THE MONEY MINUTE – Pensions: Do I take the lump sum or monthly payment?

by Jac M. Arbour CFP®, ChFC®, President
J.M. Arbour Wealth Management

For those of you who need to choose a pension payout option, you might agree that the task can seem confusing. In this month’s article, I will share eight key considerations when making this decision.

Terms of the Lump Sum: One must compare the amount of the lump sum to the value of the payments over an estimated period of time (life expectancy). Many people are tempted to take the lump sum, but it is important to note that this may not always be the best choice.

Interest Rates: In low interest rate environments (like right now), the higher the lump sum payout is likely to be. Once the tides turn, so will the lump sum amount.

Life Expectancy: If you have medical issues and do not have longevity, a lump sum may be the best choice. On the flip side, someone who might live well into their 90s could be a strong candidate for the pension payments.

Financial Stability: If the plan sponsor is weak, the lump sum looks more attractive. People often mention the backing of the PBGC, but with its own financial problems, the PBGC may not have the ability or the legal obligation to insure your full amount.

Market Risk: Once a person takes the lump sum, the risk (totally) and performance (somewhat) are in your hands. You will want to consider what type of income you can create with the lump sum and its relativity to the pension payout amounts.

Taxation: You can rollover the lump sum to an IRA, but monthly pension payments you cannot. Therefore, your desire for tax deferral is something to consider.

Habits: Are you the type to spend money if you have access to it or are you a saver and investor? The person with financial discipline will likely prove to be the better person to receive a lump sum.

Beneficiaries: Many people feel as though they have more flexibility to pass money to their heirs by taking the lump sum. If you have a spouse or heirs, the above considerations apply to them as well.

Here is what I promise: All you can do is make the best decision with the information you have. Therefore, it is your job to get all the information before making the decision.

See you all next month.

Jac Arbour CFP®, ChFC®

Jac Arbour is the President of J.M. Arbour Wealth Management and can be reached at 207-248-6767.

Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.


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