When it comes to pension plans there is often not a more commonly discussed question than the lump sum vs. monthly payout query. While it does come down to personal preference for many, there are a lot of factors that come into play.
If you are dealing with a defined pension plan then this is probably something that you have discussed with yourself over and over. In many instances it comes down to whether you prefer the security of a monthly payment or the investment flexibility that comes with a lump sum payment. However the issue goes much deeper than that.
While the monthly payment may sound good now it is rarely adjusted for inflation and can make it difficult to make a large purchase such as a retirement home later on. It also presents problems in case of emergencies or any instance where you may need to access a lot of money at one time.
The lump sum payment allows you to maneuver quite a bit more but can be hazardous if you aren’t smart with your money, or don’t trust yourself to invest properly. With that being said, here are 4 steps that you should go through that will allow you to come up with a more complete answer to this oft-discussed question.
Speak with Human Resources
The very first step when trying to make a decision about your pension payment is to check with your company’s human resources department. This is the best way to make sure that you are aware of all the options that are available to you and how the calculations are made. You may be able to receive half in a lump sum payment and the other half as monthly checks which can be a great option. Better yet, they may let you know that you qualify for added benefits if you stay employed for just a few more years.
Create a Post Retirement Budget
Before you can make an educated decision on which payment plan you prefer it is best to have a grasp of how much you will be spending. You can do it with a pen and paper if you want but are better off using some quality budget software. Try and categorize your expenses into discretionary and necessities.
This will give you an idea of how much you have to play around with, where you may need to cut down, and show you how much regular income you are going to need. There is a chance that your social security benefits will cover most of what you need and in that case you can opt for a lump sum payment, as you won’t have to rely on the steady, monthly income
Calculate Big Expenses and Expenditures
This is where the process becomes tough for some people. It is hard to plan far ahead and decide what you may want or need in a few years, but an estimate can really help. Consider the cost of keeping your home in good shape, grandkids, medical costs, and other unforeseen costs. If you have enough in an IRA account or your 401 (k) to fall back on then you don’t have much to worry about. However if you have very little savings or resources then you may need to consider a lump sum in order to afford some unforeseen expenses. You don’t want to be stuck with a massive hole in your roof and no savings left aside to patch it up.
Decide Whether you Want to Lean on Your Company
This is another big decision. If you choose to take monthly payments for the rest of your retired life then you will be relying on your company quite a bit. Even the biggest of companies can run into financial trouble and struggle to meet their pension obligations. If this makes you nervous then a lump sum payment may be your best choice. While there are certain protections offered to pensioners, that protection has its limits.
All in all a decision between a lump sum pension payment and a monthly payout is a personal decision. There is no clear cut answer that can be provided that you should follow. Weigh your options, consider your future plans, and make the best decision for your future and the future of your family. A lump sum payout will give you added flexibility but needs to be used wisely.
A monthly payout is an excellent way to get in a routine and live comfortably, but can leave you strapped for cash if something unexpected comes up. In the end the decision is yours, but hopefully this information has steered you down the right path.