Lump Sum vs. Pension Payments: An Overview

Monthly pension payments are a fixed dollar amount. They begin at retirement and last until a retiree's death. Some plans offer a survivor's benefit for a living spouse. A lump sum distribution is a one-time cash disbursement at retirement. The retiree is solely responsible for managing the funds throughout their retirement years.

Those who are approaching retirement and who are eligible for a pension often weigh the choice between accepting the traditional, lifetime monthly payments or taking a lump-sum distribution.

Lump-Sum Distributions

A lump-sum distribution is a one-time payment from a pension administrator. Individuals have access to a large sum of money that they can spend or invest.

A pension payment annuity is commonly a fixed payment, but a lump sum offers flexibility. It may also provide regular income if it's invested properly. Those who take a lump-sum distribution can name a 澳洲幸运5官方开奖结果体彩网:beneficiary to receive a🎉ny money that's left after their deaths.

Income from pensions is taxable, but individuals can 澳洲幸运5官方开奖结果体彩网:roll over a lump sum into an IRA and control when to withdraw the funds and pay income tax. Retirees will eventually have to take 澳洲幸运5官方开奖结果ꩵ体彩网:required minimum di🐭stributions (RMDs) from their IRA, but that won’t happen until age 73.

Pension Payments

A pension payment is a set monthly payment to a retiree for life and for the life of a surviving spouse in some cases. Some pensions include cost-of-living adjustments (COLA) so payments are indexed for inflation.

A regular pension check can help retirees budget and control overspending. Retirees with company health insurance🐈 may have to opt for pension payments because coverage might stop if an employee takes a lump sum.

Retirees with pension income were more likely to remain financially stable in 2020 than those who cashed out the lump sum, according to research from the Consumer Financial Protection Bureau. Of those with regular payments, 73% could maintain the same spending level after five years compared to only 56% of those who had chosen the lump sum.

One threat to pensions is that an employer fails to pay long-term. However, pension benefits are safeguarded by the Pension Benefit Guaranty Corporation (PBGC), a government entity that collects insurance premiums from employers sponsoring insured pension plans. The PBGC only covers defined-benefit plans, not defined contribution plans like 401(k)s.

The maximum annual benefit was $85,295.40 in 2024 for a straight-life annuity for a 65-year-old retiree.

Key Differences

How Will I Use This in Real Life?

Planning for retirement can be a challenge because real life has a w🌊ay of being unpredictable, but the decision between taking a lump sum distribution or pensiꦓon payments can come down to how well you know yourself.

That lump sum payment might not be the right choice for you if your risk tolerance is minimal and the thought of investing the money in the stock market gives you indigestion. You might consider a safer investment, however, or roll the money over into an IRA. Accepting a lump sum payment might be a disaster if spending freely and lavishly is your vice. You could deplete your retirement cushioꩵn if you treat it as an unexpected windfall.

Taking pension payments may be your best option if you value a safe, steady income above all else, especially with the added ♈benefit of PBGC insurance. You may also be able to keep your health insurance benefits if you continue making your monthly payments.

It may help to make a checklist of all pertinent factors and organize them according to what's most important to you.

The Bottom Line

A lump-sum pension payment makes sense for some. Having less upfront capital is better for others. Pension payments should align with a retiree's personal goals in either case. A financial advisor can guide those who are considering whether to choose a monthly payment or invest a lump sum for the long term.