How Many Lumps Do You Want

Deciding whether to take a lump sum or monthly payments from your defined benefit plan can be one of the most important financial decisions of your retirement.  

A defined-benefit plan is the promise of a monthly salary substitute after retirement. The employer funds the plan fully.

The amount you’ll receive from pension depends, first of all, on whether you work for a company that offers one. Most of us don’t. In fact, only 35 percent of Americans have such a benefit. In 1975, 88 percent of workers with workplace retirement plans had defined-benefit pensions.

If you are among the lucky few, the benefit you’ll receive is based on your salary and the number of years you worked for that employer.

Even if your company currently offers a pension, in some form or another it may be switched over to a 401(k). And you’ll not only contribute to the funding for your own retirement, but you’ll also have to choose where to invest those funds.

First, Get the Funding Status of Your Pension

In 2010, 147 pension plans failed, scary. Make sure your employer has enough money set aside to pay on their promise.

Ask your plan administrator in writing about the plan’s funding status. If it’s less than 80% funded, start collecting or roll out a lump sum immediately. Set up a paycheck system from your IRA in the form of monthly payments for the remainder of your life.

Another resource to find out whether your plan is in trouble is the Pension Rights Center. Go to and click Get the Facts to help you determine your plan’s status or call (202) 296-3776.

Fortunately, the Pension Benefit Guaranty Corporation (PBGC) provides backup insurance for pensions. Unfortunately, the PBGC is effectively insolvent itself.

Taking a lump sum by rolling over your pension to an IRA has several advantages. The IRA can grow if it’s invested intelligently, whereas monthly pension payments typically don’t increase over time, even to account for inflation. You will always have access to all of your money if you need or want to. Your heirs would receive money, with a pension, your heirs get nothing.

If you opt for monthly payments should you take the larger monthly payout for as long as you live and ignore the possibility that benefits would cease for a surviving spouse, or should you take a reduced income and guarantee those payments as long as either spouse lives?

A way to know is to have an insurance company research the following:

  • How much life insurance do you need to insure a lifetime income for your spouse?
  • How much will that coverage cost?
  • How does that compare with taking the joint life option?
  • Your goal is for you and your spouse to have more money. If your dependent spouse dies first, you can stop paying premiums and continue receiving the non-reduced benefit per month. If you’re healthy, this solution may work great.

    I don’t have a pension, most of us don’t. It’s up to me and you to have a successful retirement. If you have a pension, taking the lump often outweighs taking monthly payments but get the math done.

    About the author

    James Shagawat, CFP®, ChFC®, MBA

    Jim handles client relationships and provides expertise to the firm on financial planning. He has been providing wealth management services since 2002. He currently serves working families, widows and retirees. Jim has been featured in the Wall Street Journal, Dow Jones Newswire, Bottom Line Personal and MSN Money. Specialties: Fee-Only Comprehensive Wealth Management.

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