When you retire should you take a lump sum or opt for a lifetime of pension checks? In our last post, we mentioned that roughly 70% of American workers take the money even though that is frequently not optimal. If you missed the post, here it is: Workers Taking their Lumps If you are contemplating converting your pension to cash, here are seven questions to ask yourself:
You may consider yourself an above average investor, but what does your investing track record show? Look at previous statements from your investment accounts to see how you have fared against market benchmarks over the long-term. If you haven’t done well, consider taking the monthly lifetime payments or seeking professional help to manage the lump sum distribution.
Pay careful attention to how you reacted when the stock market imploded in 2008 and 2009. And also think about how you reacted during the dot-com meltdown. Did you panic or see these periods as opportunities to buy stocks at lower prices? You especially need a steady hand when you are investing during retirement because you can no longer make up for mistakes by adding more money to your portfolio.
Employers calculate lump-sum payouts based on average life expectancies. If you or your spouse outlive the projections, the lump sum may not be adequate. In contrast, pension payments will continue even if you and your spouse beat the odds and live into your 90s or even past the century mark.
You might consider taking a lump sum if you are in poor health and don’t expect to live long. An important consideration in making this decision is whether you will be leaving behind a spouse who will need lifetime income.
If you take a lump sum distribution and don’t roll it over into an Individual Retirement Account, some of that money will be eaten up by taxes. In fact, the payout could push you into a higher tax bracket. The best place for the lump-sum distribution is an IRA rollover account, where you will continue to enjoy tax-deferred growth until you make withdrawals. In addition to the taxes, if you park the money in a taxable account, you may also be more likely to access the cash before you really need it.
Once you take the lump sum, you can’t change your mind if you have regrets.
You may want to consider taking a lump sum if you enjoy a large retirement nest egg or you have a secure stream of income from a spouse’s pension or other source.