Should You Accept a Lump Sum? What’s Your Situation?

Part of a continuing series.

You’ve been told you have the option of converting all or part of your pension plan to an immediate cash payment (a “lump sum”). What should you do?

Fifteen things to think about…

1. Can you trust yourself? Be honest (no one needs to know what you’re thinking except you).
2. How much risk can you tolerate? A traditional pension involves very little risk. If you cannot afford any risk, or if taking it would cause ongoing stress for you, then that is an important consideration.
3. How big is the lump sum? If it represents less than one paycheck, or even if it is as much as two or three paychecks, it might not make much difference what you do with your windfall.
4. What is your age, and how long until you retire? Unless you have plenty of financial resources elsewhere, the decision to give up a monthly pension for a lump sum can have big consequences.
5. Are you under financial stress now? If you’re truly under the gun, a lump sum might be irresistible, and using it to solve immediate problems might make all the sense in the world.
6. What are your retirement needs? Does your retirement look financially secure, or not? If not, you need to think hard about doing anything that detracts from it.
7. What are your other financial needs? Providing for retirement is important, but so is paying for serious illness, sending children or grandchildren to college, finding the right place to live, etc.
8. What’s your life expectancy? Keep in mind that the lump sum you are being offered has been calculated by experts to equal the expected value of the future pension payments.
9. What are interest rates today, and what’s their likely direction? The experts calculating the amount of a lump sum you’d get instead of a traditional pension have to use current interest rates.
10. What are your other financial resources? Between Social Security, personal savings, and other resources, you may or may not need to worry about liquidating the pension benefit.
11. What about taxes? A lump sum is going to be taxed as ordinary income when you take it, unless you roll it over into another pension plan (such as an IRA account).
12. What are your alternative investment opportunities? If you take a lump sum, even if you roll it into an IRA, you will have a lot of flexibility about how those funds are invested.
13. What about early retirement? Some traditional pensions, in effect, give an extra boost to your benefit if you retire early.
14. What about peace of mind? Traditional pension plans that  pay a benefit for life pay it no matter how long you live. If you live a long time, that’s a big deal.
15. What about your spouse or ex-spouse? By law,  if you’re married, your spouse (or perhaps ex-spouse) would have to approve a decision to take a lump sum option. That may limit your choice.

For more on all of these considerations, and much more, check out our guide "Should You Accept A Lump Sum From Your Pension Plan?".

For a free copy click here.

For your free copy just click on the pamphlet cover above