Investing, Retirement 

Lump Sum or Regular Disbursements from Pension?

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Usually the questions sent into Walter Updegrave, a Money magazine senior editor, are like softball pitches – pretty transparent and easy to knock out of the park. This week’s question is a little bit trickier… Victor of Boca Raton, FL asks whether he should take the monthly annuity payments from his pension of $3,600 or a lump-sum payment of $775,000. He has half a million in his 401(k) and IRAs. There is a second question, would he get more if he took the lump sum and invested it in an income annuity. If this is a softball pitch, I’d have struck out.

Walter did some research and found that if he were to just take the $775,000 as a lump sum and immediately did an IRA rollover, so it wasn’t taxed, he could get a “joint lifetime income annuity with 100% to the survivor” where he’d be paid $4,295 per month, much more than the $3,600. To get $3,600 Victor would only need to put $650k into the annuity, leaving $125,000 to invest elsewhere. That’s a pretty solid answer. I think the key in all this is the fact that this isn’t a black and white answer, take the lump sum and run or take the regular disbursements, but shades of gray that must be appreciated.

In retirement, you try to strike a balance between income and investment because when you retire in your 60s you still have a few more decades left on your ticker, if not more. You don’t want to put too much of it into your income because it could be exhausted before you are, so you want to have a little bit of investment (also so you can pass it down to your children and such). However, you don’t want to push off too much of your retirement funds into investment because you should be enjoying the fruits of your labor.

However, in this particular case, it’s a matter of sheer numbers. When you can get an annuity that pays out the same as your pension and $125,000 then you take it.

via CNNMoney.

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3 Responses to “Lump Sum or Regular Disbursements from Pension?”

  1. CK says:

    Can you imagine the look on Walter’s face when he heard this news?

  2. Bald Man says:

    The annuity option offered within a retirement plan is rarely the best choice, because the Plan Administrator is under no obligation to find the best deal. If you’ve got your heart set on an annuity, you’re probably better off doing a rollover and shopping for one on your own. Or, just take installment payments from your 401(k) or IRA. You get periodic income, the balance of your money remains in the market, and you avoid the built in expense of a formal annuity.

  3. Mike says:

    In comparing your options, be sure you understand whether or not the annuitized payments will adjust for inflation. (Apples Vs Oranges).

    Also, a male will get a larger annuity payment from the open market than a female due to the difference in life expectancies between the sexes. As I understand it, this differentiation is not allowed for pension benefit payments.

    Meaning that a male is more likely to do better with a lump sum distribution than is a female.

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