If you are debating whether or not to take a lump sum pension offer in place of lifetime benefits, it’s important to understand key information in order to make an informed decision. According to a new Government Accountability Office report, many of the informational materials provided by sponsors offering lump sums do not present enough information for participants to clearly understand the lump sum offer. That is why it is essential that you understand the benefits and risks of taking a lump sum pension offer before making the decision that is best for you.
Lump Sum vs. Pension Payments
There are benefits and risks involved with both the pension and lump sum options. The pension allows you to get a guaranteed income for life, but this income ends when you or your spouse passes away. One risk you need to consider with lifetime payments is inflation. If your payments are fixed, they may not be able to provide for all of your future needs as inflation rises. Keep in mind that each pension will vary, and some may increase with inflation or allow your beneficiaries to receive benefits for a few years after you pass.
The main benefit of the lump sum option is that you are able to control your assets and pass any remaining money left at the end of your lifetime on to your beneficiaries. After taking the lump sum, if your investments do well, you will be able to pay yourself a monthly income while growing your principal. However, if your investments do poorly and you depend on them for income, then you may lose the money in your account rather quickly.
When Should You Take the Lump Sum?
Taking the lump sum pension offer is a personal decision that should be carefully considered based on your unique circumstances. That being said, there are some situations which make this the better option:
- You and/or your spouse are not in good health, and you do not expect to live very long.
- You are confident that you can successfully invest the lump sum amount and achieve favorable investment returns over the course of your lifetime. This means that you think you will be able to generate further income that will last the rest of your life.
- You have enough retirement savings that you do not need the pension to feel financially secure.
- You are concerned about the financial security of your pension plan because your company may go bankrupt in the future and your pension plan will be underfunded if it does.
Before making a final decision, consider your anticipated needs and those of your spouse, the present value of your pension, terms of your pension payments, your tolerance for risk, and your investment experience.
Pension Lump Sum Calculator or Retirement Calculator
The best way to really see what is right for you is to is to use your own numbers and goals and see what happens when you opt for the lump sum or the lifetime benefits.
Use a Retirement Calculator to get a better idea of your overall financial picture. The NewRetirement Calculator can be used to input a monthly pension payment, or you can input a lump sum and see how your retirement finances change with the different inputs.
You can also use a pension lump sum calculator, but that only gives you a slice of your overall retirement plan finances. Here are a few lump sum calculators:
Overall, the pension can be a very important part of your financial plan in retirement. It is vital to gain a thorough understanding of your options and carefully consider your circumstances before making a decision.