Q: I’m 60 years old and was recently downsized from my employer of 38 years. I have a pension, but I have not activated it yet. I am wondering if I should take the lump sum or the annuity.
A: The first question when it comes to taking a lump sum vs. a monthly pension is: what is the payout percentage?
Generally, that if the annual pension payment is 6% or more of the offered lump sum, it is may be better to keep the monthly pension. If it is less than 6%, it may be better to take the lump sum.
Here’s an example of how the math works:
•Monthly survivor benefit = $1,000/month
•Annual survivor benefit = $12,000/year ($1,000/month x 12 months)
•Offered lump sum = $190,000
•Annual survivor benefit / offered lump sum = 6.31% ($12,000 / $190,000)
To clarify, this is just a simple way of making this decision based on the payout percentage. There may be other circumstances in your particular situation:
Do you have other income sources to meet your expenses in retirement (social security, other pensions, rental income, or portfolio income)?
Do you need a quick injection of cash?
Do you want to invest the lump sum for a future beneficiary (children, grandchildren, charitable organization)?
What is your tax situation (lump sum will be taxed as ordinary income and may move you into a higher bracket, unless lump sum would be tax deferred rollover to IRA)?