Investing For Couples

Partners With a Common Goal

Should I take the lump sum or pension?

Often clients nearing retirement are forced to decide between taking a lump sum or receiving a monthly pension for the rest of their lives from their employer. One could say that receiving a steady paycheck for the rest of their lives is hardly a bad thing. But, is it a better option than the lump sum that you can invest and grow yourself? Both options can be attractive, but which decision is right for you? Before making this decision, one should carefully weigh the benefits and hindrances of both options. Seeking the advice from an objective financial expert is highly recommended, as each person will have their own unique and specific financial needs. If you are currently in need of objective financial advice or just have some questions, we can help!

Our Lump Sum vs. Pension Analysis will help you answer the question “Should I take the lump sum or pension?”  We understand this question can be difficult to answer.   Our Lump Sum vs. Pension Analysis includes:

• An “apples to apples” comparison of your various pension options;
• Stress testing each pension options to see which ones are expected to best meet your goals;
• Factoring in other income sources from your investment accounts;
• A review of your Social Security benefits and the impact on your pension choices.

For many years now, employers have been phasing out their pension plans, which is one reason we see clients who are offered a lump sum in lieu of a pension for life. Typically these clients are in their 50s and 60s and nearing retirement. These same clients often face difficult choices regarding when to take their Social Security. When faced with these difficult decisions, we are reminded of an old saying in financial planning, “If we knew how long you were going to live, we could tell you exactly what to do.” Of course life is not that simple, and only time will tell which financial choices provided the highest level of financial security.

When should you take the pension rather than the pension?

Regarding the question “Should you take the lump sum or pension?”, for those who choose the lump sum, their former employers are freed of the burden of paying pensions. As a result, a lump sum can represent significant cost savings to these companies. In addition, many financial advisors are highly biased in favor of the lump sum as this choice can result in additional assets for them to manage. While the financial benefits to the client’s former employer and financial advisor are often clear, a lump sum is not always in the client’s best interest.

If you are offered a lump sum, here are three reasons you may want to take the pension instead:

• If you are healthy and have an above-average life expectancy due to longevity in your family, a pension may be a more financially secure option compared to a lump sum;
• If you are married and the pension provides a generous survivor benefit to your spouse, taking the pension may be the least risky choice; and
• If the pension includes a cost of living adjustment each year, it is more likely to keep up with inflation, thus providing you with more income over time.

When should you take lump sum rather then pension?

The lump-sum option will only provide you with a higher level of financial security if it is properly invested. A lump sum can be the more attractive option if your pension does not include a cost of-living adjustment. Also, if the company paying your pension is not financially secure, taking the lump sum can be less risky. When our clients are faced with difficult choices regarding company pensions, lump sums or when to take Social Security, we will run various financial projections to see which options are expected to provide the highest level of security. Before making what are often irreversible decisions, such financial planning will help answer the question, “Should you take the money today or later?”

If you have any questions or concerns regarding whether to take your lump sum or pension, please reach out to us: