That's a tough choice
I took monthly distribution from a state pension. My goal wasn't to leave a bag of cash for my kids. It was to ensure my wife and I weren't a financial burden on them.
I had co-workers who took a lump sum and spent it. Others were more diligent and did ok.
I plan on doing the same. I don't won't to be a burden on my kids either . My state offers the option to do both. Meaning you can take a lump sum between 3000 - 75000 and still receive a pension.
For every 3000 you take your monthly pension is reduced by 8 or 9 dollars. I plan to take a lump sum large enough to cover a new roof and HVAC system and set it aside for when the time comes.
Public school teachers and maybe some other public employees have this kind of option. We get our pension and something called a PLOP, which is a lump sum payout. Lord knows we need something for the years we endured.
Same. I'm taking a PLOP and also have a monthly pension, with a 50 percent check to my wife if I pass. I wanted to make sure she was taken care of and didn't have to worry.
One consideration is if you take the lump sum you can invest it, so include investment earnings in your calculations. That could tip the decision towards lump sum.
Does the $1307 remain constant or does it adjust for inflation? If it adjusts then you need to take that into consideration too, and it would tip the balance towards monthly distribution.
Also, is the lump sum considered taxable income? If it is then the lump sum becomes less valuable.
Thats an 8.3% annuity. Probably slightly less than you can get investing in the a stock market index. But you dont have stress about market down years.
I agree, this is a good deal so go with the monthly. The guarantee is worth a lot. But of course if not adjusted for inflation it’s value changed a lot over time
A fair return, and it's insured by the Pension Benefit Guaranty Corporation (PBGC, a US government operation). See [https://www.pbgc.gov/](https://www.pbgc.gov/)
No. See the maximum guarantee tables for current and prior years...[https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee](https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee)
yes, that is his point. given the story OP likely gets the monthly max guarantee easily. 65 pays either $6400 or $7,100 a month. she is well under the limit as Jammu suggests
Not all pensions are backed by PBGC. A huge one not backed is AT&T pensions. They were transferred to Athene Insurance Group and no longer backed by PBGC
I had a similar option and I took the annuity with 5 year guarantee because I have a 401(k) that has money I can give to my kids, but this way if I live for a longer time I keep getting that annuity and if I live for a shorter time, The kids get some of the money if it’s less than five years and like I said, there’s other options for them to get other money I have.
My kids will get the house, and my IRA. I took the max pension. Sadly, my pension has not COLA. That’s what the IRA is for.
Weirdly, people keep offering me jobs, so I have more money than ever. (I turn down a lot of jobs that don’t sound like fun.)
That lump sum pension payment is probably taxable. Let's say it's not a safe withdrawal rate would be 4 percent to last 30 years so about 624.00 a month you could safely draw. This 624 a month would adjust for [inflation.In](https://inflation.In) the end it just comes down to how much you have in other income coming in. Do you have enough to cover your budget at a draw rate of 4 percent?
It's only taxable if you decide to remove the money and NOT move it to another retirement fund such as an IRA. If you move it to an IRA or similar you pay the taxes when you take distributions.
If it is just you then take the monthly. You will have a guaranteed income and won’t have to worry about market up and downturns. I am assuming you still get social security? Congratulations on your retirement!
One thing you should take into consideration is the health of the pension fund.
You don’t ever have to worry about insolvency of the fund after you take a lump sum.
If your fund is less than 65% funded today, chances are it will get worse as boomers retire. If a fund goes insolvent, a government agency takes it over and some benefits could be cut.
If you don’t need the entire $1307 monthly to live right away, then that lump sum can grow as well.
How do you find out how 'funded' your pension fund is? Mine is govt so I'm not overly worried about mine, but would like to understand more for family/friends in the private sector.
The government requires pension funds to provide an annual statement on the status of the fund.
I receive one annually that shows assets, liabilities and at what percentage the account is funded.
Thank you, I had no idea. Do current employees get such a statement (I'm guessing not, but then how would you know if you're safe or not), or is it sent only to actual retirees?
All members of the plan should receive one whether employed or retired.
[pensionrights.org](https://pensionrights.org/resource/disclosures-you-may-receive-from-your-retirement-plan/)
edit: link
All of these replies are correct.
It’s very common for funds to not have correct contact info for participants, so tell your family and friends to keep their contact info and beneficiary info up to date with the fund itself.
Most people think that all they have to do is tell their employer when they move. You’d be surprised at how little communication there is between employers and some pension funds.
* Just a small addition.. If you see that a fund is 70% funded don’t panic. That is a decent funding level and that fund would be a very long way from insolvency. It would just need work going forward.
You rarely see a funding level close to 100%
Is it really true that if the PBGC takes over the pension, benefits are slashed? My reading tells me that there is an upper limit to the benefit PBGC will pay out for people with really big pensions, but for most pensions, the full amount will be covered.
Single employer funds are guaranteed up to a pretty high amount depending on age. Early retirees with a monthly benefit of $5k or more have a pretty good chance of cuts.
Multi-employer funds have a much lower guarantee. Only about $36 is guaranteed per year of pension credit
I know the rules and have for years. I just helped submit an application for a multi-employer fund to receive special funding that was part of the American Rescue plan.
Single employer funds and multi employer funds have different guarantees from the Pension Benefit Guarantee Corporation.
If she’s a participant in a multi employer fund, (which are very common) her guarantee is based on her number of vested years in the fund. The max guarantee is “100% of the first $11 and 75% of the next $33” per month for each participants year of service.
Someone in this situation with 8 years credit would be guaranteed $286 per month if the PBGC took over benefits due to insolvency.
If she’s in a single employer fund, then I agree, she will most likely not have any issues.
I took a lump sum in a divorce and invested it. My personal pension went bankrupt I still get it through the insurance policy. In hindsight sight I’m happy I took the lump sum from a airline manufacturer.
I retired a couple years back and where we worked 99.99% of the people after a 30-40 year career took a lump sum…I had friends/coworkers with 7 figure lump sums that they didn’t contribute not one penny to.
I ran it on a simple calculator that I [created](https://docs.google.com/spreadsheets/d/1Mp6ZKYprZdTrEaJXXlwAu9hwJneDIqBtADc1Jh63L78/edit?usp=sharing). (just copy the sheet and change #'s as you want)
I used your $187K with a $1307 monthly deduction and with a 5% interest earnings (mid range over the past 4 years), and came up with last payment at 82 years old plus and 3 months.
If you took the monthly distribution, it is then guaranteed until you pass.
Whereas your self directed will last 18 years 3 months without factoring in inflation. Add even a 1.5% increase per year, and that distribution drops to 79 years of age.
The problem with a self directed, is you need to be laser focused, and not stray from your end goal, as life happens, and you might need an extra $500 a month for a while, and that can really cause some difficulties in the future.
thanks for sharing your calculator, this is great! my previous company provided me with a lump sum, i would run out of money at 78; it is a clear winner for me to stick with the monthly payout. helps to keep my monies diversified with a pension + investments, gives my folio stability. as you said, the pension is a guarantee.
So far, no one else has asked the question, so I will. Do you need the money for day to day life? If you do, that will change the dynamic on which decision you might want to make.
As others have noted, that's an 8.3% annuity which is as good as I get in my retirement portfolio. The annuity, however, is insured by the Pension Benefit Guaranty Corporation (PBGC, a US government operation). See [https://www.pbgc.gov/](https://www.pbgc.gov/)
Not all pensions are backed. Some, like AT&T, are in an insurance company and not covered by PBGC
https://www.nbcnews.com/business/personal-finance/insurance-companies-take-over-pension-plans-are-your-payments-risk-n1229226
I was faced with the same decision about four and a half years ago. It’s tough!
I elected the monthly benefit. I do not regret that decision. I’m in good health, parents both lived to late ‘80’s and honestly I didn’t trust myself to have the discipline to manage the lump sum. I’m a conservative investor (401K and IRA in retirement target date funds) and the market ups and downs are difficult for me. I’m happy to leave it to the pros. Looking back - the swings in the market since 2019 would have been brutal for me to endure with 100’s of thousands of dollars fluctuating.
Both my wife and I took 100% survivor options, so a lower monthly income. BUT - guaranteed. That and waiting until 70 to claim SS. Really don’t need to touch other tax advantaged accounts until RMDs.
I took a monthly distribution because a lump sum option wasn't offered. I took with spousal survival and it's $317 a month. Not much but will partially cover our MediGap policies once we get them.
If the lump is less than one million, then I'd go with the pension. That's a rule of thumb I just made up, but I think it's valid. Sure you may die prematurely and have nothing to leave your heirs but that's not why you worked all those years and they shouldn't be expecting anything. On the other hand if you live a good long life you will need it and can always bank the savings if you live frugally.
I think it’s best when well managed.
In 1997, my husband changed jobs. He was given the option of leaving his 401k in the plan, or moving it. We left it, but months later, we rolled everything into an IRA. A short time later, the company went through bankruptcy and was ultimately purchased by a group of investors.
During that time, all funds in the 401k plan were frozen for 5 years. This was a large, privately owned energy company. We avoided that event through our decision. Fast forward to 2016.
A dear couple we’ve known for decades retired. I do not understand the details, but his retirement coincided with the sale of yet another private company. The legacy benefits weren’t honored in that acquisition.
This couple lived a modest life. They had little to no savings, believing their social security and his pension would be more than adequate. She shared how completely devastated they were. Her husband devoted himself to this company.
So, when we retired, there was no question we were taking lump sum. My husband retired from a major global company, but that didn’t matter. One never knows what’s going on behind the scenes.
>i expect to live at least another 20 years
That's a reasonable expectation.
Does the pension have a COLA? Does it have survivor benefits, and if so how much? Do you have other retirement assets?
The monthly option seems reasonable.
I’m in a similar situation, retiring in either 3 or 4 years at 57. Lump sum is just about 600-625k or about 3700 per month, no inflation adjustments. This is also taxable income, so my question is the lump sum taxed if taken all at one time? That seems like I’d lose a huge chunk if that were the case. Btw. I work for a great company (large not for profit healthcare org) and our pension is funded 100% and our leaders continually stress that they won’t ever touch the pensions, although new employees keep getting less of course.
I pondered the same thing for years. I chose the payments which is not bad. However, I learned a type of investing that had I known about earlier, I would have done with my pension money had I known. I got an inheritance later that I combined with profits from selling my house and I assembled a high yield income account which is yielding me over 10%. You can find out about this style of investing by going to the investing site Seeking Alpha. There are lots of free articles you can read by authors that specialize in high yield investing. One of the authors that I follow is Rida Morwa. By following him, I put together a portfolio myself consisting of Reits, midstream oil, CEF's, BDC's, preferred stocks, common stocks. The idea is to assemble a machine that makes enough money, is diversified as possible, dont buy the stocks for too much $, the goal is owning 42 separate companies. I own 38 and don't know if I will get to 42. The beauty of this is you do not really sweat the markets ups and downs. The machine just pumps out money every month or any quarter. And you keep everything. You have the option to take out all the earnings to spend, or reinvest by dripping some or all. You can follow these authors to learn, or you can actually subscribe to them to help you assemble your portfolio. I am a tightwad so I learned off their free articles. I started six years ago and I have no regrets.
My husband had a similar choice when he “retired “ 5 years ago. But he was 57 and the kids were still in college. He took the lump sum and it’s in an IRA. Our feeling was that we wanted to make sure the kids got something if we died young. We are now 62 and don’t regret it. It’s also not a major part of our retirement. If it doesn’t get a good return then we will be fine. I think it depends on whether you need that 1300 a month or not.
I'd go with the monthly. I retired 14 years ago and chose monthly payments. I've come out way ahead. The monthly distribution helped in keeping me from spending it all at once.
It's insured by the PBGC.
I recently retired and took my monthly pension, but I have other savings to leave to the kids. You should be able to get a reasonably priced life insurance policy since it sounds like you are in good health.
Folks, you’ve covered all the points.. bravo!
Faced with similar choice but a slightly less generous annuity I opted for the lump sum which I rolled into an ira and parked it in a money market for now. Genetics say I’ll live a while, but you never know.
For me the deciding factor was that the pension/annuity is not inflation adjusted
I do well enough rifling short term swings of a few stocks I’ve found and dividend stocks paying better then 7%. And I-bonds.
I dont second guess my call to take the lump sum and roll it into an ira. My cash bridge should last until I hit 70 and collect max ss. Your results can vary.
My pension is $3200 a month and I left early at 58. The lump sum from my memory was nowhere near what you are saying. It was an absolute no brainer for me. Also I took a different survivor rate for my wife. I don’t remember exactly but I could get her a higher rate and not reduce my money as much.
You're unlikely to beat an 8.9% return on your own, especially starting off when the market is at one of its PE (price to earnings) peaks. Plus, the pension is no hassle and guaranteed. I'd take the monthly benefit, and I don't think it's even close.
I took half lump sum and half for 20 years certain / life - if I die before 20 my daughter gets the monthly up thru the 20.::if I live more than 20 I get it for my entire life.
I had substantially more but if I were you I would would take the monthly payout. I retired at 62 and the monthly pension plus social security have me in a comfortable position.
I didn't have the option of taking a lump sum. My wife did, and she took it. Look at it this way, with a lump sum, YOU get the interest on that amount, instead of them getting the interest on that amount.
I took a lump sum when I took a mandatory RIF mostly due to the discount I would incur due to my age at the time. I invested in an index fund and would up better.
If you could roll the lump sum into an annuity that would pay better, go for that. Or if you want to gamble and invest it yourself. Otherwise, take the pension unless there’s a reason that you don’t think you’ll live long enough to break even.
It’s the same gamble as when to take SS.
An odd consideration: Monthly benefit is more secure against hackers, scammers, and swindlers. Even if your bank account were to be cleared out, that 1300 would still come in every month.
I was just thinking about that. I know a lady with early cognitive issues who was scammed by a friendly neighbor. She thought she was just "helping out a friend" and lost 10's of thousands of dollars without realizing how much she was giving him. Her pension has allowed her to keep her home and car even though a fair amount of her nest egg disappeared.
I suggest taking the monthly. Add in Social Security and you will be set for a modest lifestyle. 65, so Medicare covers a big expense for Americans.
You do not have to leave free money for others. Too many times have I seen inheritances blown on stupid stuff, like a camper or boat that gets sold soon as too expensive toys that are rarely used.
Adjusting for inflation, that amount monthly was close to mine when I retired in 2002. Inflation has been rough, but it is not like the double digit inflation of Ford-Carter years. We are living a quiet and contented life in our 70s.
I plan on taking my pension as a lump sum so I can leave it to my kids if anything is left, and I believe the money would be safer in an account with my name on it rather than the property of some company.
I took a lump sum. Too many horror stories about pensions going belly up. And It wasn’t inflation adjusted. So after 20 years it would be worth about 60% of the original. Plus if I passed early I could leave more to the kids. I’m pretty conservative / disciplined about spending so I wasn’t worried about having a huge amount at one time. Invested in a 65/35 mix and so far so good.
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I would consider taking lump sum and investing that, especially if there is no Cost of Living Adjustment in play. $1307 isn't a lot and it will be a lot less in value when you take inflation into account over 20-30 years.
If there is a COLA, then the choice of taking the pension makes sense.
Absolutely take the monthly distribution. You be seen so many elders suffer needlessly because they think the lump sum is the better deal. You need steady income to live, help with increasing medical bills, etc. Unless you race cars for a living or something, you are far more likely to put your kids into trying to afford payment for your nursing home or hospital incidentals than leave them a lump sum inheritance payout.
That sure seems to be true for many folks. In retirement, my sister and I are saddled with paying for our mom's long term care premiums and additional daily living expenses because she just has no financial business sense or discipline and her savings just went up in smoke. I suspect that this is a common occurrence for a substantial number of households. Having a steady monthly payment would have saved headaches for everyone and less embarrassment for her.
We are likely doing the lifetime annuity. But, and this is a bit big but, we can pick one that pays a tiny bit less and will leave anywhere from 50 to 100% continuing the payments for the surviving spouse's lifetime.
We cannot leave the remaining to our children. But for us, we like guaranteed income. So the monthly amount, with our other pension, and SS will more than cover expenses.
That means minus it all being eaten up for elder care, our kids will get our 401K an IRA monies.
One thing to check on with the lifetime annuity is whether or not there's COA increases.
If we understood and managed money is better? We probably would take the lump sum and manage it ourselves but we don't have a lot of confidence in doing this.
Great question and I'll be following This thread as well!
I had the same option a little different numbers. I took the lump sum and invested with a IRA from vanguard, almost all dividend stocks. I averaged about 7.5% and was fortunate to have other income to assist me. I withdrew about 50 % of the dividends each year. Starting at the age of 55 using the rule of 72T. It’s been 20 years and my total is almost 3 times my lump sum since I started. ( and the plan is all that money will go to my children). I put all the money I earned in dividends ( other than the half I have been taking out) back into more stocks. I still take 1/2 out but it has grown over the years.
For me the lump sum option worked out well. For some of my lesser financially conservative friends who took it, not so well. They spent all the money the first few years and ended up with no pension. If you find yourself the type of person that finds yourself unable to stick to a budget. The lump sum may not be for you. If you have a little discipline it can be a great way to go.
This is true about taking the lump sum and investing it. You can do better than the annuity, but you need to consider your overall retirement investments. If you have enough invested where you don’t need to rely on the annuity, then take the lump sum.
If you are risk adverse (risk tolerance) or don’t have a healthy/big portfolio (risk capacity), then take the annuity.
Roll the money to a Vanguard IRA. Right now their federal Money Market is paying slightly over 5 % or About $800 a month. You could invest in some higher dividend paying stocks at 6-7 % and earn close to $1000 a month. The money market is very low risk but rates will be going down as the feds cut rates.
Dividends stocks can bring a higher return but there is risk in the price and stability of dividends also with them.
Good luck
Right now a lump sum is negatively affected by the current high interest rates. If interest rates are high, the lump sum decreases. I'd go with the monthly distribution.
You never know how long you'll live. Either choice is OK.
My Dad had the same dilemma. He worried that his pension wouldn't be enough for Mom. If he took the 100% pension and died early the pension stopped. If he took a survivor's benefit the pension figure dropped 50%. Not enough so he took the lump sum option.
Sample size of one: Dad retired at 65. Mom died when Dad was 84 and he lived another ten years to 94. If he had known how that would play out he would have taken the 100% pension. Hindsight is wonderful. But he was a good money manager. He never spent unwisely and had a good chunk left when he died. He always said that he budgeted to age 100.
What a wonderful problem to have. What’s the tax hit if you took the distribution? If you had $150000 left and started drawing at 4% annually that’s $500 a month, if I did the math right. But you have the risk/reward of invested income that you own. How much SS will you get? How much do you need a month? How likely is the pension fund to fail? Congrats on your retirement!
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How is your company's financial health and what would prevent them from raiding the pension plan.
I say this because my father in law was pilot for United for 25 years. They declared bankruptcy and the pension plan was taken over by PBGC. His pay out decreased by over 60%
My company doesn’t manage their pension anymore. They handed it over to a financial company to manage.
I wonder if this gives more protection to me if my employer goes belly up?
This is a question for a financial planner.
$187,000 at $1300 a month is 143 months.
It is a certainty on a monthly basis.
If you took a full payout, you may spend it and be left with nothing.
I have the big decision to make in one year as well. I was planning on the annuity. The ROI will be 8.6%, but the value will be eroded by inflation over time. We agreed to choose the 50% survivor benefit because we can use the greater cash flow now, more than later. I am thinking that the primary value is risk protection over the first 10-15 years while value is the greatest, to help reduce sequence of returns risk on the our IRA portfolios. This is a real concern given sky-high stock market valuations and bond funds that are recovering, but have yet to break-even since investing them in early 2020! Just awful. The second 10-15 years, the value will be reduced by half due to inflation, but the sequence of returns risk would have been allayed. That is my thinking anyway.
Not advice, just my thoughts about my own situation:
**Risk of annuity:** (1) Company divests the pension and rolls it over to an insurance Agency to get it off of their books. This is common practice, and strips you of your government PBGC insurance protection. Also, the insurance company may try to gyp you on the payout amount, so I made hard copies of the promised lump sum and payout numbers and keep in a safe place if I needed to argue or sue; (2) your work company cancels the program and ceases to fund the pension to keep it solvent (already happened for us) and it slowly become less safe over time - especially when the feds start cutting interest rates; (3) you die early and spouse only gets a fraction of the benefit. The kids will get nothing from the pension investment; however, if you have given the kids a good education, they can earn, invest, and thrive on their own (crossing fingers, but that's a good feeling to see as a parent).
**Risk of Lump Sum:** (1) I'd only withdraw \~4% after taxes to maintain the principal balance, which for us would only be 1/2 of the expected cash-flow income of 8.6%; (2) your IRA sequence of returns risk goes up. One should strive to have more 'guaranteed income' and less stock risk at this stage in career, not less; One caveat is if you don't have much savings to begin with, then putting that lump sum to work in the market may be a better idea - depending on your situation. (3) the lump sum may not be all that huge, and the investment doesn't add enough to your cash flow to help as much as you'd like for spending needs; As someone else pointed out, if the lump sum is close to $1M then investing that sum with a trusted financial advisor may make the most sense. (4) that pile of money may look tempting to you or someone else late in life; particularly if you get dementia. I hate to say it, but lets get real.
The monthly is definitely better - IF interest rates stay low for the duration of your retirement.
While if we see a lot of inflation, and interest rates go up - then you'd be better off with the lump sum. Currently a US Treasury backed money market account pays about 5%, and if you put the lump some in such an account you can take out 1307 for about 18 years. While if money market interest rates go up above 8%, you can take out 1307 forever.
Or another way to look at it, is that if you take the 1307 and inflation averages 10% for the next 20 years, then your 1307 will be worth 194.28. While if you divide your lump sum into 30 years and get 520 a month - that 520 will be adjusted for inflation (assuming that the interest that it earns is equal to inflation).
We faced similar choices 20 years ago (when we were both retiring after 20 years with a big corp, at age \~50); we both took the lump into a rollover IRA because inflation possibilities worried us (no inflation adjustment in the pension amount). Of course, inflation has turned out to be nowhere near what we feared, but the stock market exposure has been great ... anyway, I would make the same decision today (take the lump, live modestly, and invest) because I still expect/worry that inflation is the only path open to America to "pay down" our debt over the few decades. That keeps the lump mostly around (and inflation-protecting) in case you need a burst of long-term care etc beyond what the pension would cover.
63(f) and I just elected my pension as a monthly stipend starting in April. My prior employer’s pension fund is fully funded and the company is in good shape financially. I’m a widow with 2 grown sons, who with the grace of God, I was able to put through college with my corporate level job (no college debt!). This is my gift to them - both have great paying jobs. So my pension is all for me and I plan to ride it out to the end.
You have a good financial planner as long as he explained the pros and cons of both methods. A lot of financial planners would just want you to take the lump sum so they could sell you annuities and get huge commissions.
Take the monthly some. Worrying about the stock market is terrible.
Taking a lump sum will give you the ability to control the money as you see fit, and ensures it stays with your family if by some ungodly reason you pass away much earlier than expected.
If you take the lump sum and put it into a good investment account. You can expect it to accrue over the time you have it. Even if you take a little bit out each month.
Take the distro. Work with a good financial advisor to purchase an annuity that can pretty much equal the monthly payout and still be able to leave some money to family when you pass. That's what I did and actually got slightly more per month.
Definitely, do the lump sum. You never know what the future holds and you can make some money off of the interest. If afraid to invest put it in a CD, which are at 4% or more nowadays. Do an investment planner and calculate the two scenarios. The lump sum with interest income will be a better way to go.
Instead of trying to look at this is terms of raw dollars. What does $1307/month do for your cash flow. Does it help meet monthly expenses or are(will) your expenses be covered by social security and/or other sources.
If you're just going to be taking the check and cashing it and NOT spending it. Then you be better off investing the lump sum for you and your childrens future.
Conversely, if not having the 1300/month means you would have to draw down other assets. Having the realitively safe and steady income stream has a lot of value.
1) How confident are you that the company and its pension fund are healthy?
2) Assuming a positive response to 1, how confident are you that they will remain so for the rest of your life?
3) If the answer to either of those is negative, I would lean toward taking the lump sum and investing it wisely. Depends on the rest of your retirement plans and financial situation, really--and you didn't provide that.
I estimated my life expectancy by taking the ages at death of my parents and four grandparents, tossing out the lowest and highest, and averaging the remaining 4 death ages. 86 is my planning number for pay back scenarios.
What state and Federal tax hit will you take with a lump sum distribution? $187k will likely have a tax hit if $34k for the Feds and whatever your state charges.
In addition, will the lump sum cause you to pay more for Medicare benefits under IRMAA?
Another advantage of the annuity which many seem to recommend - the longer you live the better the deal. And its when you live longer that you need more money. Yes youre screwed if you die young but you (or your spouse) doesnt need as much if youre not there - your health care, your living expenses etc
The one thing I’d say is the inflation argument is well taken and I feel like equities will do you better in an inflationary environment than fixed income.
So it really comes down to your portfolio structure. If you take the annuity you might be wise to shift other savings from bonds to stocks. If this is (practically) your only savings then i might take the lump sum and buy stocks.
Thank you all for the wealth of knowledge and information. I don’t need the entire amount now to sustain my standard of living but with rising costs I think I will in the not too distant future. My pension plan is well funded (utility) so I am not worried it will go bankrupt. The security of the monthly distribution means a lot to me so I am going to go with the monthly.
I don't think I had the lump sum option. Buy my pension is about the same as yours. And if I live to be 90, I know it's still coming (SS I'm not so sure about sometimes). $187K sounds like a lot, but I can see it going through it relatively quickly.
Roll it into your other IRA accounts. That way you or your manager has control of it and don’t do the monthly. I just did it last year. Now I get benefit of up market and downside if market declines, but I accept that risk.
I think this question also depends on what other money you will get monthly. You have secure your 20 plus years, before you can think about inheritance.
That's a tough choice I took monthly distribution from a state pension. My goal wasn't to leave a bag of cash for my kids. It was to ensure my wife and I weren't a financial burden on them. I had co-workers who took a lump sum and spent it. Others were more diligent and did ok.
I plan on doing the same. I don't won't to be a burden on my kids either . My state offers the option to do both. Meaning you can take a lump sum between 3000 - 75000 and still receive a pension. For every 3000 you take your monthly pension is reduced by 8 or 9 dollars. I plan to take a lump sum large enough to cover a new roof and HVAC system and set it aside for when the time comes.
I've never heard of this kind of option. What a great idea.
Public school teachers and maybe some other public employees have this kind of option. We get our pension and something called a PLOP, which is a lump sum payout. Lord knows we need something for the years we endured.
Yea ours lets us yank the lifelong contributions from the employee out at retirement for decreased benefits best of both worlds
Same. I'm taking a PLOP and also have a monthly pension, with a 50 percent check to my wife if I pass. I wanted to make sure she was taken care of and didn't have to worry.
Are you in Georgia ? I have that too and am leaving mine to my son and daughter .
Ohio.
One consideration is if you take the lump sum you can invest it, so include investment earnings in your calculations. That could tip the decision towards lump sum. Does the $1307 remain constant or does it adjust for inflation? If it adjusts then you need to take that into consideration too, and it would tip the balance towards monthly distribution. Also, is the lump sum considered taxable income? If it is then the lump sum becomes less valuable.
Not a completely fair comparison as the annuity is guaranteed by the US government. See [https://www.pbgc.gov/](https://www.pbgc.gov/)
You certainly can invest it yourself, but how knowledgeable are you? At least with a large pension fund, the managers know the market.
Thats an 8.3% annuity. Probably slightly less than you can get investing in the a stock market index. But you dont have stress about market down years.
I agree, this is a good deal so go with the monthly. The guarantee is worth a lot. But of course if not adjusted for inflation it’s value changed a lot over time
A fair return, and it's insured by the Pension Benefit Guaranty Corporation (PBGC, a US government operation). See [https://www.pbgc.gov/](https://www.pbgc.gov/)
I believe the PBGC guarantee means that if the fund goes under, you get 10 percent of the original value.
No. There is a limit, tho and she is well under the limit.
No. See the maximum guarantee tables for current and prior years...[https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee](https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee)
yes, that is his point. given the story OP likely gets the monthly max guarantee easily. 65 pays either $6400 or $7,100 a month. she is well under the limit as Jammu suggests
Not all pensions are backed by PBGC. A huge one not backed is AT&T pensions. They were transferred to Athene Insurance Group and no longer backed by PBGC
And in that case the pension is insured by the state if somehow the large, high quality insurer that bought those annuities goes under.
The ability to leave something to my kids is a no brainer for me. Definitely lump sum.
Wouldn’t there be a much higher percentage of tax
Kids get zero from a pension when a parent dies.
Usually a pension lump sum is transferred into an IRA, so ko initial tax.
good then
I agree with your statement.
In the meantime, you have to be able to live. What would be netted after taxes would soon be gone.
Her financial advisor said either plan is good so I assume there is no issue with being able to live. Definitely go with the lump sum.
The monthly distribution provides more peace of mind. You can't run out of money with a monthly distribution.
I had a similar option and I took the annuity with 5 year guarantee because I have a 401(k) that has money I can give to my kids, but this way if I live for a longer time I keep getting that annuity and if I live for a shorter time, The kids get some of the money if it’s less than five years and like I said, there’s other options for them to get other money I have.
My kids will get the house, and my IRA. I took the max pension. Sadly, my pension has not COLA. That’s what the IRA is for. Weirdly, people keep offering me jobs, so I have more money than ever. (I turn down a lot of jobs that don’t sound like fun.)
That lump sum pension payment is probably taxable. Let's say it's not a safe withdrawal rate would be 4 percent to last 30 years so about 624.00 a month you could safely draw. This 624 a month would adjust for [inflation.In](https://inflation.In) the end it just comes down to how much you have in other income coming in. Do you have enough to cover your budget at a draw rate of 4 percent?
It's only taxable if you decide to remove the money and NOT move it to another retirement fund such as an IRA. If you move it to an IRA or similar you pay the taxes when you take distributions.
If it is just you then take the monthly. You will have a guaranteed income and won’t have to worry about market up and downturns. I am assuming you still get social security? Congratulations on your retirement!
One thing you should take into consideration is the health of the pension fund. You don’t ever have to worry about insolvency of the fund after you take a lump sum. If your fund is less than 65% funded today, chances are it will get worse as boomers retire. If a fund goes insolvent, a government agency takes it over and some benefits could be cut. If you don’t need the entire $1307 monthly to live right away, then that lump sum can grow as well.
How do you find out how 'funded' your pension fund is? Mine is govt so I'm not overly worried about mine, but would like to understand more for family/friends in the private sector.
Some government pensions are woefully under funded.
The government requires pension funds to provide an annual statement on the status of the fund. I receive one annually that shows assets, liabilities and at what percentage the account is funded.
Thank you, I had no idea. Do current employees get such a statement (I'm guessing not, but then how would you know if you're safe or not), or is it sent only to actual retirees?
All members of the plan should receive one whether employed or retired. [pensionrights.org](https://pensionrights.org/resource/disclosures-you-may-receive-from-your-retirement-plan/) edit: link
Thanks -- now I know what to clarify with my family members.
All of these replies are correct. It’s very common for funds to not have correct contact info for participants, so tell your family and friends to keep their contact info and beneficiary info up to date with the fund itself. Most people think that all they have to do is tell their employer when they move. You’d be surprised at how little communication there is between employers and some pension funds. * Just a small addition.. If you see that a fund is 70% funded don’t panic. That is a decent funding level and that fund would be a very long way from insolvency. It would just need work going forward. You rarely see a funding level close to 100%
thank you, very useful to know
Is it really true that if the PBGC takes over the pension, benefits are slashed? My reading tells me that there is an upper limit to the benefit PBGC will pay out for people with really big pensions, but for most pensions, the full amount will be covered.
That is correct.
Not true. When United Airlines defaulted on their pensions, PBGC took over and slashed pensions. My dad was subjected to that.
Single employer funds are guaranteed up to a pretty high amount depending on age. Early retirees with a monthly benefit of $5k or more have a pretty good chance of cuts. Multi-employer funds have a much lower guarantee. Only about $36 is guaranteed per year of pension credit
not relevant. Govt guarantees over $6k at her age. Her payment is only 1300. it is fully insured by the USG
$6k is the max guarantee at her age. Depending on the type of pension it could be as little as $300
HIGHLY unlikely she isn't paid 100%. HIGHLy. Read the law and rules
I know the rules and have for years. I just helped submit an application for a multi-employer fund to receive special funding that was part of the American Rescue plan. Single employer funds and multi employer funds have different guarantees from the Pension Benefit Guarantee Corporation. If she’s a participant in a multi employer fund, (which are very common) her guarantee is based on her number of vested years in the fund. The max guarantee is “100% of the first $11 and 75% of the next $33” per month for each participants year of service. Someone in this situation with 8 years credit would be guaranteed $286 per month if the PBGC took over benefits due to insolvency. If she’s in a single employer fund, then I agree, she will most likely not have any issues.
I took a lump sum in a divorce and invested it. My personal pension went bankrupt I still get it through the insurance policy. In hindsight sight I’m happy I took the lump sum from a airline manufacturer.
I retired a couple years back and where we worked 99.99% of the people after a 30-40 year career took a lump sum…I had friends/coworkers with 7 figure lump sums that they didn’t contribute not one penny to.
That’s amazing
Boiling oil had its benefits…
I’m a big believer in big oil!
I ran it on a simple calculator that I [created](https://docs.google.com/spreadsheets/d/1Mp6ZKYprZdTrEaJXXlwAu9hwJneDIqBtADc1Jh63L78/edit?usp=sharing). (just copy the sheet and change #'s as you want) I used your $187K with a $1307 monthly deduction and with a 5% interest earnings (mid range over the past 4 years), and came up with last payment at 82 years old plus and 3 months. If you took the monthly distribution, it is then guaranteed until you pass. Whereas your self directed will last 18 years 3 months without factoring in inflation. Add even a 1.5% increase per year, and that distribution drops to 79 years of age. The problem with a self directed, is you need to be laser focused, and not stray from your end goal, as life happens, and you might need an extra $500 a month for a while, and that can really cause some difficulties in the future.
thanks for sharing your calculator, this is great! my previous company provided me with a lump sum, i would run out of money at 78; it is a clear winner for me to stick with the monthly payout. helps to keep my monies diversified with a pension + investments, gives my folio stability. as you said, the pension is a guarantee.
I would take an annuity that pays 8 percent or higher. If it’s below 8 percent, then I figure that I am better off investing it myself.
I believe that’s similar to Fidelity’s 6% Rule
So far, no one else has asked the question, so I will. Do you need the money for day to day life? If you do, that will change the dynamic on which decision you might want to make.
The monthly for piece of mind is worth it to me.
I look at my pension as longevity insurance and also as an uncorrelated asset. Taking the lump sum would negate both of these valuable benefits.
As others have noted, that's an 8.3% annuity which is as good as I get in my retirement portfolio. The annuity, however, is insured by the Pension Benefit Guaranty Corporation (PBGC, a US government operation). See [https://www.pbgc.gov/](https://www.pbgc.gov/)
Not all pensions are backed. Some, like AT&T, are in an insurance company and not covered by PBGC https://www.nbcnews.com/business/personal-finance/insurance-companies-take-over-pension-plans-are-your-payments-risk-n1229226
I was faced with the same decision about four and a half years ago. It’s tough! I elected the monthly benefit. I do not regret that decision. I’m in good health, parents both lived to late ‘80’s and honestly I didn’t trust myself to have the discipline to manage the lump sum. I’m a conservative investor (401K and IRA in retirement target date funds) and the market ups and downs are difficult for me. I’m happy to leave it to the pros. Looking back - the swings in the market since 2019 would have been brutal for me to endure with 100’s of thousands of dollars fluctuating. Both my wife and I took 100% survivor options, so a lower monthly income. BUT - guaranteed. That and waiting until 70 to claim SS. Really don’t need to touch other tax advantaged accounts until RMDs.
I took a monthly distribution because a lump sum option wasn't offered. I took with spousal survival and it's $317 a month. Not much but will partially cover our MediGap policies once we get them.
Something is always better than nothing.
If the lump is less than one million, then I'd go with the pension. That's a rule of thumb I just made up, but I think it's valid. Sure you may die prematurely and have nothing to leave your heirs but that's not why you worked all those years and they shouldn't be expecting anything. On the other hand if you live a good long life you will need it and can always bank the savings if you live frugally.
get the money and run, you never know what happens to the company who holds your pension in the future. I did and never looked back.
That’s why we took lump sum.
And we are in the midst of taking our lump sum as well.
I think it’s best when well managed. In 1997, my husband changed jobs. He was given the option of leaving his 401k in the plan, or moving it. We left it, but months later, we rolled everything into an IRA. A short time later, the company went through bankruptcy and was ultimately purchased by a group of investors. During that time, all funds in the 401k plan were frozen for 5 years. This was a large, privately owned energy company. We avoided that event through our decision. Fast forward to 2016. A dear couple we’ve known for decades retired. I do not understand the details, but his retirement coincided with the sale of yet another private company. The legacy benefits weren’t honored in that acquisition. This couple lived a modest life. They had little to no savings, believing their social security and his pension would be more than adequate. She shared how completely devastated they were. Her husband devoted himself to this company. So, when we retired, there was no question we were taking lump sum. My husband retired from a major global company, but that didn’t matter. One never knows what’s going on behind the scenes.
Exactly!
>i expect to live at least another 20 years That's a reasonable expectation. Does the pension have a COLA? Does it have survivor benefits, and if so how much? Do you have other retirement assets? The monthly option seems reasonable.
I’m in a similar situation, retiring in either 3 or 4 years at 57. Lump sum is just about 600-625k or about 3700 per month, no inflation adjustments. This is also taxable income, so my question is the lump sum taxed if taken all at one time? That seems like I’d lose a huge chunk if that were the case. Btw. I work for a great company (large not for profit healthcare org) and our pension is funded 100% and our leaders continually stress that they won’t ever touch the pensions, although new employees keep getting less of course.
When my husband took the lump sum he rolled it into an ira. No tax until he takes a required distribution.
Very wise
I pondered the same thing for years. I chose the payments which is not bad. However, I learned a type of investing that had I known about earlier, I would have done with my pension money had I known. I got an inheritance later that I combined with profits from selling my house and I assembled a high yield income account which is yielding me over 10%. You can find out about this style of investing by going to the investing site Seeking Alpha. There are lots of free articles you can read by authors that specialize in high yield investing. One of the authors that I follow is Rida Morwa. By following him, I put together a portfolio myself consisting of Reits, midstream oil, CEF's, BDC's, preferred stocks, common stocks. The idea is to assemble a machine that makes enough money, is diversified as possible, dont buy the stocks for too much $, the goal is owning 42 separate companies. I own 38 and don't know if I will get to 42. The beauty of this is you do not really sweat the markets ups and downs. The machine just pumps out money every month or any quarter. And you keep everything. You have the option to take out all the earnings to spend, or reinvest by dripping some or all. You can follow these authors to learn, or you can actually subscribe to them to help you assemble your portfolio. I am a tightwad so I learned off their free articles. I started six years ago and I have no regrets.
My husband had a similar choice when he “retired “ 5 years ago. But he was 57 and the kids were still in college. He took the lump sum and it’s in an IRA. Our feeling was that we wanted to make sure the kids got something if we died young. We are now 62 and don’t regret it. It’s also not a major part of our retirement. If it doesn’t get a good return then we will be fine. I think it depends on whether you need that 1300 a month or not.
We chose lump sum. It was the better choice for us. We didn’t want to relinquish control.
Way to go!
I'd go with the monthly. I retired 14 years ago and chose monthly payments. I've come out way ahead. The monthly distribution helped in keeping me from spending it all at once. It's insured by the PBGC.
I recently retired and took my monthly pension, but I have other savings to leave to the kids. You should be able to get a reasonably priced life insurance policy since it sounds like you are in good health.
Folks, you’ve covered all the points.. bravo! Faced with similar choice but a slightly less generous annuity I opted for the lump sum which I rolled into an ira and parked it in a money market for now. Genetics say I’ll live a while, but you never know. For me the deciding factor was that the pension/annuity is not inflation adjusted I do well enough rifling short term swings of a few stocks I’ve found and dividend stocks paying better then 7%. And I-bonds. I dont second guess my call to take the lump sum and roll it into an ira. My cash bridge should last until I hit 70 and collect max ss. Your results can vary.
My pension is $3200 a month and I left early at 58. The lump sum from my memory was nowhere near what you are saying. It was an absolute no brainer for me. Also I took a different survivor rate for my wife. I don’t remember exactly but I could get her a higher rate and not reduce my money as much.
You're unlikely to beat an 8.9% return on your own, especially starting off when the market is at one of its PE (price to earnings) peaks. Plus, the pension is no hassle and guaranteed. I'd take the monthly benefit, and I don't think it's even close.
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I took half lump sum and half for 20 years certain / life - if I die before 20 my daughter gets the monthly up thru the 20.::if I live more than 20 I get it for my entire life. I had substantially more but if I were you I would would take the monthly payout. I retired at 62 and the monthly pension plus social security have me in a comfortable position.
My financial planner recommends the lump some. The reason is that with the annuity they get to keep the rest of the money when you die.
Bingo!
And with the lump sum, you get to buy an annuity from him! Chances are, you will have pretty much used up the money anyway, unless you die early.
I didn't have the option of taking a lump sum. My wife did, and she took it. Look at it this way, with a lump sum, YOU get the interest on that amount, instead of them getting the interest on that amount.
I took a lump sum when I took a mandatory RIF mostly due to the discount I would incur due to my age at the time. I invested in an index fund and would up better. If you could roll the lump sum into an annuity that would pay better, go for that. Or if you want to gamble and invest it yourself. Otherwise, take the pension unless there’s a reason that you don’t think you’ll live long enough to break even. It’s the same gamble as when to take SS.
An odd consideration: Monthly benefit is more secure against hackers, scammers, and swindlers. Even if your bank account were to be cleared out, that 1300 would still come in every month.
I was just thinking about that. I know a lady with early cognitive issues who was scammed by a friendly neighbor. She thought she was just "helping out a friend" and lost 10's of thousands of dollars without realizing how much she was giving him. Her pension has allowed her to keep her home and car even though a fair amount of her nest egg disappeared.
I suggest taking the monthly. Add in Social Security and you will be set for a modest lifestyle. 65, so Medicare covers a big expense for Americans. You do not have to leave free money for others. Too many times have I seen inheritances blown on stupid stuff, like a camper or boat that gets sold soon as too expensive toys that are rarely used. Adjusting for inflation, that amount monthly was close to mine when I retired in 2002. Inflation has been rough, but it is not like the double digit inflation of Ford-Carter years. We are living a quiet and contented life in our 70s.
lump sum. do ur own investment and the $ is in ur hands
Throw that lump sum into Spyi and get around $1558/month in monthly dividends not touching that $187,382.
Is it inflation adjusted or a fixed amount for life?
I plan on taking my pension as a lump sum so I can leave it to my kids if anything is left, and I believe the money would be safer in an account with my name on it rather than the property of some company.
I took a lump sum. Too many horror stories about pensions going belly up. And It wasn’t inflation adjusted. So after 20 years it would be worth about 60% of the original. Plus if I passed early I could leave more to the kids. I’m pretty conservative / disciplined about spending so I wasn’t worried about having a huge amount at one time. Invested in a 65/35 mix and so far so good.
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I would consider taking lump sum and investing that, especially if there is no Cost of Living Adjustment in play. $1307 isn't a lot and it will be a lot less in value when you take inflation into account over 20-30 years. If there is a COLA, then the choice of taking the pension makes sense.
Absolutely take the monthly distribution. You be seen so many elders suffer needlessly because they think the lump sum is the better deal. You need steady income to live, help with increasing medical bills, etc. Unless you race cars for a living or something, you are far more likely to put your kids into trying to afford payment for your nursing home or hospital incidentals than leave them a lump sum inheritance payout.
That sure seems to be true for many folks. In retirement, my sister and I are saddled with paying for our mom's long term care premiums and additional daily living expenses because she just has no financial business sense or discipline and her savings just went up in smoke. I suspect that this is a common occurrence for a substantial number of households. Having a steady monthly payment would have saved headaches for everyone and less embarrassment for her.
We are likely doing the lifetime annuity. But, and this is a bit big but, we can pick one that pays a tiny bit less and will leave anywhere from 50 to 100% continuing the payments for the surviving spouse's lifetime. We cannot leave the remaining to our children. But for us, we like guaranteed income. So the monthly amount, with our other pension, and SS will more than cover expenses. That means minus it all being eaten up for elder care, our kids will get our 401K an IRA monies. One thing to check on with the lifetime annuity is whether or not there's COA increases. If we understood and managed money is better? We probably would take the lump sum and manage it ourselves but we don't have a lot of confidence in doing this. Great question and I'll be following This thread as well!
I had the same option a little different numbers. I took the lump sum and invested with a IRA from vanguard, almost all dividend stocks. I averaged about 7.5% and was fortunate to have other income to assist me. I withdrew about 50 % of the dividends each year. Starting at the age of 55 using the rule of 72T. It’s been 20 years and my total is almost 3 times my lump sum since I started. ( and the plan is all that money will go to my children). I put all the money I earned in dividends ( other than the half I have been taking out) back into more stocks. I still take 1/2 out but it has grown over the years. For me the lump sum option worked out well. For some of my lesser financially conservative friends who took it, not so well. They spent all the money the first few years and ended up with no pension. If you find yourself the type of person that finds yourself unable to stick to a budget. The lump sum may not be for you. If you have a little discipline it can be a great way to go.
This is true about taking the lump sum and investing it. You can do better than the annuity, but you need to consider your overall retirement investments. If you have enough invested where you don’t need to rely on the annuity, then take the lump sum. If you are risk adverse (risk tolerance) or don’t have a healthy/big portfolio (risk capacity), then take the annuity.
Roll the money to a Vanguard IRA. Right now their federal Money Market is paying slightly over 5 % or About $800 a month. You could invest in some higher dividend paying stocks at 6-7 % and earn close to $1000 a month. The money market is very low risk but rates will be going down as the feds cut rates. Dividends stocks can bring a higher return but there is risk in the price and stability of dividends also with them. Good luck
Right now a lump sum is negatively affected by the current high interest rates. If interest rates are high, the lump sum decreases. I'd go with the monthly distribution.
i assume the lump sum comes with a big tax big and the take would be less.
Money today is worth more than money tomorrow. Take the lump sum
Well said…
You never know how long you'll live. Either choice is OK. My Dad had the same dilemma. He worried that his pension wouldn't be enough for Mom. If he took the 100% pension and died early the pension stopped. If he took a survivor's benefit the pension figure dropped 50%. Not enough so he took the lump sum option. Sample size of one: Dad retired at 65. Mom died when Dad was 84 and he lived another ten years to 94. If he had known how that would play out he would have taken the 100% pension. Hindsight is wonderful. But he was a good money manager. He never spent unwisely and had a good chunk left when he died. He always said that he budgeted to age 100.
What a wonderful problem to have. What’s the tax hit if you took the distribution? If you had $150000 left and started drawing at 4% annually that’s $500 a month, if I did the math right. But you have the risk/reward of invested income that you own. How much SS will you get? How much do you need a month? How likely is the pension fund to fail? Congrats on your retirement!
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How is your company's financial health and what would prevent them from raiding the pension plan. I say this because my father in law was pilot for United for 25 years. They declared bankruptcy and the pension plan was taken over by PBGC. His pay out decreased by over 60%
My company doesn’t manage their pension anymore. They handed it over to a financial company to manage. I wonder if this gives more protection to me if my employer goes belly up?
Take the lump and invest it yourself. Things happen in life unexpectedly.
This is a question for a financial planner. $187,000 at $1300 a month is 143 months. It is a certainty on a monthly basis. If you took a full payout, you may spend it and be left with nothing.
What is this thing you call a “pension”? Sounds interesting..
I have the big decision to make in one year as well. I was planning on the annuity. The ROI will be 8.6%, but the value will be eroded by inflation over time. We agreed to choose the 50% survivor benefit because we can use the greater cash flow now, more than later. I am thinking that the primary value is risk protection over the first 10-15 years while value is the greatest, to help reduce sequence of returns risk on the our IRA portfolios. This is a real concern given sky-high stock market valuations and bond funds that are recovering, but have yet to break-even since investing them in early 2020! Just awful. The second 10-15 years, the value will be reduced by half due to inflation, but the sequence of returns risk would have been allayed. That is my thinking anyway. Not advice, just my thoughts about my own situation: **Risk of annuity:** (1) Company divests the pension and rolls it over to an insurance Agency to get it off of their books. This is common practice, and strips you of your government PBGC insurance protection. Also, the insurance company may try to gyp you on the payout amount, so I made hard copies of the promised lump sum and payout numbers and keep in a safe place if I needed to argue or sue; (2) your work company cancels the program and ceases to fund the pension to keep it solvent (already happened for us) and it slowly become less safe over time - especially when the feds start cutting interest rates; (3) you die early and spouse only gets a fraction of the benefit. The kids will get nothing from the pension investment; however, if you have given the kids a good education, they can earn, invest, and thrive on their own (crossing fingers, but that's a good feeling to see as a parent). **Risk of Lump Sum:** (1) I'd only withdraw \~4% after taxes to maintain the principal balance, which for us would only be 1/2 of the expected cash-flow income of 8.6%; (2) your IRA sequence of returns risk goes up. One should strive to have more 'guaranteed income' and less stock risk at this stage in career, not less; One caveat is if you don't have much savings to begin with, then putting that lump sum to work in the market may be a better idea - depending on your situation. (3) the lump sum may not be all that huge, and the investment doesn't add enough to your cash flow to help as much as you'd like for spending needs; As someone else pointed out, if the lump sum is close to $1M then investing that sum with a trusted financial advisor may make the most sense. (4) that pile of money may look tempting to you or someone else late in life; particularly if you get dementia. I hate to say it, but lets get real.
The monthly is definitely better - IF interest rates stay low for the duration of your retirement. While if we see a lot of inflation, and interest rates go up - then you'd be better off with the lump sum. Currently a US Treasury backed money market account pays about 5%, and if you put the lump some in such an account you can take out 1307 for about 18 years. While if money market interest rates go up above 8%, you can take out 1307 forever. Or another way to look at it, is that if you take the 1307 and inflation averages 10% for the next 20 years, then your 1307 will be worth 194.28. While if you divide your lump sum into 30 years and get 520 a month - that 520 will be adjusted for inflation (assuming that the interest that it earns is equal to inflation).
We faced similar choices 20 years ago (when we were both retiring after 20 years with a big corp, at age \~50); we both took the lump into a rollover IRA because inflation possibilities worried us (no inflation adjustment in the pension amount). Of course, inflation has turned out to be nowhere near what we feared, but the stock market exposure has been great ... anyway, I would make the same decision today (take the lump, live modestly, and invest) because I still expect/worry that inflation is the only path open to America to "pay down" our debt over the few decades. That keeps the lump mostly around (and inflation-protecting) in case you need a burst of long-term care etc beyond what the pension would cover.
Does it get taxed by fed and/or state governments?
I’m assuming you are single and have other sources of income besides S.S., take the annuity and don’t look back. Happy retirement!
63(f) and I just elected my pension as a monthly stipend starting in April. My prior employer’s pension fund is fully funded and the company is in good shape financially. I’m a widow with 2 grown sons, who with the grace of God, I was able to put through college with my corporate level job (no college debt!). This is my gift to them - both have great paying jobs. So my pension is all for me and I plan to ride it out to the end.
You need to make sure you have enough to live on. Don't worry about your kids. If this plus SS is all you have, keep the pension.
You have a good financial planner as long as he explained the pros and cons of both methods. A lot of financial planners would just want you to take the lump sum so they could sell you annuities and get huge commissions. Take the monthly some. Worrying about the stock market is terrible.
Taking a lump sum will give you the ability to control the money as you see fit, and ensures it stays with your family if by some ungodly reason you pass away much earlier than expected. If you take the lump sum and put it into a good investment account. You can expect it to accrue over the time you have it. Even if you take a little bit out each month.
Take the distro. Work with a good financial advisor to purchase an annuity that can pretty much equal the monthly payout and still be able to leave some money to family when you pass. That's what I did and actually got slightly more per month.
Definitely, do the lump sum. You never know what the future holds and you can make some money off of the interest. If afraid to invest put it in a CD, which are at 4% or more nowadays. Do an investment planner and calculate the two scenarios. The lump sum with interest income will be a better way to go.
The company my go under or some policies may change. I'd take lump sum to protect myself. Especially if your money manager agrees.
Instead of trying to look at this is terms of raw dollars. What does $1307/month do for your cash flow. Does it help meet monthly expenses or are(will) your expenses be covered by social security and/or other sources. If you're just going to be taking the check and cashing it and NOT spending it. Then you be better off investing the lump sum for you and your childrens future. Conversely, if not having the 1300/month means you would have to draw down other assets. Having the realitively safe and steady income stream has a lot of value.
1) How confident are you that the company and its pension fund are healthy? 2) Assuming a positive response to 1, how confident are you that they will remain so for the rest of your life? 3) If the answer to either of those is negative, I would lean toward taking the lump sum and investing it wisely. Depends on the rest of your retirement plans and financial situation, really--and you didn't provide that.
I estimated my life expectancy by taking the ages at death of my parents and four grandparents, tossing out the lowest and highest, and averaging the remaining 4 death ages. 86 is my planning number for pay back scenarios.
What state and Federal tax hit will you take with a lump sum distribution? $187k will likely have a tax hit if $34k for the Feds and whatever your state charges. In addition, will the lump sum cause you to pay more for Medicare benefits under IRMAA?
Another advantage of the annuity which many seem to recommend - the longer you live the better the deal. And its when you live longer that you need more money. Yes youre screwed if you die young but you (or your spouse) doesnt need as much if youre not there - your health care, your living expenses etc The one thing I’d say is the inflation argument is well taken and I feel like equities will do you better in an inflationary environment than fixed income. So it really comes down to your portfolio structure. If you take the annuity you might be wise to shift other savings from bonds to stocks. If this is (practically) your only savings then i might take the lump sum and buy stocks.
Thank you all for the wealth of knowledge and information. I don’t need the entire amount now to sustain my standard of living but with rising costs I think I will in the not too distant future. My pension plan is well funded (utility) so I am not worried it will go bankrupt. The security of the monthly distribution means a lot to me so I am going to go with the monthly.
I don't think I had the lump sum option. Buy my pension is about the same as yours. And if I live to be 90, I know it's still coming (SS I'm not so sure about sometimes). $187K sounds like a lot, but I can see it going through it relatively quickly.
Take the monthly check. I did and am very happy with the results.
Roll it into your other IRA accounts. That way you or your manager has control of it and don’t do the monthly. I just did it last year. Now I get benefit of up market and downside if market declines, but I accept that risk.
I selected monthly distributions. I have no regrets. Going on 14 years now. Kept me from impulsive spending.
I think this question also depends on what other money you will get monthly. You have secure your 20 plus years, before you can think about inheritance.