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CESCrews Blog

Should You take a lump sum? What Are your options?

9/15/2020

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Part of a continuing series.

You have several main options, though some of them come in multiple flavors:

Option #1 of 4 – Keep the Pension

This option applies only if the lump sum offer is coming from a traditional pension plan that provides a guaranteed retirement income for life. It does not apply to most 401(k) plans, or other similar plans where you have a specific account balance.

Advantages:
  • It’s the simplest choice: just keep things as they are.
  • You get retirement income for life, which might also include the life of a spouse, partner, or other beneficiary. You don’t have to worry about outliving it, generally speaking. And some pension plans even offer an inflation adjustment, though this applies mostly to government pensions, and usually not to corporate pensions.
  • Your monthly benefit is determined by formula, based on your years of service and compensation. It is not affected by fluctuations in the financial markets, or to other events. You know what you will get, and when.
  • You might get a bit of a bonus in your benefit if you retire early if your pension plan provides for this.
  • Since the pension will dole out money on a monthly basis, you can’t readily spend it or give it away prematurely and then be left broke. You’re protected against yourself, and against others who might try to influence you (especially when you are older and perhaps more vulnerable).
  • Pension benefits are also exempt from garnishment by creditors (other than the IRS), though once you actually receive payments creditors may be able to try to get them from you, depending on state law.
  • Even if your employer goes out of business, your pension is owed to you. And payment (within limits) is guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a U.S. government-backed organization.

​Disadvantages:
  • Although you have an opportunity now to “cash in” your future pension benefits, this may be a one-time offer. Keeping the pension as-is may lock you into that for life. Taking a lump sum gives you a lot more options, including the option to lock yourself into an irrevocable lifetime payment arrangement later, if and when you choose to do so.
  • A lump sum could be invested differently, using a plan tailored to your specific needs, or following a strategy that might provide a much better long-term return – though you could also come out worse that way, depending on the specifics of what you do with the funds.
  • You have limited (perhaps no) control over the timing and amount of what you receive out of a traditional pension plan. If you need money sooner,  you can’t get it. If you don’t need money that soon, you probably don’t have the option of leaving it where it is. There is very little flexibility.
  • Although you “win” the bet if you live a long time, you “lose” the bet if you don’t. You could die the day after you receive your next pension check, and under most pension plans that would be all you’d get. (A spouse or other beneficiary might or might not be able to get something more out of it, depending on what options the plan offers and which you choose at the time your pension begins. But choosing an option that covers someone else means a smaller pension during your own lifetime – there’s no free lunch there.)
  • While the rigid nature of future pension payments does protect you from making bad decisions about your money, it also prevents you from making good decisions about them. Committing to a steady stream of monthly income for a long period of time may (or may not) be the single best thing you could do with your financial resources right now.
  • The PBGC guaranty is limited. In 2016 the limit at age 65 is $60,136 a year (if your benefit is payable for your life only), so that if your own pension is higher than that, the extra amount you receive is at risk if your pension plan goes broke. Note, however, that in some cases your pension plan may actually be transferring the risk to an insurance company, in which case your guarantees come from the insurance company, the insurance industry, and/or your state government.
 
Up next: Option #2 - Take the lump sum and roll it over into a tax- advantaged retirement plan
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For more about CESCrews' Participant Services for Lump Sum and Pension Elections click here.

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  • Home
  • Lump Sum Elections
    • Lump Sum Analyzer >
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