our website, give us a call, we would love to talk.

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More Reading: Successful Investing Lessons from 2020

This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. See our website at for full disclosures.








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