The pension-vs.-lump-sum decision

 In Retirement Income, Retirement Planning

If retirement is on the horizon, there’s a very important question you’ll need to ask yourself.
Hawaii or Arizona? Well, yes, that too.
But the question I’m thinking of is: Pension or lump sum?

When you stop working, there’s a big decision to be made. Should you leave your money in your employer-directed pension plan, or take it out as a lump sum?
The security of lifetime pension payments, and their consistent cash flow, certainly has its appeal. On the other hand, taking the commuted value (or net present value), and investing the proceeds, can prove to be a savvy move.
There are numerous factors to consider. Here are a handful of them.

Cash-flow flexibility
Pension payments certainly provide an inherent comfort.
But do you think your annual household budget will be the same at age 68 as it is at age 85? What if you’re considering a big purchase to begin retirement, like that cottage on the lake? Would you be able to help pay off your daughter and son-in-law’s mortgage 10 years from now?
Your financial situation will likely ebb and flow through retirement, and financial flexibility — which is quite limited with a pension plan — may become very important to you.

Your employer’s health . . . and yours
There’s plenty to consider here.
First and foremost, company pensions are not guaranteed. Given the financial health of your employer, your full pension benefits may not be available in the future — and taking your money out now may prove to be a very wise move.
Is your pension indexed? Government pensions often are. Private-sector pensions, though, don’t tend to provide protection from inflation, and as a result private-sector employees often take the lump sum.
You’ll also want to give some thought about your family genes, and how long you expect to live. Pension benefits continue until your death, and sometimes at a reduced rate until your spouse dies — and of course that means that the longer you live, the better a pension plan looks.

Estate issues
Regardless of your life expectancy, you’ll definitely want to consider the inheritance issue.
Are you planning to leave money to your children? Because the cold, hard truth says that your pension lasts only as long as you do (or, in some cases, as long as your spouse does).
With a robust performance from your investment portfolio, taking the lump sum now could leave you with more of an estate, and give you more to pass on to the next generation.

If you’re nearing retirement, or if you’re offered an exit package, it’s important to ask yourself all of these questions and more. How you take that money requires a well-informed decision, and that’s why I’m here as your dedicated and experienced financial advisor — to help you weigh the pros and cons, and point you toward the best choice for your situation.

(Want to know more? Book an appointment with me, give me a ring at 403.457.4142, or send me an e-mail so we can follow up with a discussion about your financial future.)

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