Should I Choose A Lump Sum Or A Pension?In the private sector, the responsibility and risk of retirement funding shifted from employer to employee over the last few decades. But for the 10,000 Baby Boomer retirees that will leave the workforce today, there is still a likelihood that a defined benefit or pension plan was a part of their employer retirement benefits at some point in their career. So deciding to roll over a pension into Traditional IRA in one lump sum payout or annuitize the amount to make payable over one life, or include a spouse comes down to a single question; Who do you trust?
Monthly Pension Payouts
Receiving a regular "paycheck" feels familiar with the monthly annuity payout option. Retirees with this type of fixed income should maintain a budget to keep spending under control to meet their financial obligations.
If you choose this option, make sure your pension plan adjusts for inflation as we have seen costs dramatically increase over the past year, your payouts must keep up with the rise of goods and services.
Pension plans with a monthly payout feel like a source of security if you fear running out of money in retirement.
However, one major disadvantage of this payout option is that your monthly pension payments may not continue after your death. Spousal benefits may be optional, but a single-life-only payout is generally higher. Check with your plan administrator to see if your benefits will continue after you die.
Do You Trust The Plan?
The Employee Retirement Income Security Act (ERISA) was passed into law by Congress in 1974 to guarantee workers' benefits in corporate pension plans by creating the Pension Benefit Guaranty Corporation (PBGC), a federally funded insurance program. However, according to PBGC's Fiscal Year (FY) 2019 Annual Report, "Absent changes in law, the Multiemployer Program is likely to run out of money during FY 2025." PBGC mentioned the underfunding crisis seven times in that report. In 2020, the insolvency projection improved slightly to FY 2026, thanks to the Bipartisan American Miners Act, but the problem remained. Then, in 2021, Congress passed the American Rescue Plan included an $86 billion aid package that provides grants to underfunded multiemployer pensions, but will this amount be enough? Only time will tell.
Lump-Sum: Do You Trust Yourself?
A lump-sum payout from a pension is a large sum of cash deposited into your account upon retirement. However, if you do not trust yourself as a spender, this option is not for you. Click here for a flowchart to help you determine if you are better off taking the annuity or one-time payout.
Rolling a pension payout into a Traditional IRA will prevent taxes from becoming due on the entire amount in a single year. It will also give you the freedom to invest those funds how you want. Work with a financial advisor if you need help investing the money and setting up a monthly payment automatically deposited into your checking account. By rolling your one-time payout into your Traditional IRA, you also have access to the funds. If necessary, you can increase your spending for unexpected costs, like needing a new roof or medical expenses. You can also increase your spending if you want to go on a vacation or buy a new car.
Can You Trust A Fiduciary?
Developing a financial plan to invest and make regular withdrawals can ensure your money lasts for the rest of your life, your spouse's life, and beyond, but managing those funds can be complicated. For over two decades, the CFP® professionals at Hurlow Wealth Management Group have worked with retirees to manage their investments and ensure our clients have the cash flow they need and never run out of money. As fiduciaries, they must put your financial best interests ahead of their own, whether the advice is one-time or ongoing. If you have questions about developing your financial plan, schedule a complimentary call with a fiduciary today.