One of the retirement questions many wrestle with is whether to take a pension or a lump sum payment.
On this episode we flesh out an example from baseball: Did Bobby Bonilla Day make the right decision to take annual payments for 25 years vs. taking a lump sum payment?
Seeing this example play out over time might help you make your own pension vs. lump sum choice.
A Challenging Retirement Planning Question
If you are one of the retiring professionals who will still receive a pension in retirement, you’ve likely considered which option would be better for you: taking regular payments or a lump sum payment.
This decision can leave you fraught with uncertainty which is why you’ll want to analyze this decision in a calculated way.
How the Lump Sum and Pension Packages Are Figured
Many companies offer a lump sum package to replace the annuity which reduces the size of their financial obligations from their future financial statements.
In these situations, actuarial professionals calculate your life expectancy and current interest rates to decide how much to offer as a lump sum payment.
A few items to consider in your analysis when considering the annuity payments:
- Most often private pensions are not inflation-adjusted, meaning they are not worth the same value later on.
- You’ll have several options for different amounts based on whether you take the payments only for your life or to provide for your survivor. Most provide a joint survivor option, where you can choose a percentage that will be left to your spouse after you pass.
Why Having a Financial Advisor Can Help You Make This Choice
The lump sum vs. pension choice is most often not an isolated decision. This is where financial planning can help.
A financial advisor can take a deeper look at your big picture and offer a different perspective than you may have considered. It is important to consider this decision with your overall retirement plan in mind.
For example, some people worry about a company’s financial solvency and base their decision on that. The PBGC (Pension Benefit Guarantee Corporation) will currently pay a portion of your pension up to a legally defined limit of about $7000 per month if you retire at age 65.
When considering the lump sum vs the pension payment, you’ll want to consider how much control you want to have over your future.
Consider all the variables. Size matters, sometimes it’s not simply about the numbers.
Do you prefer to have a guaranteed payment each month?
Consider reaching out to a financial advisor who can help you see the blind spots and walk you through the potential curveballs. We want you to have the confidence to make the best decisions. We’re here to help enhance your today and enrich your tomorrow.
Outline of This Episode
- [0:46] Our article of the week
- [2:47] Pension or lump sum?
- [7:27] An advanced strategy to consider
- [9:42] What happens if the company goes bankrupt?
- [12:26] Our example revealed
- [19:01] The takeaways
