If you’re torn between choosing a lump sum payout and a monthly pension payment the 6% test can provide the clarity you need to make an informed choice! Wes Moss breaks down the math behind the 6% test with examples, how inflation impacts these payments, as well as what this decision means for your retirement.

Read more about lump sum payouts versus pensions and the use of the 6% rule:

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When it comes to retirement, one of the biggest decisions you’ll face is how to receive your retirement income. For many individuals, this often boils down to a choice between taking a lump sum payout or receiving a pension.

Wes Moss, a well-known financial advisor and host of his own radio show “Money Matters,” has been examining this very question lately. In a recent article, he writes about his own experience and the test he has developed to help individuals decide which route is best for them.

Moss begins by noting that pension plans are becoming increasingly rare in the private sector. This means that many workers are faced with the decision of taking a lump sum payout from their employer-sponsored retirement plan, or opting for a monthly pension benefit.

The lump sum option can be tempting because it provides individuals with a large influx of cash which they can then invest or use as they see fit. However, Moss warns that this approach also comes with significant risks, as it requires the individual to take on the responsibility of managing and growing that money to support themselves throughout their retirement years.

On the other hand, pensions provide a guaranteed stream of income for life, which can provide a sense of security for retirees. However, Moss acknowledges that in some cases, the lump sum option may still be the better choice, particularly if the pension plan is severely underfunded or if the individual has health concerns that could affect their life expectancy.

To help individuals make this decision, Moss has developed a simple test that considers a variety of factors including health, financial literacy, and risk tolerance. By carefully considering these factors, individuals can gain a better understanding of which option is best for them.

Ultimately, there is no one-size-fits-all answer to the lump sum versus pension question. Each individual’s circumstances and preferences will play a significant role in making this decision. However, Moss’s test can provide a helpful framework for individuals to consider as they weigh their options and work towards a financially secure retirement.

In a time when retirement planning is becoming increasingly complex and individualized, resources like Moss’s test can provide valuable guidance for individuals navigating this important decision. By taking a thoughtful and deliberate approach to this decision, individuals can set themselves up for a comfortable and secure retirement.