Should You Consider a Lump Sum Pension Payment at Retirement?
Imagine if you were negligent in your banking executive job, which resulted in your bank being fined $185 million, and when you decide to retire, the company hands you $125 million. That’s the scenario playing out at Wells Fargo, where the head of consumer banking, Carrie Tolstedt, gets to walk away with a huge payday to get her through retirement.
If only the rest of us could be so lucky.
You and I have to earn our retirement funds the old-fashioned way – with honest, hard work.
If you work for a company or government agency that has a pension, you can choose to receive your pension payment each month or take it out in one lump sum.
Sure, a guaranteed monthly pension payment sounds great, but there are instances where a lump sum payout makes sense, such as:
Be sure to check to see if the monthly pension payments come with cost-of-living increases. If not, you may find yourself short on funds 10 years down the road when inflation overtakes your pension payments. A lump sum payout would give you the flexibility to choose investments that could keep up with inflation.
With a pension, the fund managers choose where to invest the pension funds. If you roll a lump sum payment into an IRA, you have control over the investments that you place the funds in.
With a pension, the monthly payments stop when you and your spouse die. If you invest the lump sum payout in an IRA, you can pass along the remaining funds to a designated beneficiary.
There is no guarantee your company will be around for years to come. If the company goes out of business, monthly pension payments are taken over by the Pension Benefit Guaranty Corporation (PBGC), a government entity that sets maximum payments for the pensions it takes over. If your pension was higher than the PBGC’s maximum, your monthly payments get reduced to the maximum amount.
Ultimately, the decision to take the monthly or lump sum payments is your decision, but you may want to consult with a financial advisor to determine which is right for you.
For more, be sure to see Pension Payments: Monthly or Lump Sum?