Retirement: Pension decision: Lump sum or annuity?

Eileen Ambrose June 18, 2019

This article appears at the following website: sandiegouniontribune.com

If you leave an employer that provides a traditional pension, you’ll likely be asked if you want to take it in a lump sum or as an annuity that will pay you an income for life.

There are advantages and risks to both options, says David Kudla, founder of Mainstay Capital Management in Grand Blanc, Mich. The advantage of rolling a lump sum into an IRA, he says, is that you’ll be able to decide when to withdraw money and control taxes on those withdrawals. You can leave a lump sum to heirs if you’re in poor health and unlikely to collect many pension checks. You may also be able to invest the money to keep up with inflation; most pensions don’t have cost-of-living increases, and your purchasing power decreases over time.

Plus, if your employer fails and its pension is taken over by the Pension Benefit Guaranty Corp., which insures private pensions, the PBGC may not cover the full pension you’re due, Kudla says. (The PBGC’s maximum annual benefit for plans it takes over in 2019 is $43,742 for a 60-year-old, or $39,368 with a survivor benefit.)

But traditional pensions are disappearing, and their value shouldn’t be underestimated. For example, suppose you were offered a pension that paid a $1,490 monthly benefit for life for a 60-year-old man, or $1,445 for a woman. To buy an annuity that paid the same amount, you would need $300,000, according to www.immediateannuities.com.

With the annuity option, you also have the ability to choose survivor benefits, so if you die before your spouse does, he or she will continue to receive a check.

But taking a lump sum puts all of the investment risk on you. How confident are you that you will be able to successfully invest that money throughout retirement? A 2017 MetLife study found that 20 percent of workers electing to take a lump sum depleted the cash in 5½ years.

“There is a behavioral benefit” to a monthly pension check, says Mark Fonville, a certified financial planner in Williamsburg, Va. “It can be immensely liberating, knowing every morning that you wake up, you’re going to get your payment.”

If you’re unsure which option is best for you, have a financial professional run the numbers and the scenarios for you.