Podcast Episode 339: Pension Planning – Lump Sum or Monthly Payments?

Believe it or not, we still get a lot of questions about pensions. Just because there aren’t many private companies that are still offering pensions, there are still many people that had them at a job 20 years ago and they have a choice to make or they are retiring from a state employee job. Whatever the case, one of the questions that people are trying to work through is do I take the lump sum on this pension or do I take the monthly income for the rest of my life?

Heath Grossman, CFP® joins the podcast to walk us through that conversation because the answer won’t be the same for everyone. It needs to be a part of the broader retirement income plan and we’ll share a look into how to determine the best answer for you and your family.

When approaching retirement, one of the most crucial decisions you may face is how to handle your pension, and this decision is more than just a matter of preference—it’s about crafting a financial strategy that suits your lifestyle, income needs, and long-term goals.

For those who value stability and predictability, the monthly income option could be more appealing. It guarantees a steady stream of income to cover living expenses throughout retirement. This option might be particularly fitting for individuals who aren’t confident in their money management skills or who may not have significant savings outside of their pension.

Conversely, a lump sum offers flexibility and control over your retirement funds. You can invest the money, manage it as you see fit, or even pass it on to your heirs. For someone comfortable with investing or who has a trusted financial advisor, this could be an attractive route. A lump sum might also make sense if you have concerns about your pension plan’s long-term viability or if you wish to manage a large expense immediately.

Interest rates can significantly influence the value of lump sum payments and the attractiveness of annuities. A higher interest rate environment may reduce the lump sum amount but could increase annuity payouts. It’s essential to consider the current economic climate when making your decision.

As we illustrate with the story of a retiree we worked with, sometimes a hybrid approach works best. This person chose to invest a portion of their lump sum into an annuity that guaranteed income for life while still providing a legacy for his children.

Ultimately, deciding between a lump sum and monthly pension payments comes down to personal circumstances, health, family longevity, and your overall retirement plan. Utilizing tools like our Money Map can help chart a course that aligns with your financial aspirations, ensuring a comfortable and secure retirement. Whether you crave the certainty of monthly checks or the autonomy of a lump sum, careful planning with expert insights is key to navigating this important choice.

Here’s some of what we discuss in this episode:

• What type of person would benefit from the lump sum over the monthly payout and vice versa.

• How to utilize a hybrid approach to get the best of both worlds.

• Pension plan payouts are different and that could impact the decision.

• How does the interest rate environment change the decision?