Lump Sum vs. Monthly Payments: Which is the Better Option?

Shutterstock

Lump Sum Pension Distribution vs. Monthly Payments: When You Retire, Which Will Work For You?

The years have flown by (well, if you didn’t like your job, maybe not so much) and now it’s time to fly the coop and leave behind full-time employment. But be aware that in recent years, more and more corporations are electing to “freeze” or discontinue defined benefit plans (also known as pension plans), replacing them with employer-matched 401(k) plans.

With a defined benefit plan, corporations are on the hook for the performance and funding of its plan. If a financial crisis hits and the underlying investments underperform, the plan can become cost-prohibitive for the company to provide adequate funding so that it can meet not only current but also future pension obligations. And while rising life expectancies might allow more time for you to whittle down your bucket list it can mean employers could be looking at employees collecting a pension for not just several years but decades.

Now, because more companies are discontinuing their defined benefit plans, retiring employees may face a choice: take a lump sum distribution now, which can be rolled into an IRA, or take an annuity that pays a level amount each month when retirement begins. The decision you make should be founded on what’s best for your individual goals but the lump sum option can provide several distinct advantages when compared with an annuity.

Consider the following when trying to determine which option makes the best financial sense for you.

A lump sum:

1. Affords complete control of your funds right away

2. Gives the investor more control over their tax liability

3. Offers many distribution options

4. Avoids dependence on the company’s solvency

5. Eliminates the possibility that funds can be lost if the plan member passes before retirement or soon after electing payments in retirement

6. Allows for passing on to heirs the remaining account balance upon death, which can be a significant wealth-building tool for a family

When deciding which option is best for you, remember that lump sum payment amounts are determined not only by the employee’s earnings history and the number of years worked but also by current market interest rates. As rates increase, the outcome of the lump sum payment calculations will decline as the mount is determined by discounting all expected future payments to a current present value amount.

Whichever retirement you plan you choose, one thing is certain: It pays to do your research.

RECOMMENDED CONTENT

5 Tips To Help You Retire 10 Years Earlier

Planning An Affordable Wedding: How Tie The Knot on a Budget

8 Interview Tips That Will Help You Get Hired

15 Perfect Destinations For A Couples Getaway

Two Minute Trick That Can Save Up To 30% On Utility Bills

Down Payments: How They Work & How Much To Pay

Sandra Murphy

Sandra Murphy

Holds a master's degree in professional writing and has more than 15 years of experience writing for national and international entities.

Want to Learn Ways to Make & Save Extra Money?

Sign up for Free Updates: