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Retiring From Your Cooperative Soon? Lump Sum or Annuity? Thumbnail

Retiring From Your Cooperative Soon? Lump Sum or Annuity?

Today I would like to discuss one of the biggest decisions you will have to make when you retire. Should you take your cooperative's monthly pension offer or should you take the lump sum offer? 

Deciding between the monthly pension or the lump sum option is one of the most critical decisions of your financial life! Most importantly, it's a decision that can't be corrected later! Once you sign the papers, that's it. Sometimes the monthly pension is the right choice and sometimes it can be the single most devastating decision you can make for your retirement. Let's look at the options:

What is a lifetime pension annuity offer?

A lifetime pension annuity offer is a flat monthly payment based on a percentage of your income history for your entire life or your spouse's life or for a certain time period or... a combination of any of these. See my blog on annuity payment options in plain English here.

What is a lump sum offer?

The lump sum distribution is a one-time payment from your pension administrator. You gain access to a large sum of money by taking a lump sum payment which you can then spend or invest as you see fit.

The thing I like to emphasize to potential clients about the lump sum offer is the flexibility and control that comes with taking this option. A 30 year retirement means more than likely facing many surprises with which a flat monthly payment isn't going to help. The lump sum option, invested properly, offers flexibility to meet those surprises, can be strategically invested to provide regular income, and most importantly could possibly change the lives of the loved ones you leave behind.

Which option is the better deal?

It depends on your unique financial situation, but if you look at your options mathematically you can figure this out pretty easily. Start by asking if the monthly annuity option passes the 7% test.

What do I mean when I say pass the 7% test? If your monthly pension offer from your employer is 7% or more of the lump sum then it may be worth considering. If it’s below 7%, then you can likely do just as well (or better) by taking the lump sum and working with a financial advisor to invest the money strategically, and then paying yourself a salary from the lump sum amount. This allows you to create your own personal pension that you control.

Ex. Let's say you were given the choice of taking a $7,000 per month annuity or a $1,700,000 lump sum.

Here’s how the math works:

Take your monthly pension offer and multiply it by 12, then divide by the lump sum offer.

Example:  $7,000 a month for life beginning at age 65 or a $1,700,000 lump sum today?  $7,000 x 12 = $84,000. $84,000 divided by $1,700,000 equals = 4.9%

In this example, by accepting the life only annuity you are getting a return on your money of approximately 4.9%. 

***Keep in mind that what a monthly pension annuity is doing is just paying you back your money. If you took the lump sum option of $1,700,000 instead and transferred it to an IRA and withdrew 4.9% per year you could create the same salary of $7,000 per month for the next 20 years on your own and still have a balance of $1,700,000. Read this again and again until it sinks in.

I use 7% because stock/equity investments have historically yielded 10% per year. Inflation has averaged around 3% a year.  That gives a return net, including inflation, of 7%. (10-3=7).

Which should you choose?

If we are just looking at this from a math perspective then as of right now taking the lump sum would be the best choice in this example. However, retirement isn't just a math problem and the choice will be dependent upon your unique financial circumstances. The good news is at 80/20 Financial Services we specialize in retirement planning for electric cooperative employees. 

I can help you make the right decision for your situation. As an Independent Registered Investment Advisor, I work for you. You can be assured you are getting financial advice from an advisor you can trust, that knows your profession, that once had the same benefit plan as you, that is a Fiduciary who is required by law to put your interests ahead of my own.

Final thoughts

We worry about many decisions in our lives but almost all the decisions we worry about can be undone. Even if we choose wrong, we can fix it later. When choosing between  a monthly pension and lump sum offer this is NOT the case. You can't change your mind later. You can't undo the decision.

At 80/20 Financial Services, we believe that you, not the company you worked for, should be in control of your money. In the current interest rate environment there are very few instances where taking the monthly pension annuity makes sense. With the lump sum amount you have control, flexibility, options and security. You have control of your money and can make your own salary, flexibility in case of emergency or other financial needs, the option to leave a legacy to your heirs or to your favorite charity and you have security knowing that all of your money is in YOUR Individual Retirement Account (IRA).

You need a plan

At 80/20 Financial Services, we are retirement planners and we specialize in working with electric cooperative employees. We can help you answer questions like:

  • Should you take your cooperative's monthly pension or lump sum offer?
  • Do you have enough money between your R&S and/or 401k to retire?
  • Could you possibly retire at age 55?
  • Is your cooperative 401k invested correctly for your retirement goals?
  • Should you be investing in a Traditional 401k or a Roth 401k?
  • Are you contributing too much or too little to your 401k?
  • Should you quasi-retire from your cooperative?
  • Should you accept an early retirement offer from your cooperative?
  • When should you claim Social Security benefits?
  • How can you lower your tax bill in retirement?
  • How do you invest your retirement money so that you increase your income in retirement?
  • How do you create an income stream in retirement that is similar to when you were working?

I started this firm specifically to help electric cooperative employees with retirement planning. I worked for an electric cooperative for 11 years and I know your profession and benefit plans better than any other financial advisor will. You have excellent retirement benefits available to you. I can help you optimize those benefits while creating a retirement income and investing plan that aligns with your retirement goals.

Contact us to set up a consultation. The consultation is free and without obligation.

For more articles about retirement planning and investing, click here. You may also sign up to receive our weekly retirement blog here.

Thanks for reading!

Brian Coleman/Retirement Planner

80/20 Financial Services is an Independent Registered Investment Advisory Firm. We help Electric Cooperative Employees create their retirement income and investment plans.

Photo by Jamie Street on Unsplash