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Take the Money Now, or Get it Monthly? Thumbnail

Take the Money Now, or Get it Monthly?

Doug Garrison, CFP, MBA - Senior Wealth Advisor



Sam Engineer is about to retire. He's worked for 31 years for a company like ExxonMobil or Chevron that offers a tax-qualified pension plan. Sam now has an important decision to make. Should he take his retirement benefit as a lump sum or as a monthly annuity?

Sam approaches this decision with several concerns. Let's review his worries and help him address them.

1) Sam doesn't want to be responsible for managing all that money on his own,

especially as he gets older or dies before his wife, Betty. She's sweet, but she has neither the interest nor aptitude for investment management.

Sam could opt for the monthly pension and make Betty his co-annuitant. They'll get a fixed payment every month for as long as Sam lives. At his death, Betty would receive a percentage of Sam's benefit for as long as she lives.

Or, Sam can take the lump sum. He can roll it into an IRA, and find a trusted financial advisor to manage his investment. Invested in a diversified portfolio of stocks and bonds, the account should grow over time. Sam and Betty can take periodic withdrawals based on earnings and appreciation and IRS requirements. Depending on investment performance and how much the Engineer family withdraws from the IRA, they may increase their withdrawals over time.

2) Sam worries about making the wrong decision.

Life can hand you unexpected challenges. He wonders whether one form of benefit is more unchangeable than the other.

The decision to take a monthly pension is generally irreversible. If Sam opts for the lump sum and then changes his mind and decides he wants a regular monthly paycheck, he and Betty can buy an annuity later. And if they purchase the annuity when they're older and interest rates are higher, they may get more monthly benefits for their lump sum dollars.

3) Sam and Betty would like to leave an inheritance to their children.

One of the disadvantages of a monthly pension is that upon the death of the annuitant (or joint annuitant, if there is one), the benefits typically stop. With a lump sum, however, it's possible that with decent investment results and a modicum of restraint on how freely the couple spends the assets, an inheritance will be available for the heirs or charitable gifts.

4) What would happen if both Sam and Betty die prematurely?

The company's monthly pension is generally payable until the death of the annuitant (or joint annuitant), whichever is later. (Some plans do offer an option of guaranteeing a certain number of payments (e.g., 10 or 20 years) regardless of whether the annuitants are alive.) Alternatively, whatever remains of the lump sum when the couple finally passes remains for their heirs.

5) Sam worries about a resurgence of inflation.

The monthly pension payment is likely fixed for as long as it's paid. Companies can opt voluntarily to provide cost-of-living adjustments, but not very many do. A lump sum, invested well, should be able to keep up with the cost of living or do even better. Stocks' annual returns have historically been a few percent better than inflation.

Interest rates used to commute monthly pension benefits into lump sums are at near all-time lows, creating a windfall for those fortunate enough to elect their benefits as a lump sum. But as with Sam and Betty, you need to consider your circumstances and concerns to make the right decision for your family. A trusted financial advisor can help you evaluate your choices. Give us a call. Let's talk!

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Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.