The pros and cons of the lump sum pension

Choosing a lump sum over receiving monthly pension checks for life has some advantages and potential downside consequences. There is no perfect choice for every retiree.

Questions Needing Answers

• How well do you manage money and investments?
• Is your monthly pension check indexed for inflation, at least annually?
• When must you choose? Now or in the future?

Pros

Can be a hedge for life longevity. Unless your monthly pension payments can increase with interest rates, a lump sum offers you flexibility to pursue aggressive investing to create a larger retirement fund. This would help your money last longer, just as you may live longer. When interest rates are low, you could focus on short-term investments to stay liquid until interest rates increase. Even most government retirement benefits are not indexed for inflation. Therefore, a monthly pension check calculated during low interest periods could lose significant value over time because of inflation.

Potential tax benefits. While you'll be responsible for federal income taxes on your monthly pension checks, choosing a lump sum, if you do not need this money right away, could postpone income tax liability. You are not mandated by the IRS to withdraw funds from your retirement accounts until you become 70 and one-half years of age. Only then would you be liable for income taxes if you didn't need the lump sum funds now.

Protection for your beneficiaries. Most company-sponsored pension checks stop if you pass away. In some cases, your spouse may continue to receive payments. However, when both spouses die, additional beneficiaries get nothing. A lump sum pension allows any monies left over from your personal retirement account to be distributed to your heirs.

Cons

No guarantees for investment returns. You may be an experienced and effective money manager. Unfortunately, no amount of expertise can ensure that an aggressive--or conservative, for that matter--investment strategy will guarantee a wonderful return. You face risk the loss of some or all of your principal in your lump sum pension fund.

You might "leave money on the table." Should you be offered an early retirement or other special pension incentive, your potential lump sum with the regular pension plan may not be factored into the offer. Seek out the best retirement calculators online to compare the offers and benefits in these cases.

Disease or disability may challenge your money management ability. Should you suffer poor health, your investing decisions may become inappropriate or unwise, risking your lump sum fund principal and earnings. Should you suffer any form of dementia, your investment decisions could be even riskier.

Evaluate your private or government retirement benefits to make wise lump sum decisions. Use the best retirement calculators to analyze and project potential scenarios for you and your family. There is no automatic right choice. Analyze your options and decide on the best choice for you.

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