If your employer provides a pension plan benefit, you may be offered a lump-sum buyout in place of ongoing monthly payments. A lump-sum buyout can present some attractive opportunities, but a lump sum isn’t right for everyone. In this article, we cover some of the most important considerations to help decide between keeping your monthly pension or taking the lump sum.
Monthly Payment Vs. Lump Sum
Pension plans offer the unique benefit of guaranteeing* (1) a certain amount of monthly income during your retirement for as long as you live. This guaranteed income can remove some of the stress of wondering if you’ll ever run out of money.
But a lump-sum payment, under the right circumstances, may be an attractive option for other reasons. Whichever decision you make will be permanent, so it’s important you fully understand the implications of each option to make the best decision for you and your family.
1. Recognize Your Money Habits
Take a good look at your money management habits and be honest with yourself. If you know you’ll immediately be tempted to buy a fancy new sports car or take the extravagant vacation your family has always dreamed of, a lump-sum option might not be the right choice for you. This money is meant to fund your retirement and should not be used for anything else.
But if you’re responsible when managing your money or have a trusted wealth strategist on your side, then a lump sum could offer you the chance to invest that money and allow it to grow for an additional number of years before you need it. Invested properly, a lump sum can eventually reach or exceed the amounts an ongoing monthly pension payment might have offered.
2. Consider Life Expectancy
You should also consider your expected longevity and the needs of your spouse. If you’re married and your pension offers a joint and survivor payout, your payments could continue as long as one spouse is living. This can offer much-needed security to a spouse who may outlive you.
On the other hand, if your spouse is still working and will receive a pension or benefits of their own, you might consider taking the lump sum and investing it. The time value of money concept suggests that money you have now is worth more than the equivalent sum in the future. This is because having the money now allows you more time to earn interest on that amount of money.
Furthermore, if you’re unmarried and in poor health, the lump sum might be an especially sound option. A chronic medical condition likely means you won’t need the monthly payments for long, so a larger sum of money now could offer you more comfort in the meantime.
3. Examine Your Goals
Examining your goals can reveal useful insights into which option you should take. If you plan to spend most of your retirement at home with your family and grandchildren, there may not be a need to risk taking a lump sum and hoping for good returns on the investment. A monthly pension plan may fund this type of lifestyle perfectly well if you’ve planned properly for your retirement.
However, if you plan to spend your retirement traveling to exotic locations or enjoying extravagant golf outings, the lump-sum payment may offer you more growth opportunities than a recurring, smaller monthly payment. If this option will help you reach your goals, you just need to know the best ways to manage the lump sum so it furthers your goals rather than detracts from them.
Ask An Expert
The truth is, you might still not know which option is right for you. That’s okay—this is a big decision and it’s one you’ll have to live with for the rest of your life. Unfortunately, no one can tell you what to do without a full understanding of your financial situation and habits.
Before making any huge decision like this, we always recommend contacting us to schedule a meeting to discuss what will be the best option for you and your family.
John Halterman, best-selling author and nationally published blogger has been featured as a financial guest expert on the TV shows of self-help gurus Brian Tracy and Jack Canfield, author of Chicken Soup for the Soul. He has appeared on ABC, FOX, BRAVO, NBC, CBS, and A&E. John is the expert host of the weekly WDTV News 5 segment, “Solutions 4 Financial Independence.”
As an authority on wealth management, he has been invited by hundreds of institutions such as universities, federal agencies, professional associations, and large energy and utility corporations to be a guest speaker and educational event host. Event topics include maximizing your retirement, managing down market investment risk, how to reduce your tax burden, and transferring your family wealth in the most tax advantageous way.
John is the founder and owner of Beacon Wealth Management, specializing in helping entrepreneurs, professional practitioners, and retirees overcome the 4 major challenges facing successful families. He is a warm communicator with a passion for helping people transform their financial futures. John understands the multifaceted set of financial worries people face as they become more successful and enter the retirement red zone. He empathizes personally with each client and delivers a collaborative client experience that empowers people to reach their life goals.
With more than two decades of experience, John’s professional credentials include:
- Certified Wealth Strategist (CWS)
- Accredited Investment Fiduciary® (AIF®)
- Certified Estate Planner™ (CEP®)
- Chartered Federal Employee Benefits Consultant℠ (ChFEBC℠)
- Professional Plan Consultant® (PPC®)
- Registered Financial Consultant (RFC)
- Past member of Ed Slott’s Master Elite IRA Study Group
A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a Wealth Advisor. Today, he resides with his family in Bridgeport, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-loving man, he enjoys giving back to his community, coaching youth sports, landscaping and architectural design, WV Athletics, and is an outdoor and racquetball playing enthusiast.
(1) *We use the term guarantee lightly here. For example, if your previous employer files for bankruptcy, you will no longer receive pension payments from the company.