Lump-Sum or Monthly Pension: Which Is Right For You?
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- เผยแพร่เมื่อ 19 มิ.ย. 2024
- Increasingly, employees with pensions have a difficult choice: take their pension as a lump sum or monthly pension payments.
Here's a pension calculator I mention in the video:
www.bankrate.com/retirement/c...
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Am a retired RN, one of the lucky ones who has a pension. Have been receiving it over the last 8 years,since age 55. Claimed Social Security benefits at 62 at the end of 2020. The one-two punch of the pension and Social Security benefits have been a game changer for me. Family emergencies cropped up and it was difficult to save. My former employer was a county hospital and part of the state retirement system.It also offered
a 457 B deferred retirement option plan called DROP,particularly for those retiring under age 55. This allowed one to legally retire,continue to earn wages from their employer, and secure their pension upon complete separation from their employer . The monthly pension amount was determined by pension formula along with the credited service documented upon the date of entering the DROP. Participants in the program either had 30 yrs credited svc ,regardless of age,or were 62 yrs of age with at least 6 years credited svc. Am not wealthy
but healthy financially with my pension,Social Security benefits,and DROP money.
I'm an RN too and have a pension, I can take it as a lump sum or a monthly annuity. Trying to decide which one to do. Were you offered the lump sum ? Just curious
I am a RN as well, currently only 40 yrs old. I will have 2 pensions and 401k and ROTH. I would like to retire by 55, but if I collect pension at 55 it will be worth only about half the amount compared to 65. I still have a lot of time to think about it. I might collect a lump sum on one of the pension at 55 and put in S&P and survive off that until 62. Then collect SS at 62. Then collect the other pension at 65. Roth will not be touched and pass on to my kids tax free. Life is worth much more than money which is why I plan to retire at 55. 😅
I'm about to take the lump sum in a couple of months. I only have to make 4.5% per year off it to equal the annuity option, plus I still have the principal. Another plus for the lump sum is that it's inheritable even after both people pass away whereas the annuity is not. If I took the annuity I would only get 85% of it to also have my spouse get the money if I die first. The lump sum has no such discount to cover my spouse.
My wife and I will both have State Pensions when we retire.
Our state Pension allows a Lump sum withdraw but we will not go that route.
What we plan to do is to take the full monthly payment for each of us and increase our life insurances to cover any difference in the event that one of us dies, which will stop the pension payment upon our death.
The key is not having any debt when we retire.
Good for you both,that’s mine as well.
TL, you are right about debt. It is THE four letter word when retiring. Eliminate it and life will be a lot easier.
Only one in five spent the lump-sum? I don't know who Met Life polled, but nearly all people will spend the money in a few years if given a lump-sum. My mother retired from the phone company in 1991 when they offered an early retired bonus (added four years of service and four years of age), Several people at the office where my mother worked accepted the early retirement offer. The employer offered a monthly payment or lump-sum. Only my mother took the monthly payment in her office. She met her coworkers a few years later and every one of them had none of their lump-sum left and had to work at another job.
Lump sum opens you up to creditors and lawsuits if you file for bankruptcy or someone suing you.
A monthly guarantee is nice but if you are offered a lump sum, take it, especially if you work for a private company. At the end of my benefit calculation on my company's HR page, it states that the plan can change or cease at any time. I'm sure that is just a legal CYA but for me, take the $ and run. Also, as it gets deposited in your traditional IRA, start paying taxes now on it & move it to a ROTH (but don't transfer too much to throw you in the next highest tax bracket). With more $ in your ROTH, start looking at closed ended funds that pay a monthly divvy. If done right, you can generate more money than the monthly annuity would pay and no taxes!
I'm 52, and I just started getting my pension last year. I also work , I choose the monthly option.
thank u for the info
I appreciate you are primaliry talking to aU.S.audience but the key to a comfortable retirement is guaranteed income,and not a lump sum
My first job out of college, worked there 1982-93, vested in the pension plan and grateful a lump sum option did NOT exist. Had no idea as an unemployed 33yr old the value of that pension. Started collecting monthly payments at age 58. Now 61 and knowing that company is obligated to pay me for the rest of my life...
So basically you were locked 🔒 in you just had to wait until a certain age to receive your payouts. 💯🤘🏾👍🏾🙏🏾 I also have a pension were I work and I’m locked 🔒 in.
@@user-wy8zl9wp7u the company is also locked into paying us for life
Great analysis and insight! I happen to have a pension with my employer, but had never considered the lumpsum option. Thanks for this video, I have some personal analysis and thinking to do!
I have 46years of LGPS coming next year, so thanks for your videos, I have a lot to learn
I took one lump sum this year and collecting another pension. Exwife got half of the pension which cut it in half of what I should have gotten. The lump sum was taken and started January 2024. It is making money right now and will not touch it for a while
Lump sum option is TERRIBLE right now thanks to our self induced inflation
It certainly can be if you don't reinvest it into a portfolio that you expect to beat inflation over the long term. The problem is that the companies that manage these pensions are faced with the same investing conundrum. This is assuming there's a cost-of-living adjustment on the pension.
I guess to make it easier to understand is with the lump sum you will have to have restraint on spending. But with the monthly payments it’s balanced for you and you can’t go overboard. Please correct me if I’m wrong. 🙏🏾
I'm going to need to ask these questions when I start this new job that offers a pension.
Had the option to do a lump sum in addition to a pension, but would give up 6% on pension. Was told it would take decades to make up the money by taking the higher monthly.
It is a great addition to the additional IRA I had contributed to. Helped me decide to take SS right away- too much money not going into investments to wait until FRA.
Amazing. I just had this conversation with my financial advisor today and this video pops up on my TH-cam recommendations page. Fabulous explanation here that really helps me feel better about this decision. Thanks so much.
Awesome, Brian! Sounds like you've done your due-diligence! So glad you enjoyed the video. Congrats on your retirement! 🙌
Nice video. Very simple to understand the difference between lump sum and monthly pension.
Thank you for the kind words! I'm happy that you found it helpful!
We had to make this decision about seven years ago. Not having issues related to longevity (early death), we ran the numbers. We'd have to earn 7+% on the lump sum to match the annual pension payments. We took the monthly pension. IIRC we need to live to around age 82 to breakeven.
I retired 11/30/2018 and took a LS instead of a monthly payment, put the LS money in my 401k so far its grown about 225k, had I taken the monthly pension payment I would have only collected 110k.
Awesome, Brad! The lump sum can work out pretty well if you do what you did. Thanks for the comment! 🙏
Many pensions also don’t offer an annual cost of living adjustment (COLA) so you lose purchasing power to inflation over time.
The 20% of retirees who lose everything, have lost all their purchasing power in six years.
Good call, Wilson. In the Monte Carlo analysis, I accounted for no COLA. Most pensions that I've seen are like this.
@@PranaWealth Most pensions nowadays are public sector and they almost all have cost of living increases built into them(with caps).
You are right about the COLA in my case. My companies pension doesn't offer one, but they do offer a lump sum amount and give you some time to decide. In about 8 yrs when it's time for me to decide, I figure I'd just take that lump sum figure and compare it to triple AAA rated insurance company annuities, and see which one I would get the better deal from. I think this is the best way for me to go, because if I decided to just manage the lump sum myself, I'm afraid that I may wake up feeling a little bit too lucky one day, and next thing you know a couple days later I again wake up but this time in Vegas feeling very unlucky with a massive hangover, and also dead broke. So I plan on sticking with the guaranteed life time payments, and hopefully I'll have enough surplus to invest a little of it each month to fight off inflation down the road. Then if I'm lucky and don't need it, I can either finance some Vegas trips within my means, or I can make my heirs happy when I die.
Good video
Thanks so much for the kind words, Nigel!
If you take a lump sum from your pension, you can roll it over to an IRA or Roth.
True! Great comment!
Is the rollover amount taxed up front or only when you withdraw?
@@brendad3570 At withdrawal
I retired in Jan 2022. I receive 2 pensions...GE@ 60. NRECA Coop at 62. Both monthly annuities. Why? If I die the week after I receive Lump sum...my wife has to deal w distributions/taxes/ portfolio/CFP. With annuity she receives monthly check seamlessly. I opted for 100% Joint Survivorship.
I was notified this week that I have a modest pension from an employer I departed almost 10 years ago. I had worked there for 7 years and was fully vested. I’m given the option for a lump sum or annuity payments (various options, no COLA increases). However, I’m not even 50yo yet.
Do I HAVE to choose an option now? If I wait 10-15 years, assuming the firm remains solvent, will my benefit/lump sum/annuity increase?
I'll be receiving a pension from my employer when I retire next year. I don't think they offer lump sum payout out option. My employer is the state of CA. Even if they did I doubt I would take it. I feel more financially secure knowing that I'll be getting that monthly check. Nice video.
Marvin, there are no wrong answers when it comes to making that choice. There's a lot of comfort in getting that check every month! Thanks for watching and thanks for the kind words!
If you cash that pension out you may become one of the one fifth of people who quickly go broke for having done so. Plus you will have left the comfort of knowing that CA’s liberal leaders will tax the living crap out of it’s residents to make sure you get paid a comfortable retirement.
Marvin,mine is a monthly and glad to have it.
Only if you think the company you work fore will still be in buisness 5 years from now
@@stevecowley6344 I hope so. My employer is the State of California.
I am in a private pension plan that is ending this year. Employees will have to choose between a lump sum or investing that sum in one of five or six annuity options. The company will then increase 401k match from 6% to 8%. I'm 65, wife is 59. She doesn't plan on retiring for a few years, I just switched to part time. The annuities don't seem like a good investment, according to my very crude math. In my case, what to do with a lump sum? I could find uses for the cash, but I really want to minimize taxes.
Lump sum i would only do that if i reinvented it in stocks or real estate for a bigger pay day.
I am taking monthly payments now for the last 8 years. My company did not offer a lump sum option. I wish they had.
I have a balance in my Federal government TSP. It has an annuity option, but you can just treat it like a 401k if you wish. Leave it, withdraw it, move it to another qualified account, or annuitize it. I'm leaving it alone for now, even though I've retired from the government, because I don't need it. In fact, I'm thinking about rolling it over to my SEP-IRA because that account is actively managed. (The TSP is not.)
The TSP plans have some pretty limited investment options. That being said, the ones that are there aren't bad and have very low expenses. Sounds like you're probably good either way. Thanks for the comment!
In 2014 I turned down, the lump sum of 52k. Not being educated about the pension, I figured I would rather have someone manage the funds for me and later collect the pension at ripe time . I’m 62 , now, logged into the pension, and the NOW PAYOUT LUMP SUM is sweeter and more enticing , 8 yrs later ; it’s about $98k now…in 2022. I’ve been pretty ok managing my IRA s and 401ks - roughly with 10% -11-12% at times , depending on accounts 15-17 % returns …. Now as the interst rates are high I’m seeing a good opportunity to take the lump sum, but I’m concerned about the income taxes now…? As I understand - I can put the lump sum into an IRA ? Possibly in 2023-? I’m currently unemployed , and my accountant told me , if you are not working , you can not put money into an IRA, as it would be a penalty? ….that seems like a -double punishment putting money into an IRA , but due to unemployment status it’s punishable by the IRS.?
If your pension is with a private company, take a lump sum. You never know if they will go bankrupt. For example, Pan Am went bankrupt and employees lost their pensions.
@S CT -- while there's never a clear-cut right or wrong answer, I agree that this is the right move most of the time. If the company goes bankrupt, you'll have to take your chances with the PBGC.
It depends on what they offer you for the lump sum payout and this will vary widely. Remember the ONLY reason they will offer you a lump sum payout is to save the company money.
Mine is from GE. I wish they had offered a lump sum.
Since companies in the 80s and 90s (like Pan AM) abused pension accounts, laws have been passed that don't allow them to borrow against them and even if your employer goes broke, the pension money should still be safe.
I worked for Jeld-wen for years and have been offered to cash out my pension since it's less than 5k. The Company is terribly managed but I wonder if they are hands off on the management of the pension. The payout when i retire is showing 108 a month. Should I take the cash out option now at 39 or should I just leave it alone if I think the company is terrible.
There are plans that allow you to take a set range of the lump sum amount ($10-$50k), and the individual will still receive a monthly 75% joint annuity payment for the primary’s and spouse’s life. This will allow them to play both sides of the fence by having that lump sum directly rolled over to a traditional ira; while receiving a slightly reduced monthly annuity for the rest of their lives.
Interesting! I haven't seen a lot of plans that allow you to do that, but I'll certainly be asking about it more. It may be one of those details that are buried in the plan documents. Great comment! Thanks for that gem of knowledge!
Yes-that is what my spouse and I each have working for a public school system. We will each receive a reduction of only about $400 a month from our pensions and we will both choose to take our full amount we contributed plus interest as our lump sums which we can invest as we wish and also have in case of emergency, at the same time having the security of our monthly lifetime pension payments. I feel like this is a no-brainer for us and grateful that we both have this.
I worked for 13 years from 1990 to 2003 , me and my employer were paying into pension,I stopped working at 2003 at age 45 and resided overseas, now I am 62 .. am I entitled to any pension,and if so, what are my options? .. Thank you
I am considering the lump sum, which I am thinking could be my cash account, so that I would not have to pull so much out of my IRA in a severe down market.
@jdgolf499 -- If you pull money out of your IRA, it would be subject to tax -- but so would your lump sum if you didn't roll it over. Something to think about there. If you're trying to build up cash reserves, it may make better sense tax-wise to take out smaller chunks over a series of years. Be sure to run it by your CPA. Great question! Thanks for the comment! 🙏
What I would do with the lump sum is put it into an annuity.
Lump Sum? The right choice for Estate Planning and consider a Self Directed IRA to purchase real estate to balance out stock investments.
@R Defender2 -- a self-directed IRA can be a great tool. It's a pretty advanced strategy!
What about the fact that a single retiree has no need to worry about spousal survivor-ship benefits and that a monthly annuity payout doesn't allow the retiree to leave anything to their children when they die? Not to mention, a LOT of annuities do NOT have inflation protection provided with them. Taking a lump sum so that I can leave whatever I don't spend to my son, paying a true fiduciary financial management company to manage both the lump sum and my 401k seems best to me. A single person who retires and takes an annuity and then dies quickly leaves a lot of money on the table possibly that would go back to the employer, I'm assuming. There's a lot of these details that you also could have covered. Any chances you could widen the scope of this video to include these kinds of questions?
Some employers (mine included) offered the retirement option (I have a lifetime annuity) HOWEVER, I had the option of opting for a 10 yr guaranteed payout. That means for about a $113 reduced monthly payment, it guarantees that my kids will get at least 10 years of my benefit, if I die before the minimum 10 years is payed out. If I didn’t take that option and died tomorrow (1 year after retirement), the company would have gotten to keep the remainder. If I continue living beyond the 10 years I still get paid the continued reduced benefit for life. I did the math based on living until 85, but my family tends to live until their early 90’s.
So are you saying given two options people should choose LS over pensions if they know how to invest then money?
In most cases, the lump sum tends to be the best option. Of course, each case is different, so be sure to consult with a fee-only financial planner to run the numbers. Thanks for watching!
@@PranaWealth Thank u. Will do if need later.
No brainer, take monthly if your DBPP adjusts with COLA like mine. I can't imagine the bankruptcy of my pension employer unless otherwise, entire country goes bankrupt. Annuity ROI is usually calculated at 4.8% meaning that $1,000/month pension income requires $250K deposit in the life insurance company
Dave -- great point. If you have a COLA, then that changes the math completely. Great comment!
Since companies in the 80s and 90s abused pension accounts, laws have been passed that don't allow them to borrow against them and even if your employer goes broke, the pension money should still be safe.
even if the pension fund is healthy today, will that continue to be true 10, 20, 30 years down the road? And do you want to rely on the PBGC to work as advertised? point in case, prior to Madoff's collapse his investors were sure that SIPC would be there to cover them and it didn't work that way at all. We've decided to eliminate that risk and take the lump sum. Once in an IRA it's 100% our money, no longer their money.
Does the monthly annuity really mean for life? What I lived to 100 ?
@Bro Fessor -- yup! These insurance companies have been doing the math on these things for centuries. If you live to 100, you still get paid. 💵
Yes it does. My Dad retired from one of the Big 3 auto's in 1980, after a 30 year career. Still collecting his pension at 98, 42 years later! However, that pension did not have COLA, so the purchasing power is nowhere near where it was.
yes.
my grandfather retired as a longshoreman at 54, pensioned he received monthly checks for the next 38 yrs until he died.
Most every financial advisor is going to advise taking the lump sum regardless of how good or bad the amount offered might be. Why? Because now you can give the money to them to invest and they get to earn income on it with you!
@CEBEDH -- there's always a potential conflict of interest there, for sure. Or you could work with a fee-only financial advisor on a flat-fee or retainer basis? There are a lot of good people out there in the independent advisor space.
@@PranaWealth That’s the thing though. In order to know enough to choose a good independent financial advisor you have to educate yourself to the point where you really no longer need one. My neighbor just retired and per the advice of his financial advisor he took a lump sum on his pension. When he told me the numbers, his rate of return for having just left it as a pension would have been almost 10%. And his financial advisor claims to be a fiduciary? C’mon!
@CEBEDH -- I do wonder sometimes if they make it confusing as hell on purpose. I know I probably could earn more working at a brokerage house, but then again I have to look in the mirror every morning...
@@PranaWealth You have said that “in most cases” it makes sense to take the pension as a lump sum. In my experience(I am nearing retirement and so are lots of my friends) when you do the math most public sector pensions are going to be a no-brainer to keep as a pension and most private sector pensions are going to be a very tough judgment call where you are basically betting that your financial advisor can continually return big gains. I have one friend who retired at 58 because of major life threatening health problems and the pension had no survivor benefits for his girlfriend(of 10 years) so I told him if it were me I would go ahead and take the lump sum. Are there other reasons why someone would give up a guarantee to roll the dice?
@CEBEDH -- In my experience, the pensions where there's been a lump-sum offer have been relatively small. It wouldn't have made much sense to annuitize them. I'm sure things are different with a public-sector pension. I've actually never run into someone with a public sector job who has been offered a lump-sum payout -- if that was the case, the math would probably change.
I still can't decide? I will get $1840 p mo or $236K Lump sum?
Without knowing your circumstances, sounds like the annuity is much better. I have a lump sum option from a company I worked 11 years for in the '90's, and if I took the annuity at 62, (this year) it would be $582 a month, and the LS would be $118,000. If I took the 55% joint survivor, monthly would be $502. Sounds like your lump sum is pretty low compared to the annuity.
True! @Joseph J -- hard to say which is better without more details.
Boycott fee only advisors! Only use fiduciary advisors!
So let say you take the buy out and you retire at 66/67 and you spend out you buy out in 6 years you would be now 72/73 and if you waited to file for your SS income and had paid in the max each year your income would be more than you will need at that age providing you own your home and have no bills out standing. your age is now the factor when you pass on !!! 77 to 84 you will not be living the high life for sure !!!
I took the monthly payment. I had it directly deposited into my brokerage account, I purchased close end muni funds for 7 years with the monthly pension and dividends. PBGC just took over my pension plan, but my pension is so paltry I get the whole amount. I now have both monthly pension and tax free dividends go into my checking account, which covers my monthly medical expenses, and then some.
No big difference between the two. 😂
Another one who only pitches the lump sum option
There is no right answer for everyone. However, from what I've seen over my career, the lump sum option fits more often than not.
@@PranaWealth That’s because it creates a potential stream of income for you.
I would have to have guaranteed 6% gains each year on my lump sum to make what I get on my monthly LIFE TIME annuity payments. I like getting my monthly deposit especially in today’s market.
Let me just stop you right there. It took 3 minutes to get to you mentioning IRS. Please put a $ symbol in your subject line. TH-cam is global. Just because your presentation is in English, does not mean that here in the UK we can make use of your advice.
Sorry for the confusion, @Smelter57.
The other reason ...I already have a portfolio of close to $1M.
Sorry, bank rate calculator is WORTHLESS.