Retirement Choice – Lump Sum or Monthly Check?

If you work for a large company that’s been around for a while, you may be one of the lucky few who have a retirement pension as part of your benefits package.

If so, you may be faced one day with an option of keeping that pension or trading it in for a lump sum of money, paid to you right now.

A retirement pension is a type of retirement plan that promises a monthly income for the rest of your life.

A few decades ago, however, large employers began realizing how expensive these plans were to fund and maintain, and some began making arrangements to get out of them as soon as possible. One way to do this is to take advantage of disruptive events (such as recessions or lay-offs or mergers or buy-outs) that provide a convenient excuse to either drop the plan or give employees an incentive to opt out of it.

In most cases that I’ve seen, a pretty fair choice is offered: the worker can keep the original promise – they can get a check a month for the rest of their lives. Employees are also usually offered the option to include a spouse in these benefits at some level.

As an alternative to the check a month for the rest of your life, companies may offer that same worker a lump sum benefit to be paid right now, which financially and actuarially is close to equal of the monthly checks for life, beginning at retirement. 

Now if you ever get that choice, let me suggest that you not ask, “Which is better?” 

Rather, you ask yourself, “Which is better for me?”

One common strategy is to offer employees a “buyout package,” either in a special offering or at the time of their separation from service. 

In order to really be equal, the recipient of the lump sum would have to be able to invest that money in a similar fashion as the pension fund would have, and generate for themselves a check a month for the rest of their lives. Their checks would keep coming as long as they live, but there would be nothing left over at the end.

At least, that’s the way it works on paper.

For the sake of this discussion, let’s assume that what I usually find also would be true if you were offered such a deal on paper. 

So, if they’re equal, how do you make the choice?

Well, by taking each of these options and overlaying them onto your own life, your personality, your circumstances, your temperament, your talents and your goals. In other words, this choice needs to be made in the context of a personalized financial plan. 

What other assets do you have besides this lump-sum-or-monthly-check choice? If this and Social Security are all you’ve got for retirement, you may make a very different decision than someone who has Social Security, this retirement option…and say $1,000,000 in the bank.

What is most important to you - your lifestyle or your legacy? Are you most concerned with your own retirement income security? Do you desire to leave a family legacy to those you love? Are you planning to leave it all to a research hospital one day?

What is your own personal appetite for risk and return? For most of us, whatever appetite we may have had for investment risk when we were younger kind of tends to decrease as we age. Most crave certainty and would give up the potential for gain to get it. But that may not be you...just be sure that you understand the nature of investment risks and that you and your spouse can live with your choice.

Here’s my advice – don’t try to choose between lump-sum or a check a month later. Choose to do a financial life plan, based on more than just finances – based on your whole life.

Then let that planning process reveal the right choice… for you.

Offering you Wisdom on Wealth, I’m Byron Moore.

Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.

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