A former employer has offered me a lump sum payout to get me off the books of their retirement plan. I’m 45 years old and would like to retire at 65. They’ve offered me three options: change nothing and get a $517 monthly annuity for life starting at age 65 as well as a cash amount of $65K available to me at age 65 as a cash payout or an annuity. The second option would be to start receiving monthly payments right now of $131/mo on the pension and $108/mo on the cash benefit. Third option is to receive a payout or rollover of $29K on the pension and $24K on the cash benefit. I’m not sure which option is best.
To put this into some sort of prospective, $24M (cash benefit now), if invested at 4%, will grow to $48M in 18 years. They are offering you $65M in twenty years, which is certainly more that the $48M. I don't know what guarantees are associated with the offer OR what rate of return they are projecting over the period OR into what investment vehicle they plan to place the assets. Since you are planning to retire in twenty years I assume that a guarantee that your monies will be there is very important to you. You have to determine what guarantee is given to Plan participants. On the other hand, if you feel confident that you can have these monies invested (through a tax-deferred roll-over IRA) and earn more that what they are saying your account will grow to in twenty years then that would be the path to take. If you take an annuity today the money is partially taxable at your current tax rates. If you take an annuity in twenty years when you might be in a lower tax bracket then you should have more money left in your pocket. It's probably best to have a free 1/2-3/4 hour consultation with an independent Registered Investment Advisor, who can review other specific details of your situation and give you a more informed opinion. Good luck!
Hi there! The decision to take a lump sum versus a pension is a difficult one, with a number of pros and cons either way. Many find that it's nice to get their hands on the lump sum all at once, while others prefer the security of the monthly pension. Here are some pros and cons:
Benefits of Lump Sum
Investment Independence: By taking the lump sum, you have the independence to make your own investment decisions or a hire a financial planner to guide you. Good investment results could provide you with more funds to enjoy than the monthly pension.
Leaving an inheritance: Most pensions offer the option to continue payments to your spouse upon your death, however, there is generally nothing left for kids or other beneficiaries. A lump sum provides the opportunity to leave something to your heirs.
Tax flexibility: A monthly pension is generally taxes when received, as ordinary income. Assuming you roll a lump sum into an IRA, distributions are also taxed as ordinary income. However, by making smart decisions around your IRA distributions, you can maximize your after tax withdrawals. For example, you might take larger distributions in years in which you are in a low tax bracket.
Distribution flexibility: With a lump sum, you can decide to take a larger or smaller distribution depending on your situation. A larger distribution might be necessary for a large one time expense (major travel, medical expense, home remodel). A smaller distribution might be due to reduced expenses or cash flow from other sources.
Benefits of Monthly Pension
No investment risk: Poor or inappropriate investment decisions with the lump sum may result in low returns, hampering your standard of living. The monthly pension assumes the risk for you.
Psychological peace of mind: Not being able to see your lump sum rise and fall with the market may give you added peace of mind. It will also prevent emotional mistakes that are often made by investors, such as selling low after a crash.
Dormant Pension Idea's...
Eric has given you a very helpful answer. You might also find this calculator comparing the NPV (Net Present Value) of your choices useful for an objective comparison of results.
Good luck and I hope this helps!
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