ABOUT Nathaniel

As a CERTIFIED FINANCIAL PLANNER™ professional, Nate through proactive planning and management helps individuals and families gain confidence and control over their financial situation so they can work toward accomplishing their retirement goals. Since 2002 he has been responsible for leading clients through the wealth management process, which includes guiding clients from goal setting to [...]

Nate Ritchison, CFP® outlines a few of the factors to consider when choosing between the lump sum payout or monthly annuity payments when collecting your pension – like other retirement income resources and assets, your life expectancy and family longevity, and the financial health of the pension plan and the company.

Recently, we received a question asking whether I should take the lump sum or the annuity options on my pension. It’s a really good question, one with long term implications. So, you want to take a deep dive into this analysis.

The first place to start is understanding your resources. What are your assets? What are your income sources for retirement? So, assets might be retirement plans, like a 401(k), an IRA, or a non-retirement account. Income sources might be real estate, maybe another pension, potentially social security. If you have adequate, or high resources, assets, or income sources for retirement, you might want to consider doing the lump sum, that way you can control how much you want to take out of the accounts and you can control the taxation of that money.

On the other hand, you might want to also, consider taking the annuity if maybe you haven’t done as well of a job saving for retirement. It’s a great way to have money throughout retirement that you’ll never outlive.

Another consideration is, what is your personal longevity? What is your life expectancy? The longer you live, the more valuable a pension is going to be, the income from that pension is going to be. So, if you have a long life expectancy, a long family history, or if you’re really healthy, you might want to consider the annuity option for the pension. Or, on the flip-side, if you don’t have longevity in your family, or you’re not as healthy, maybe you want to consider doing that lump sum and taking control of that money so you can control when you spend it and how much you’re spending each and every year.

Another implication or consideration to look at is what’s the financial health of the pension or the company that’s sponsoring the pension? Now you can review the pension details by looking at the form 5500, and you can see whether the fund is either over-funded, under-funded, or adequately-funded. I think it’s a good place to start to make sure that you feel comfortable because if you take the income, you’re going to be taking money from that pension for maybe 20, 30 years. So, you want to make sure it’s in really good financial health.

If the company or the fund is not in as good financial health and you don’t feel as confident, you might consider taking the lump sum, that way you can control that.

These were just three different considerations when looking at your pension options, whether it’s the annuity or the lump sum. There’s a whole host of others, and we really encourage you to sit down with a financial advisor to help go through some of this analysis, and if you need help finding an advisor, please visit us at PureFinancial.com. Thank you.

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