Millington Financial Advisors
Lump Sum or Monthly Pension?
Frequently Asked Questions...
When you are faced with the decision to receive a lump sum or monthly pension from your employer, you may have a number of unanswered questions. We at Millington Financial Advisors are ready to answer these questions and provide you and your family a sense of comfort and control. Below you will find a handful of frequently asked questions on this topic:
- Is there a calculation you can prepare to determine whether or not you should take the lump sum?
Yes, the calculation considers life expectancy and a reasonable rate of return on investments. The longer you expect to live and the less you believe you can earn on a lump sum distribution, the more you would tend to want to continue receiving the ongoing pension payments. This type of calculation depends heavily on critical assumptions, which are difficult to nail down with any degree of confidence.
- What are some softer reasons why you should or shouldn't take a lump sum?
You have to ask yourself would you value having control over a pool of money to make distributions and invest as you see fit, or are you more concerned about outliving your money.
On the flip side of outliving your money, are you concerned with collecting your pension for only a short period of time and then passing up an opportunity to provide a potentially sizable inheritance for your loved ones?
- What else goes into determining whether or not I should take a lump sum or monthly pension?
An understanding of your personal financial picture is a key component to answering this question. What do your personal financials look like? What are your liquid & non-liquid assets and liabilities? Do you have a good estimate of your current and future living expenses? Do you have any unique future goals, vacations or major home improvement projects in mind? Do you have any other sources of retirement income, such as social security or any other pensions and investments?
With a clear understanding of the above, you can build out what your future cash flows and resources may look like under various scenarios, such as a higher inflationary environment or a low return environment.
- What's the great advantage to taking a lump sum?
The greatest advantage is control over your money and being able to potentially pass on significant assets to loved ones.
- What are some advantages to taking a monthly pension?
Choosing to receive monthly payments enables retirees to have a steady income for their lifetime without the stress of investing a large amount of money all at once.
- What are your investment options with a lump sum?
If you roll your lump sum proceeds into an Individual Retirement Account (IRA), you have the flexibility to invest in stocks and bonds, alternative investments, and are able to take advantage of various investment management styles.
- If I select the lump sum option, what is the tax impact?
Provided you go through what is referred to as a direct rollover to an IRA, there is no initial tax impact. It's only when you take a distribution that you would have ordinary taxable income. You can elect to have an amount withheld to pay taxes, similar to when you were receiving a paycheck. It's important to understand your overall tax situation, and how timing your distributions can impact the tax rate you are subjected to on an annual basis.
Once the proceeds are in an IRA it's also important to adhere to the required minimum distribution requirements. At age 70½ you'll need to begin taking an annual distribution based on the value of all your IRAs at the previous year end.
There are a number of IRS rules governing how and when you can contribute and distribute from an IRA, its important to work with professionals that can help you navigate your options before taking any action.