The Big Pension Decision – Should You Choose A Lump-Sum or Monthly Annuity Payments?

If you are fortunate enough to have this decision in front of you, you may be seeing some obvious reasons to take each of these options. Maybe you want to grab the cash now while it is available and invest in an IRA. Or maybe the idea of ‘guaranteed’ income for life sounds better.

Here are the key factors to consider:

Age & Health – Pension benefits are generally calculated based on a combination of years of service and final average salary. Also, life expectancy is used in determining lump-sum amounts. Therefore, typically women and those in good health may favor a monthly pension for life. In contrast, a lump sum could be attractive for someone in poor health because the whole remaining amount could be passed to beneficiaries.

Spouse’s Resources – If your spouse already has a pension and you don’t have much saved in a 401(k), you might like having money to invest with a lump-sum. However, if your spouse has no assets, it might be comforting to have a fixed pension income for the rest of both of your lives by electing a joint and survivor annuity option.

Risk Tolerance – Generally, I have observed that risk-averse investors prefer a monthly annuity and those with greater investing experience and risk tolerance like the lump-sum. Another big factor is when you need the money. For example, if you can take a lump-sum 10 years or more before it is needed, this might be a good fit.

Other Income & Taxes – Probably the most often missed – yet key factor – is other sources of income and the rate of tax paid on the pension funds. In the example above, would it make sense to pay tax on monthly annuity payments if you don’t need the money for 10 years? A pension would be stacked on top of your other income from wages (etc.) and could end up costing you a big chunk in taxes to the IRS each year. So if you have time before the money is needed to live on, a lump-sum may work for you.

Make sure you carefully review the pros and cons of each pension option before making this important – and irrevocable – decision.

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About the author

Michael Helveston, CFP®, CRPC®

Mike Helveston, CFP®, CRPC® is Director of Adviser Services at Rodgers & Associates. He manages the team of advisers and is responsible for maintaining the firm’s financial planning process. In addition, he provides comprehensive tax, estate and investment planning advice to guide our high-net-worth clients toward their financial goals. Mike joined Rodgers & Associates in 2007 after starting in the profession over 15 years ago with Vanguard.

Mike is a contributor to Forbes, has been quoted in the Wall Street Journal and has also appeared on television and radio discussing various financial planning issues.

Mike has served the community as a volunteer mortgage counselor with Tabor Community Services, a student financial literacy volunteer for Junior Achievement and as a mentor through Bridge of Hope. His hobbies include running, golfing with friends, listening to music and watching professional sports. He resides in Downingtown, PA with his wife and three children.

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