Choosing Between a Lump Sum and a Monthly Pension

photo credit: AMagill

Only 30 million Americans are lucky enough to be covered by a traditional pension plan, and if you’re one of them, you’ve probably wondered whether taking a lump-sum payment would be better than your monthly pension check. Though it may seem complicated, when you take the facts into consideration, the answer is clear:

A 65-year old man has a 50% chance of reaching age 85, and a woman of the same age has the same chances of reaching age 88. When choosing between, say, a $300,000 lump payment and a $2000/month pension, you must weigh your years against the numbers. To boil it down to basics, to earn approximately $2000 monthly for the next 20-23 years, you will need to earn 5.1-6% interest on your $300,000.

Though these would be fair earnings for even the most conservative stock or retirement portfolio, keep in mind that your returns would be short-term. Banking your retirement on a fluctuating, short-term portfolio, taking funds out regularly, is likely not the best way to plan for your retirement. But don’t be rash, your pension may not be so, either. In fact, experts suggest that the best retirement strategy is to take the lump $300,00 and invest it in an immediate annuity. You can live on the returns, and utilize large funds in an emergency.

Expert advice is not the only solution, so take a look at your lifestyle, health, and retirement needs, and decide for yourself whether you need a lump-sum payment, or a monthly pension.

Tags: Investing | Money Management | Retirement | savings