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Lump Sum or Regular Disbursements from Pension?

Posted By Jim On 06/23/2006 @ 12:24 pm In Investing,Retirement | 3 Comments

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 [3].


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