Lump-Sum vs Monthly Pension Payments: Which Is Better?
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Lump-Sum vs Monthly Pension Payments: Which Is Better?
As retirement approaches, one major decision that individuals must consider is how they want to receive their pension payments. The two main options are either a lump-sum payment or monthly pension payments. Each option comes with its own advantages and disadvantages, and choosing the right one depends on various factors, including individual needs and preferences.
Let’s begin by discussing lump-sum payments. When opting for a lump-sum payment, retirees receive a one-time payout of their entire pension. This can provide a considerable amount of money upfront, allowing individuals to make large purchases or investments. It offers flexibility in managing the funds as per their requirements.
One significant advantage of a lump-sum payment is the potential for higher earning potential through investments. Retirees who possess investment know-how can make strategic investment decisions to grow their money and potentially achieve higher returns. This option empowers individuals to take control of their finances and reap the rewards if investments turn out to be successful.
On the other hand, lump-sum payments also come with certain risks. If individuals make poor investment choices or spend the money recklessly, they might exhaust their funds sooner than expected. This can put them at risk of financial instability in the long run.
Now let’s delve into monthly pension payments. This option allows retirees to receive a fixed amount of money on a regular basis, such as monthly or annually. This steady income stream provides financial security and ensures a consistent source of income to cover expenses throughout retirement.
One significant advantage of monthly pension payments is the peace of mind that comes with knowing the funds will last throughout retirement. Regardless of market fluctuations or investment risks, individuals can rely on a regular income source to fulfill their financial obligations. This stability contributes to a sense of financial security and reduces stress related to managing finances.
Moreover, monthly pension payments are generally not subject to market volatility. This is especially important for individuals with little to no investment experience or those who prefer a more conservative approach to their finances. By choosing monthly payments, they eliminate the risk of potential investment losses.
However, monthly pension payments may lack the flexibility that some retirees desire. They restrict individuals from making significant expenses or investments upfront, which might be necessary for certain situations or life events. Additionally, the fixed payment amount might not be enough to cover unforeseen expenses or address sudden financial needs.
Ultimately, the decision between lump-sum and monthly pension payments depends on individual circumstances and preferences. Some retirees may prioritize the immediate financial boost and investment opportunities offered by a lump-sum payment. Others may prioritize the stability and security provided by regular monthly payments.
It’s crucial to consider your financial literacy, spending habits, and long-term financial goals when making this decision. Additionally, consulting with a financial advisor or retirement planning professional can provide valuable insights tailored to individual situations.
In conclusion, weighing the advantages and disadvantages of lump-sum and monthly pension payments is essential in choosing the best option for your retirement. Carefully evaluating your financial goals, needs, and risk tolerance will guide you towards making an informed decision that aligns with your unique situation.
I will be 66 tomorrow. Presently I am on long term disability. I have worked at the company for approx 30 years, getting 48 % of my pay. I haven’t took pension or social security yet. I seem to be doing ok right now. I also have an ira, buckets and rentals for income.
What professional would you seek to do a pension analysis?
WHEN MAKING RETIREMENT PLANS, PENSIONS IS GOOD BUT HAVING PASSIVE INCOME IS MORE CRUCIAL. Big ups to everyone working effortlessly trying to earn a living while building wealth. I'm 40 oand my wife 34. We are both retired with over $3 million in net worth and no debts. Currently living smart and frugal with our money. Saving and investing lifestyle made it possible for us this early even till now we earn monthly through passive income.
There are plans that allow you to take a set range of the lump sum amount ($10-$50k), and the individual will still receive a monthly 75% joint annuity payment for the primary’s and spouse’s life. This will allow them to play both sides of the fence by having that lump sum directly rolled over to a traditional ira; while receiving a slightly reduced monthly annuity for the rest of their lives.
If your pension pays $1000 per month (for ease of calculation), $1000 per month is going to be the equivalent of $500 in 25 years due to inflation. If you take the lump and invest it properly you can outpace inflation. For me, payments would take about 21.5 years to equal the lump. I always figure they probably have actuaries figuring these things out so it’s maybe six of one, half dozen of the other. However, if you think your company may go out of business then definitely take the lump.
long winded commercial…At least provide the 6% rule to start the analysis.
I took the monthly,happy I did so.
Our pension is 2.5 percent a year for 32 years at 80 percent, of our pay.
Hello,
So my dad's company got a "Lump Sum Pension Offer" to their employees because the company about to shut down in 2016. The deadline was Nov. 2016 to submit the forms that they offered.
There were 3 options for him to choose from:
1- Elect to receive a single lump-sum payment
2- elect to start monthly benefit payment
3- wait until later to begin receiving your pension
At that time, he chooses option 3 and does nothing.
Now 2021, he wants to rollover that pension $ to a Roth IRA or take the lump sum. Is it too late for that? If not, where was that pension $ go? because the company he worked not exist anymore so was the phone # for help assistance. Who do I contact to get help with this situation?
Thanks for your help
My comment about pensions brings up a greater point that I have yet to find, although I’m new to the channel, where you talk about pensions AND all the other investment vehicles. Seems many are just about discrete topics but not a holistic approach when there’s a DBP involved.
I watched the retirement rich but illiquid video and you kept mentioning 55 yo.
I’m 55 and retiring at 57.5 with a $90k a year pension. The DBP includes some health benefits as well. My wife is 47 and likely will work another 10 years.
Right now 90% of our buckets is all deferred taxable 401, 457 and 403 plans.
What basic strategies are recommended now that it very late to contribute to other buckets so our taxable income isn’t crazy high with pension and sra and ira withdrawals?
Based on the 4% withdrawal rate, you would want at least 25x yearly payout to make it worthwhile. You'd also consider if there is survivorship benefits.
Facial hair. Yep. Highly recommend it. For a man. Lol.
Do a video on Social Security taking it earlier or later. But with investing every penny if taken early.
Interest rates are so low right now, that even with the modern formula that includes corporate bonds, a lump sum might be enticing.
Consider years until retirement, and compute the investment return necessary to generate your own pension if given the lump sum amount right now. Also consider if you need pension for just you, for you and a spouse, or something for a legacy. And remember, social security is inflation adjusted, so maybe you can delay taking social security until age 70, maybe by taking the pension lump sum.
If you do take the lump sum, roll it over into an IRA!
My promised pension when I left that company was looking like peanuts, and decades in the future it wasn't going to be any higher. By investing the lump sum for 20 years I figured I'd have as much coming in via dividends as the promised pension, using very conservative assumptions. So far dividend growth is surpassing those conservative assumptions and while I do not have one company contracted to pay me a pension, I currently have 11 companies committed to paying me, and paying me more every year.
In the case of modern cash value pensions, it may be the other way around. As you worked, your cash value built up, but you don't know what the pension will be until the year you annuitize it. If you turn it into an annuity in a year with low interest rates, you may not get much of a pension compared to the value of the lump sum.
You also don't want your retirement income to be too high, if this is a problem for you. Single retirees pay high IRMAA and 3.8% Medicare tax if their income is over $200K. By taking a lump sum, and then only taking the RMD, you may be able to lower your income under these limits while allowing your net worth to increase.
I think this would make a great episode with several examples of when one is better than the other!
Hey Money Guys! This is to anyone heading to the comments too, when I have the chance at my lump sum I'm taking it! Here's my reason why. If I die before I retire my wife either get half or full monthly benefits at would have been my retirement age depending how I set it up. If we both die before that time, guess where the money I earned goes? It goes bye bye! My kids get zero! First chance I get I'm taking my lump sum and investing it with a big smile knowing that after that point if I die, my kids will at least get something! If you have a pension and kids….look into this and consider it.
Another variable to consider is the person's health. If he or she is in bad health one would probably take the cash payout.