In this video, you’ll learn the difference between taking your pension as an annuity vs. electing it as a lump-sum so you can determine what may make most sense for your individual situation.
Learn the tips & strategies to create your secure retirement.
⏰ TIMESTAMPS
00:00 – Introduction
1:35 – Maximizing Lifetime Payout
2:21 – Comparing Withdrawal Rates
4:12 – Example
7:57 – Lump Sum Withdrawal Rates
10:01 – Risk Tolerance
12:47 – Avoiding Annuity Option (is that smart)?
15:26 – Social Security Impact
16:33 – Legacy Goals
17:00 – How Your Pension Impacts Your Overall Strategy
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As retirement approaches, one of the biggest decisions one must make is how to receive their pension benefits. Typically, there are two options to choose from – receiving a lump sum payment or an annuity. While both options have their advantages and disadvantages, it is important to weigh them carefully to determine which option is best suited for your financial circumstances.
A lump sum payment is a one-time payout of all the pension benefits owed to you. It can provide retirees with a large sum of cash, which can be used to pay off debts, invest, or provide a steady income stream if wisely managed. With a lump sum payment, you have complete control over your money, and it becomes yours to spend and invest as you see fit.
However, there are risks associated with lump sum payments. One major risk is the possibility of running out of money. If not properly invested, retirees may deplete their savings faster than anticipated, leading to financial insecurity. Additionally, lump sum payments are subject to taxes, and withdrawing too much money too soon can result in a higher tax burden.
On the other hand, an annuity is a guaranteed stream of payments that retirees receive throughout their lifetime. An annuity offers financial stability, and the security of a guaranteed income stream without the risk of running out of money. Moreover, since annuities are not taxed until payouts begin, retirees have the flexibility to customize their taxes by adjusting the timing of their payouts.
However, annuities come with downsides as well. The payments are fixed, which means retirees cannot adjust their payouts in response to changes in financial circumstances. Additionally, annuities are often subject to high fees and inflated charges, which can erode the value of your investments over time.
Ultimately, the decision between opting for a lump sum or annuity payout comes down to personal preference. If you value control over your money and the freedom to invest and spend your money as you see fit, a lump sum payment may be the right choice for you. However, if you want the peace of mind of a guaranteed payment stream and the certainty of not running out of money, an annuity may be the better option.
No matter what option you choose, it is vital to consult with a financial advisor to ensure you make an informed decision that meets your retirement goals and financial needs.
If your company allows for lump-sum (many don't) upon retirement, take-da-money & RUN! You can thank me later…
Excellent balanced approach to this topic. What I've chosen to do is a bit of both rather than an all or nothing decision. I put about 25% of my assets to annuities to create an income floor that will be there regardless of the vagaries of the market with the remaining 75% invested in a mix of market and non market assets to give growth to account for inflation. The annuities plus my expected social security should cover my essential expenses to give me the peace of mind to remain invested in the market come what may. Then I can draw from this investments to adjust the annuity income for inflation.
I don’t have any plan how can I start?
AS INTEREST RATES RISE, THE LUMP SUM DECREASES. I hope that when/if interest rates decrease, the lump sum will increase. Lump sum values looked very good when interest rates were zero. Not the case today. Thank you for a fine presentation.
Another option for the lump sum is to buy a property and renting it. You get a monthly payment and appreciation of your asset. In addition you can leave it to your children as their inheritance. The cons are becoming a landlord and paying taxes on the property. The pros are appreciation and you can raise the rent to accommodate for annual inflation. Great video.
I am choosing the Annuity, here's why, the market's gains vs. mutual funds. Without going by what I've been told but looking at the actual gains in the different mutual funds there's a gap. Fees and other cost brings down the return and the market's recent downturns put the icing on the cake and I'm taking annuity. Yes, the average gain might be 8% in say the S&P 500 but even with the mutual finds in that market I haven't been able to get that return. Be careful what a financial advisor tells you as they are in it for the money, their money, not your money.
If you die you get nothing. Take the lump sum now. No guarantee you will live long enough to collect monthly income.
Can you review your numbers displayed around 4:49 and after? I think your lump sum total of 1,000,436 is either wrong or what you said was wrong.
On of the best videos I’ve seen on this topic. Nice work.
I worked for the state for 10 years and can take a lump sum, which they call "refunding my account". I worked in the private sector and paid into social security for 20 years. So my question is can I take the lump sum (actually just rolling over to IRA) and collect my social security and avoid any WEP issues/reduction?
I disagree with the comment at 1:40 – Maximin Payout is not as important than Securest Payout – meaning – humane nature is a fickle thing and taking a little less can be a lot better for the human soul than continually stressing about how to maximize the assets I have like chess pieces on a board. A lot can be said for – x amount is coming in next month – and I can live really well on that – and I don't have to worry about a lot of extra curricular ongoing problems – because I'm relaxing playing checkers.
My pension comes with a 3% annual COLA.
I’ve read several articles where some people with a several $100K lump sum spend it in 5 years or less! Unfortunately, I know people who have experienced this situation…sad but true!
Am 64 and will have to claim housing benefit at 66 I have a plan but will loose payments because of rent is it best to take it out in lump sum now?
3 weeks of stress until I found your video. Thank you soooooooo much for helping me yo make the best decision for myself and my family. I appreciate
i took the aunnuity – money to live on. We had other investments.
I watched this to see what you won't cover as so many people who cover retirement planing either just don't cover things or they just gloss over them. You actually did a very good job. You only missed part of one subject. You covered the comfort of risk tolerance, but you failed to cover "lottery disease" where one finds that they have a large some of money and they blow it all within a short time. One thing that needs to be covered is would they have the discipline to only take out the proper withdraw money each month that the plan accounted for and no more no matter the circumstances. Can they basically coldly tell someone to go hit the road when some relative or other person comes to them and says, "I can't pay my bills, or I want this and you have the money to help me."
I think the how much money you get over your lifetime should be the last consideration, as it is totally hypothetical. The only exception being known poor health leading to a high probability of early death.
Legacy is a strong consideration.
If there are no legacy goals then it gets to the same argument as your portfolio. We know that many people never spend down their portfolio, or if they do it is at the very end as they are dying.
To me (and I’m a physician) it becomes a false argument. The total lifetime return of a portfolio/lump sum is generally calculated over 30 years, and the great majority of people don’t get close to living 30 years in retirement. So in the end you leave all that money on the table, and never actually get to use it. The only people getting to use all that money are your heirs(which is fine if that is your intention), or maybe your medical providers.
So guaranteed income can be a better option, because it allows you to spend down the portfolio a lot quicker, say over 15-20 years. Thus, getting to actually enjoy your money and your life. After all money is just a proxy for a comfortable and enjoyable retirement, and that should be the goal, not some arbitrary dollar figure.
Excellent video. Couple of comments: 1.Taking the pension annuity (almost risk free) allows you to invest other moneys at higher risk and potentially higher gains. 2. The pension annuity can also be invested as each monthly check comes in. Not sure you included that in you analysis. 3. As far as legacy, it is possible (maybe probable if in good health) that you could leave more to your children if you take the annuity. You just have to live a long life. What if you take the lump sum and make bad investments? You touched on this point in your presentation.
I enjoy your videos. My wife has a teacher retirement annuity and I have a 401K plus a pension. When I retire I am looking at taking the annuity vs the lump sum. I am looking at retiring at 62, which is in 6.5 years, and have been given estimates of 7.2% for annuity payouts. If I take the annuity and take my Social Security at 70, I should only have to take out about 2% of my portfolio to help keep up with inflation. With my wife's pension and Social Security, we should be making more retired than we were working.
at 4:55 the last figure appears incorrect….
My family 1st
Great video
Just one thing I didn't like is you use the guardrail approach and then figure you always will be at the top end of the guard rail. If the worst shows up it's a whole different story than at the best happens.
But you explained it very well and gave great information on the choice.
Great presentation. Instant new subscriber. Given the current and foreseeable volatility of the stock market in the coming years it may be that the annuitized payments are more attractive assuming there are no legacy considerations except the spouse. Am I correct in that assessment?
Great video, James! This is so timely. I am actual in a slightly different scenario, my pension plan allows me to start collecting distribution before traditional retirement age if I leave the company. So as it turns out, I am leaving my company. I am currently 48. I have the option of annuity or lump sum. My question is, can I roll the lump sum into my next employer’s 401K plan or does it have to be rolled to an IRA? The reason I would consider rolling to the 401K versus a traditional IRA is leaving the possibility of back-door Roth IRA conversion option open to leverage. I did a $6k backdoor conversion in 2021, did the same in 2022, and planning to do another in 2023 and so on, as long as the government leaves the rules alone. I currently do not have a traditional IRA. My retirement savings are in Roth IRA, pension, brokerage account and 401K.
Very well presented. This is a situation that we will be facing in a few years and we have been running the numbers to make the best decision. I am leaning towards lump sum to have control of our money and leave a legacy as you mentioned. Thanks again for producing such informative videos.
The biggest consideration is if you want the lump sum amount in your estate…. Income is usually overall better for the retiree. Take the sure thing…. But if you want to leave a legacy, it is better to take the lump sum.. But you never know about the investment performance.
So if we take the lump sum option, how do the taxes work on that? Does it count like $700,000 of income in one year?