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Retirement Planning Question: Lump Sum vs. Pension

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)?

 


 

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