Ask The Expert: Lump Sum Or Pension Payment?

By Jon L. Ten Haagen, CFP


Q: My spouse and I are in our early 50s. She has a pension offer from a company she worked for a good number of years ago. She has the choice of taking a lump sum of $99K now or waiting until she is 65 and get a pension payment of about $1,500 a month. What should we do and how do we decide?


A: You need to carefully weigh out the pros and cons of a lump sum versus an annuity distribution.

Some pros of an annuity pension distribution include that there are no investment decisions for you to make. In addition, the income is guaranteed for life, however, it most likely does not have a COLA (cost of living adjustment for inflation).

A lump-sum pension distribution, on the other hand, is advantageous because it gives you access to money and, when managed properly, you could generate more income with good management.

There are also negatives with both distribution plans. One con of an annuity pension distribution is that your fixed monthly income will not keep up with inflation. Another con is thatyour guarantees are base4d on the strength of the insurance company.

One con of a lump-sum pension distribution is that money could be poorly managed and not be there when you need it. Another is that it makes it easy for you to get and spend if you are not careful.

So how should you decide? First, look at the number of years until you get the steady pension amount (most likely there is not a COLA adjustment for inflation). If you are within a few years of being eligible, I would wait for the pension because it is a sure steady amount. However, you have 14 years before that option, so you may want to consider taking the lump which can be rolled into an IRA so you avoid current taxes. In fourteen years with average market returns you should be able to build this nest egg so that will generate more than the $1500 from the pension.

Other things to take into consideration: What is the history of your family’s longevity? Does your family have a history of medical problems or are they for the most part long-lived? What is your comfort level with the stock market?

Please seek guidance from a good tax advisor (CPA) and/or a qualified financial advisor (CFP) before making any decisions. Each individual is different and will have separate considerations.


Disclaimer: The advice offered in this column is intended for informational purposes only. Use of this column is not intended to replace or substitute any professional advice. This column, its author, the newspaper and publisher are not responsible for the outcome of following any advice that appears here.