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Pension: Lump Sum vs. Annuity (Part 2)

This is Part Two of a two-part video blog on Pensions. Click here for Part One.

Individuals with certain types of pension plans may often choose between a lump sum distribution or monthly income for life.  We talk with many people who initially favor the lump sum.  But I think one reason for that is because the lump sum amount seems so much larger.  Imagine you’re given the choice between $350,000 today or $2,000 per month for life.  Naturally $350,000 sounds like a lot more!  But we encourage people to put much more thought into these decisions.  In another video, we discuss why individuals may choose the $2,000 monthly income.  Now let’s consider potential advantages of the lump sum option.

  1. First, by choosing the lump sum, I may transfer the $350,000 (from our example) into an IRA and then invest it. Many claim that if I invest well and during a period of time with favorable stock market returns, my $350,000 may possibly grow enough over time that it can support a higher level of spending than the $2,000 per month could have supported.  Of course, there’s risk with that, but we hear this argument frequently.
  2. A second possible advantage is one’s ability to leave a financial legacy to children and grandchildren. Once again, if I can invest well and earn good returns on my money, I may be able to spend some of this money and leave a nice inheritance to my heirs whereas the $2,000 per month would likely end at my death or my wife’s death.  No part of this $2,000 per month is typically available as an inheritance.
  3. Another potential benefit of the lump sum is its flexibility and availability. Choosing the $350,000 gives me a large balance of cash I can use in case of a financial need – perhaps a car purchase, a new roof.  If I instead choose the $2,000 monthly lifetime income, I would typically have to give up the $350,000 balance.  It’s no longer available.

Now, this is not meant to be an exhaustive list of considerations.  Instead use this information as a starting point to think about your specific situation, your family, your goals and your emotional ties to this money.  Don’t make a snap decision you may later regret.  Be wise in your planning.

If you find yourself wondering about these different options, you are not alone.  Let’s start a conversation as we are purposely built to help.

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Published: September 11, 2015terry

Authored by: Terry Prather, CFP®, ChFC®

Direct Phone: 812-602-6307

Email: twprather@paynewealthpartners.com

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The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.

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Payne Wealth Partners, Inc.
Keystone Financial Consulting
601 N Cross Pointe Blvd
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Phone: 812-477-6221
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