So you are on the verge of retiring, and you are faced with a difficult choice regarding the defined-benefit pension plan you are fortunate enough to have: Should you accept the traditional, lifetime monthly annuity payments or take the lump sum distribution?
The lump sum distribution is a one-time payment from your pension administrator. By taking a lump sum payment, you gain access to a large sum of money, which you can spend or invest as you see fit.
The thing I like to emphasize to potential clients is the flexibility that comes with taking the the lump sum option. A pension annuity payment is fixed, yours also offers a COLA (Cost of Living Adjustment) option. COLA means the annuity payment has a clause in it that will adjust your payment based on inflation. But guess what? A 30 year retirement is, more than likely to face many surprises that a cost of living adjustment of 2% isn't going to help with. The lump sum option, invested properly, offers flexibility to meet those surprises and can be invested to provide regular income also.
Do you want to leave something to loved ones upon your death? Once you and your spouse die, the pension annuity payments might stop. On the other hand, with a lump sum distribution, you could name a beneficiary to receive money after you and your spouse are gone.
Income from all pensions is taxable. However, if you roll that lump sum into your IRA, you will have much more control over when you remove the funds and pay the income tax on them. Of course, you will eventually have to take required minimum distributions from your IRA, but that won’t happen until age 70½.
The key word is control. With the lump sum option you have complete control of your money for the rest of your life and possibly your heirs life too. You control your monthly income, you control your taxes, you control your investments, you control the retirement that you worked so hard to get to.
To many of you managing this process might seem overwhelming and that's where 80/20 Financial Services can help.
"In a partnership with each client, we create a personalized retirement plan to help them realize their dreams and achieve their goals. We do this with Reliability, Integrity, Compassion, and Honesty."We partner with you to help you achieve the retirement of your dreams. Contact us today for a no obligation review of your retirement situation. Everyone has a unique situation and there is no one size fits all in retirement. For some of you the annuity might be the best option. However, for many of you the lump sum will be, by far, the better option.
We can look at these options together and determine which option actually helps you achieve the retirement you want.
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Have a great day and thanks for reading.