My mother retired from the phone company in 1992 when the employer offer a bonus payout (added four years of service and four years of age to the pension computation). Several of her co-workers accepted the early retirement offer along with her and everyone who retired in her office except my mother took the lump sum. She met her former co-workers in group gathering a few years later and everyone did not have a single penny left of their lump sum (either bad investments or just out spent the money-most outspent it) and they all had to get another job or just get by on Social Security while my mother keep getting her monthly pension checks.
Lump pay out makes sense if you have good financial sense and don’t need it right away. Pensions suck by design for all parties and are an annuity that does with you.
Good analysis. Most investment retirement planners have a bias for lump sum because they can get commissions. An objective point of view looks at both sides as you are doing.
Excellent advice. I think one thing glossed over for simplicity sake is that all traditional pensions are a separate legal entity from the company that set them up. This is why the funding percentage is critical. A company can go bankrupt or be bought out and its pension can still survive for years if its funding is 80%-100% and the stock market doesn't tank. The PBGC he mentions is more like a federal insurance program that all traditional pensions are required to pay into each year. Think FDIC except for pensions. On the PBGC web site it list how much of a monthly pension it will guarantee. It is possible your entire monthly amount might be guaranteed depending on the type of pension, your age at retirement, and the year the pension became insolvent.
It was kinda of a no brainer for me and my wife. We calculated the lump sum would be equivalent to 13.7 years of monthly payments. We are very healthy with no chronic issues so we took the monthly. We didn't need the money right away too. We are 62 and assume we will survive past 75.
that is not how you calculate it. The lump sum would go into a tax defered account that would grow more than 7% a year. You will not have to take it out until mimimum distributions at age 72 if even then. It would go to your heirs if you didn't need it.
@@louisz8951 you can always draw out money from the lump sum when needed. That way you could also extend taking Social security until age 70.!! That is what I did!
@@gosman949 That is also a good option. You are pulling money from a lump sum that is probably not getting 8% (for now) to increase your SS that will get 8% each year. I'm doing the same but with my pension, I'm postponing it and getting in return 9.2% increase each year. I'm taking SS at my FRA. That money will be used to invest by buying low and wait for the market to recover.
I know people who took the lump sum and spent it all quickly having no financial discipline. If you take a lump sum, you better be active in managing it. It's all on you. It would make sense to take a lump sum from a private company since there is no COLA and the company could fold in the future. As for the government insurance on pension, it isn't very good coverage. You'll still be hurting even with this benefit.
Check out the survivor benefits of a monthly payout. My pension would only pay 50% to my surviving spouse. For this reason, I took the lump sum after experiencing a health event.
I work for a company in the DOW. Pension over lump sum with a 3% yearly inflation increase in the payment. I can reduce it and have my spouse collect the full amount that way, but I found a glich that if I get my spouse to sign a waiver then my youngest child will receive the payment instead. So she can give it to my spouse if I die and when she should pass both of my kids will be able to split it the rest of their lives. People just need to figure those loop holes out.
Roger, I don't recall hearing a discussion about the impact of taxes on lump-sum vs monthly payments. The taxable value of one-lump-sum pension payout could be significant vs a monthly payout. I would propose developing a comparison of both options on an after-tax basis showing how they effect one's overall financial plan.
I’m in Canada so I’m sure many of the rules on pensions are different than the US but both myself and my husband have Defined Benefit contributions plans that are over 100% funded. We don’t have the option to take a lump sum. The only way we can take a lump sum is if we had less than 25 years of pensionable service but both of us have over 30 years of pensionable service so we have to have a monthly payment. I’m not at all concerned that either of our companies will default on those payments.
@@gosman949 I don’t consider my heirs in any retirement decision I make. My main goal is self sufficiency when I stop working so I’m never a burden on my kids. They can divide up what ever I have left when I’m gone.
I retired from Nursing in 2014 ,took the monthly pension.Claimed Social Security benefits last year at 62. Glad I retired and claimed Social Security benefits when I did.Three former coworkers died in the last 18 months,so I’m glad I retired when I did.
@@gosman949 No Jay,it was strategic. I needed the money. I also have a 10 year old, thus I receive an additional benefit for my child who is a minor.My pension is pretty decent. I have now little debt ,so I.am comfortable.
Financial Planners usually say Take the Lump Sum and Invest it (with them?) WHERE Would it been good place? Stocks DOWN 25% WORST Bond Market In recent History? Stable Income pay Low % like 1.5% during High Inflation? .my Pension payout is about 10% and provides stable base and peace of mind? Allows me to Delay Social Security so it can provide higher payments while I use my IRA as a Bridge account.
I had to decide whether or not to take a lump sum some years back. I made pretty good money when I worked (6-figures) but I'm not a good saver. Buying art has long been my drug of choice. Decided to take the pension as I'd probably spend the lump money. Been getting pension checks ever since I was 50. Fortunately I'm healthy as a horse. At 68 I've never had an operation or been admitted to a hospital. Still ride 100+/- miles/week on a bicycle. Worked as a pilot so until mid '13 for 38 years got a comprehensive Class I flight physical every 6 months.
Lifetime federal pension that replaces 85 percent of my final salary. Wife gets the entire pension payment for life also. Adjusted for inflation. Lump sum payment would be nonsense.
One thing you should have suggested to everyone is that they compare their company pension's monthly benefit to what they would get from taking the lump sum and purchasing an immediate fixed benefit annuity from some big insurer and choose whichever has the higher monthly payout. Why did you not even mention this ?
@@lynnorme4119 Ummm that is possible, Lynne. But some of these large annuity insurers are more than 150 yrs old and have weathered booms and busts many times. (Mass.Mutual, Prudential, NYL, MetLife, etc.). One has to choose the of annuity carefully, though. Annuities that offer variable rates based on market performance are risker.
the lump sum would go into a tax deferred account and not have a tax consequence until withdrawn, hopefully at age 72 with minimum distributions and a smaller income!
Lump sum payouts are superior for those with financial discipline and are experts at living within their means. This is not a given any longer in society and extremely rare in North America. The main reason lump sum payments win over monthly is you can pass it onto your family where as monthly payments die with you. If you are debt free and yes that includes your mortgage then you would be foolish to not take a lump sum. If you have debt still and yes that includes a mortgage then you are not good at financial discipline and have not been living within your means so therefore you would be a fool to not take a monthly.
Lump sum all day long. My pension is around $24,000/year. Lump sum is $500K. At 5%/year the $500K would bring in $25,000/year and still have the $500K sitting there. If I die a month after retiring, my wife get 50% of my pension. With the lump sum, she gets the same $25,000/year income and the $500K still sitting there.
What do you have your lump sum invested in? I pretty much have the same scenario. $25600/year pension or a $680,000 lump sum. May I ask how old you are?
500K - 680K lump sum payouts? That's huge. I'd take the lump sum and role-over to invest that. I work for my city and my lump sum will only be about 150K. So, pension will make most sense in my situation.
I’ve been working at Kroger‘s for 20 years I’m trying to figure how much my pension would be a defined contribution Trying to figure out how much I’m going to get when I retire from Kroger’s
The lump sum means you think you can do better in the Wall Street Casino than professional investors. Of course if you're betting that your company goes belly up on the pension before you do yourself... I suppose it's an option.
@@eddenoy321 As an example, I take my pension and dump it into a mirrored annuity (IE GM of Canada). Great, the monthly amount I receive would be equal to my pension had I left it with GM. However, if I die, the insurance company keeps the rest? Even if there is a clause in the contract stipulating a surviving spousal benefit (typically 66%ish of the original benefit), why should I do business with a company that will benefit from my death? And make no mistake, just because there is no annual expense or upfront commission does not mean there are no fees. Insurance companies and pension management firms make a very substantial amount from managing other peoples money. Far more than the cost of hiring a professional.
Bob Almost anybody can do better in the stock market that professional pension investors because pension money is typically invested in extremely conservative bond funds, paying something like 2% per year. They can't take the risk of losing the pension money and not having enough to pay out to retirees.
What if you did shortly after retirement, then what? Your pension stops. At least your lump plus 6% will continue. And in this economy you'll do better than 6%
Depends I think. If you take the lump sum and instruct the company to put it directly into your IRA w/ NO taxes taken it, you shouldn't have to pay taxes on it until withdrawn.
Dong As BS said, if you transfer the lump sum pension directly to a traditional IRA account, you don't pay taxes until you withdraw. If you transfer it to a Roth IRA, you pay taxes up front, which means some portion will likely be taxed at a high percentage, so don't do this. Now for the fun part. If you are lucky enough to have a 401k and a pension as I had, you can take the lump sum of the pension and invest it and live off withdrawals from your 401k WITHOUT penalty, as long as you retire at 55 or older. The 401k no penalty option is little known and little advertised, but it's a game changer. Also, most companies invest pension funds in extremely conservative mutual funds and make about 2% per year. The stock market has averaged 10% per year for a long, long time, so investing that lump sum in mutual funds will likely pay off big in the long run. If you have children, taking the lump sum is by far the safest option because they'll get the all of the pension if you die, whereas they might not if you take monthly pension payments.
@@BSinNH If you want to retire at 55 and you need to draw income from somewhere, you can do that from a 401k without penalty. You can't do that from a traditional IRA without penalty until you are 59 1/2. It is best to rollover a lump sum pension to a traditional IRA for the reasons I explained earlier. And you can't rollover a lump sum pension to a 401k. Do you understand now?
@@Dr.TJ1 Age 55 to 59 1/2 If you are retired, most 401(k) plans allow for penalty-free withdrawals at age 55. To use this 401(k) retirement age 55 provision your employment must have ended no earlier than the year in which you turn age 55, and you must leave your funds in the 401(k) plan to access them penalty-free
Most people should take the lump sum if they can. (1) pensions are assets owned by employers, not by the workers (2) pensions may or may not managed well, plenty have had scandals & bankruptcies (3) more investment options in the open market & not restricted by ERISA rules (4) open market has performed better than typical pension (8-10% plus vs ~6%) but can have more volatility (5) PBGB is in financial trouble (6) can leave an IRA to kids/charities because its part of your estate
I was at a retirement seminar and the speaker spoke on how he quit his job after he made well over $650,000 PROFIT within 3months he invested $120,000. I just began investing and i will really appreciate any tips or helpful guide.
HELPFUL TIP It is very easy to make huge profit over a short period of time by investing with the guidance of an expert, i began investing late Sep with JOANNA MALIVA LEE a licensed broker and within 2 months i've made $458,000 from my $75,000 investment.
I think i may have actually come across Joanna on linkedin talking about the stock market and she spoke so brilliantly, please how do i get to reach her?
My Best Buddy work for a Company took lump sum due to Monthly payment to Her as an allotment of 150 bucks per month. Now, this was a no-brainer. Rolled it into a Roth will grow tax-free with Dollar-cost averaging. This too me was an amazing decision.
My mother retired from the phone company in 1992 when the employer offer a bonus payout (added four years of service and four years of age to the pension computation). Several of her co-workers accepted the early retirement offer along with her and everyone who retired in her office except my mother took the lump sum. She met her former co-workers in group gathering a few years later and everyone did not have a single penny left of their lump sum (either bad investments or just out spent the money-most outspent it) and they all had to get another job or just get by on Social Security while my mother keep getting her monthly pension checks.
Lump pay out makes sense if you have good financial sense and don’t need it right away. Pensions suck by design for all parties and are an annuity that does with you.
Good analysis. Most investment retirement planners have a bias for lump sum because they can get commissions. An objective point of view looks at both sides as you are doing.
You are correct in your assumption. There is a general rule that if you pension pay out is 6% or better, then take it, if is less, then do lump sum.
Excellent advice. I think one thing glossed over for simplicity sake is that all traditional pensions are a separate legal entity from the company that set them up. This is why the funding percentage is critical. A company can go bankrupt or be bought out and its pension can still survive for years if its funding is 80%-100% and the stock market doesn't tank. The PBGC he mentions is more like a federal insurance program that all traditional pensions are required to pay into each year. Think FDIC except for pensions. On the PBGC web site it list how much of a monthly pension it will guarantee. It is possible your entire monthly amount might be guaranteed depending on the type of pension, your age at retirement, and the year the pension became insolvent.
It was kinda of a no brainer for me and my wife. We calculated the lump sum would be equivalent to 13.7 years of monthly payments. We are very healthy with no chronic issues so we took the monthly. We didn't need the money right away too. We are 62 and assume we will survive past 75.
that is not how you calculate it. The lump sum would go into a tax defered account that would grow more than 7% a year. You will not have to take it out until mimimum distributions at age 72 if even then. It would go to your heirs if you didn't need it.
@@gosman949 That is assuming you don't need the pay out money. SS is usually not enough to continue people's living standards.
@@louisz8951 you can always draw out money from the lump sum when needed. That way you could also extend taking Social security until age 70.!! That is what I did!
@@gosman949 That is also a good option. You are pulling money from a lump sum that is probably not getting 8% (for now) to increase your SS that will get 8% each year. I'm doing the same but with my pension, I'm postponing it and getting in return 9.2% increase each year. I'm taking SS at my FRA. That money will be used to invest by buying low and wait for the market to recover.
I’m a CFP with 25 years experience advising clients. Your recommendations are spot on. Good job.
I know people who took the lump sum and spent it all quickly having no financial discipline. If you take a lump sum, you better be active in managing it. It's all on you. It would make sense to take a lump sum from a private company since there is no COLA and the company could fold in the future. As for the government insurance on pension, it isn't very good coverage. You'll still be hurting even with this benefit.
Check out the survivor benefits of a monthly payout. My pension would only pay 50% to my surviving spouse. For this reason, I took the lump sum after experiencing a health event.
I work for a company in the DOW. Pension over lump sum with a 3% yearly inflation increase in the payment. I can reduce it and have my spouse collect the full amount that way, but I found a glich that if I get my spouse to sign a waiver then my youngest child will receive the payment instead. So she can give it to my spouse if I die and when she should pass both of my kids will be able to split it the rest of their lives. People just need to figure those loop holes out.
WOW, that would be a heck of pension plan.
Exactly what I’m trying to figure out now. Retirement is here.
I'm in the same boat. So far I'm leaning toward Pension + SS and move the 401 to a ROTH IRA. I have no debts.
Roger, I don't recall hearing a discussion about the impact of taxes on lump-sum vs monthly payments. The taxable value of one-lump-sum pension payout could be significant vs a monthly payout. I would propose developing a comparison of both options on an after-tax basis showing how they effect one's overall financial plan.
Thanks Roger got the book. Thanks for the all the fun and education.
@Hello Allen how are you doing?
I’m in Canada so I’m sure many of the rules on pensions are different than the US but both myself and my husband have Defined Benefit contributions plans that are over 100% funded. We don’t have the option to take a lump sum. The only way we can take a lump sum is if we had less than 25 years of pensionable service but both of us have over 30 years of pensionable service so we have to have a monthly payment. I’m not at all concerned that either of our companies will default on those payments.
but your heirs will receive nothing!
@@gosman949 I don’t consider my heirs in any retirement decision I make. My main goal is self sufficiency when I stop working so I’m never a burden on my kids. They can divide up what ever I have left when I’m gone.
What if your pension policies from your old company retirement plans are stuck back in the uk and you left over ten years ago
Not sure I trust my company to keep pension payments coming...30yrs I’ve watched down size after down size....what if the company declared bankruptcy.
I retired from Nursing in 2014 ,took the monthly pension.Claimed Social Security benefits last year at 62. Glad I retired and claimed Social Security benefits when I did.Three former coworkers died in the last 18 months,so I’m glad I retired when I did.
but what if you live to 90? Taking SS at 62 will be a drastic choice!
@@gosman949 No Jay,it was strategic. I needed the money. I also have a 10 year old, thus I receive an additional benefit for my child who is a minor.My pension is pretty decent. I have now little debt ,so I.am comfortable.
@@christopherhennessey8991 A 10 year old at your age!? Good for you. Will help you stay young like my baby grandsons are doing for me!
Great video
Financial Planners usually say Take the Lump Sum and Invest it (with them?) WHERE Would it been good place? Stocks DOWN 25% WORST Bond Market In recent History? Stable Income pay Low % like 1.5% during High Inflation? .my Pension payout is about 10% and provides stable base and peace of mind? Allows me to Delay Social Security so it can provide higher payments while I use my IRA as a Bridge account.
I thought mine was good at 9.6%. each year you delay SS is an increase of 8%
Please do a video on Private reserve accounts for retirement
I had to decide whether or not to take a lump sum some years back. I made pretty good money when I worked (6-figures) but I'm not a good saver. Buying art has long been my drug of choice. Decided to take the pension as I'd probably spend the lump money. Been getting pension checks ever since I was 50.
Fortunately I'm healthy as a horse. At 68 I've never had an operation or been admitted to a hospital. Still ride 100+/- miles/week on a bicycle. Worked as a pilot so until mid '13 for 38 years got a comprehensive Class I flight physical every 6 months.
Lifetime federal pension that replaces 85 percent of my final salary. Wife gets the entire pension payment for life also. Adjusted for inflation. Lump sum payment would be nonsense.
All pensions are different. I feel, if you have a good pension, stick with it. If not, take the money.
One thing you should have suggested to everyone is that they compare their company pension's monthly benefit to what they would get from taking the lump sum and purchasing an immediate fixed benefit annuity from some big insurer and choose whichever has the higher monthly payout. Why did you not even mention this ?
Ed Denoy I think he doesn’t want to be blame if the annuity goes wrong…
@@lynnorme4119 Ummm that is possible, Lynne. But some of these large annuity insurers are more than 150 yrs old and have weathered booms and busts many times. (Mass.Mutual, Prudential, NYL, MetLife, etc.). One has to choose the of annuity carefully, though. Annuities that offer variable rates based on market performance are risker.
So if I take the lump sum. Will I have to pay Uncle Sam and the state?
the lump sum would go into a tax deferred account and not have a tax consequence until withdrawn, hopefully at age 72 with minimum distributions and a smaller income!
yes. unless you put it in an IRA for the mean time.
Lump sum payouts are superior for those with financial discipline and are experts at living within their means. This is not a given any longer in society and extremely rare in North America. The main reason lump sum payments win over monthly is you can pass it onto your family where as monthly payments die with you. If you are debt free and yes that includes your mortgage then you would be foolish to not take a lump sum. If you have debt still and yes that includes a mortgage then you are not good at financial discipline and have not been living within your means so therefore you would be a fool to not take a monthly.
Taxes are progressive, so it you take a lump sum and don't roll it over into an IRA, a large part of the lump sum will be lost from taxes.
Lump sum all day long. My pension is around $24,000/year. Lump sum is $500K. At 5%/year the $500K would bring in $25,000/year and still have the $500K sitting there. If I die a month after retiring, my wife get 50% of my pension. With the lump sum, she gets the same $25,000/year income and the $500K still sitting there.
What do you have your lump sum invested in? I pretty much have the same scenario. $25600/year pension or a $680,000 lump sum. May I ask how old you are?
500K - 680K lump sum payouts?
That's huge. I'd take the lump sum and role-over to invest that.
I work for my city and my lump sum will only be about 150K. So, pension will make most sense in my situation.
Pension isn’t covered if you work for city and they file bankruptcy
Thank you
I’ve been working at Kroger‘s for 20 years I’m trying to figure how much my pension would be a defined contribution Trying to figure out how much I’m going to get when I retire from Kroger’s
The lump sum means you think you can do better in the Wall Street Casino than professional investors. Of course if you're betting that your company goes belly up on the pension before you do yourself... I suppose it's an option.
Why can't you take the lump sum and pay a professional to help manage it?
@@eddenoy321 lol its not free
@@eddenoy321 As an example, I take my pension and dump it into a mirrored annuity (IE GM of Canada). Great, the monthly amount I receive would be equal to my pension had I left it with GM. However, if I die, the insurance company keeps the rest? Even if there is a clause in the contract stipulating a surviving spousal benefit (typically 66%ish of the original benefit), why should I do business with a company that will benefit from my death?
And make no mistake, just because there is no annual expense or upfront commission does not mean there are no fees. Insurance companies and pension management firms make a very substantial amount from managing other peoples money. Far more than the cost of hiring a professional.
Bob
Almost anybody can do better in the stock market that professional pension investors because pension money is typically invested in extremely conservative bond funds, paying something like 2% per year. They can't take the risk of losing the pension money and not having enough to pay out to retirees.
@@eddenoy321 an annuity would be as expensive as a pension and actually be the same. A pension is an annuity.
If you think of the lump sum basically as "principal", there is no universe where surrendering your principal to get a 6% return makes any sense.
What if you did shortly after retirement, then what? Your pension stops. At least your lump plus 6% will continue. And in this economy you'll do better than 6%
@@swanni222 Economy is tanking that lump sum better ride that bad wave for a while.
If you take the Lump Sum do you have to pay taxes on it? and will it affect your social security payments? Thanks
Depends I think. If you take the lump sum and instruct the company to put it directly into your IRA w/ NO taxes taken it, you shouldn't have to pay taxes on it until withdrawn.
Dong
As BS said, if you transfer the lump sum pension directly to a traditional IRA account, you don't pay taxes until you withdraw. If you transfer it to a Roth IRA, you pay taxes up front, which means some portion will likely be taxed at a high percentage, so don't do this. Now for the fun part. If you are lucky enough to have a 401k and a pension as I had, you can take the lump sum of the pension and invest it and live off withdrawals from your 401k WITHOUT penalty, as long as you retire at 55 or older. The 401k no penalty option is little known and little advertised, but it's a game changer. Also, most companies invest pension funds in extremely conservative mutual funds and make about 2% per year. The stock market has averaged 10% per year for a long, long time, so investing that lump sum in mutual funds will likely pay off big in the long run. If you have children, taking the lump sum is by far the safest option because they'll get the all of the pension if you die, whereas they might not if you take monthly pension payments.
Dr. TJ, I am like you. Pension and 401K. Why would someone pick their 401K vs. an IRA? You are usually limited in options.
@@BSinNH
If you want to retire at 55 and you need to draw income from somewhere, you can do that from a 401k without penalty. You can't do that from a traditional IRA without penalty until you are 59 1/2. It is best to rollover a lump sum pension to a traditional IRA for the reasons I explained earlier. And you can't rollover a lump sum pension to a 401k. Do you understand now?
@@Dr.TJ1 Age 55 to 59 1/2
If you are retired, most 401(k) plans allow for penalty-free withdrawals at age 55. To use this 401(k) retirement age 55 provision your employment must have ended no earlier than the year in which you turn age 55, and you must leave your funds in the 401(k) plan to access them penalty-free
will the pension rollover exceed the $7.000max contribution for 12 months
Most people should take the lump sum if they can. (1) pensions are assets owned by employers, not by the workers (2) pensions may or may not managed well, plenty have had scandals & bankruptcies (3) more investment options in the open market & not restricted by ERISA rules (4) open market has performed better than typical pension (8-10% plus vs ~6%) but can have more volatility (5) PBGB is in financial trouble (6) can leave an IRA to kids/charities because its part of your estate
I was at a retirement seminar and the speaker spoke on how he quit his job after he made well over $650,000 PROFIT within 3months he invested $120,000. I just began investing and i will really appreciate any tips or helpful guide.
Just seek professional help from a mentor or a financial adviser.
HELPFUL TIP It is very easy to make huge profit over a short period of time by investing with the guidance of an expert, i began investing late Sep with JOANNA MALIVA LEE a licensed broker and within 2 months i've made $458,000 from my $75,000 investment.
That's wonderful, i've always been told that investing with an expert has it advantage but i have no idea how to find one
I think i may have actually come across Joanna on linkedin talking about the stock market and she spoke so brilliantly, please how do i get to reach her?
@@larryjones4253 Google search her name ‘Joanna Maliva Lee’ she is quite known for her works.
Get a pension with spouse, it will encourage you to live a very long life.
You need a better microphone. It sounds like you are talking into a soup can.
HA! yeah, that was an old one. All better now.
Pension? What's that? Just kidding, but take the lump sum and invest. You'll do so much better and your heirs will get the full amount.
My Best Buddy work for a Company took lump sum due to Monthly payment to Her as an allotment of 150 bucks per month. Now, this was a no-brainer. Rolled it into a Roth will grow tax-free with Dollar-cost averaging. This too me was an amazing decision.
What a waste of time!
will the pension rollover exceed the $7.000max contribution for 12 months