Should You Take The Lump Sum or The Pension When You Retire?

Troy Sharpe:  If your company offers you a lump sum or a pension, which one should you take, and what do you need to know to make a good decision?

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of The Retirement Income Show. If you’re fortunate  enough to have a pension offered from your company, then you’re in a really good position because that means the company, throughout your working career, has put money, 100% of the  contributions have come from them into what we call a defined benefit account, and now that you’re retiring, you have a choice.

Do you take the pension for life that they’re offering you or do you  roll that money over into your own IRA and self-direct it and determine how much income, when you need it, and take that for yourself? A couple of things you need to be aware of. When you  take the pension, it’s going to provide you a lot of security. The pension is subject to the ability of the company to pay that for as long as you’re alive.

The federal government does ensure these pensions up to a certain amount, but it’s important to understand that the federal government ensures every pension in the country, and we’re talking trillions of dollars here, so look into the  limits and understand if you’re going to take the pension, what those risks are. The biggest risk with taking the pension option from your company is the risk of erosion. This is how  inflation decreases your purchasing power over time.

If your pension check is $5,000 a month today, and that can get you through to your 65 or 70 or  75, that’s great, but over time, inflation is going to eat away at that check. What that means is you’re going to be able to buy less goods and services  over time with that same $5,000 per month. Pension checks do not increase 99% of the time. Throughout my career, I’ve maybe seen one or two that  have an increasing pension.

The biggest concern you have to have is that whatever you receive today, understand that in 10, 20, 30 years from now, that  it’s going to continually erode as far as the purchasing power is concerned. You have the choice, either take the pension and have more security, but have the risk of  erosion or inflation eroding your purchasing power, or you can roll it over into your own IRA and you carry that risk yourself, but there’s a death benefit if you pass  away before you anticipated, you have access to a larger lump sum of money for medical purchases later in life, and you can create your own private market  annuity that has an increasing option or stack them to have multiple deferred income annuities or just invest in a diversified portfolio of stocks and bonds.

You really want to make sure that you  are able to answer a few questions. Those questions are, one, how much should you take out each year? So you need a retirement plan. How long will that money last? How do you plan for taxes? How can you  reduce taxes? If something happens to you, will your family be okay?

Everyone’s situation is completely different, but understand those choices, those risks, how they benefit you,  and of course, we always recommend that you sit down with a retirement specialist that does this every single day and can help walk you through the pros and cons and look at your social security, does  it make sense to turn that on sooner or later? How does that decision interact with your lump sum or pension choice, as well as taxes, investments, and the rest of the retirement planning picture?

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