Pension Option for Retirement: Lump Sum or Monthly Payments?

Hello, welcome to Roger. We want you to not only have a great

retirement

, we want you to have a great life and we are here to try to help you. Now we got another question from a listener this week and this is coming from outside, so Al says. and he's been listening to the Answer Man podcast on

retirement

for a long time, so how much I appreciate it and thanks for the question, he says that he's about to retire. The company he works for is having some financial problems. I have a retirement plan that is now 80% funded. amount what are the advantages and disadvantages of taking the

lump

sum versus the

monthly

pension

payments

says PS I left your book on the cruise are you going to send me another one where everything is I already put it in the mail you, so, you are talking about the retirement of the Republic of China, my new book you can get at the link below, so first of all, let's talk about

pension

s, so what is a pension?

A pension is a promise from a company that four years of service will guarantee you a certain payout. amount for the rest of your life and it is something normal that many baby boomers had and it has been rapidly disappearing being replaced by the 401 K in the last four or five decades, so when you have a pension, what do you mean by funded? funded by about eighty percent, so when this company MIT, when a company makes a promise of a pension, what they do is they fund the pension with money to meet the obligations to all the workers that they make that promise to. ; the right thing makes sense.

There are a lot of really complicated accounting rules that have come up in the last four decades that make it difficult and sometimes pensions don't have to fund the full amount, they can do percentages, so how much funding is enough? Mill Men Pension Funding Study 2017, if you look at the 100 largest companies, they now have a funded pension amount of about 82% and from what I have read the 80 percent funded level is about the standard of "okay, that's acceptable," meaning they put in enough money to meet about 80 percent of the obligations and then the idea is that the company will continue to grow and be able to contribute because there are always new workers coming in , so they will have the money to fund it now that there have been articles about is eighty percent really enough because, from my reading, there are a lot of difficult things that companies can do to inflate that number or do, you know, manipulate that number, Maybe that's a good term, so the question is, so what?

What happens if a pension defaults is what happens if a company can't pay the promise to people who have worked there typically for decades. There's something called the Pension Benefit Guaranty Corporation, which is a government-sponsored entity that's a regulator that says if you have a pension and you pay into this PBGC, then if you don't comply, we'll cover a portion of those benefits and you can get them. We will have a link to being PBGC below so you can understand how that protection works because it doesn't cover all but it may cover some of that and then we will also have a link to the free communication from ERISA where you can check your company's funding level for your pension.

It's on a form called 5500 that all corporations must file. Let's talk about the advantages and disadvantages of receiving the

monthly

benefit instead of the

lump

sum that would ideally be paid into an IRA, so the advantages of simply receiving the monthly payment is that it is an easy button, and the company, it is promised which is not guaranteed to be a better term for the rest of your life and then you can use it to supplement your Social Security either for the assets that you have and you don't have to think about it, that money will come as long as you meet your promise, that's very simple and not a bad

option

for a lot of people who will depend and we'll see how to navigate that here in a second, what are some of the disadvantages of taking a lump sum? or excuse me for taking monthly benefits, so in case you run the risk that the company may be able to pay the benefits and there are concerns about funding levels and things like that, but it's not a common thing for a company to default, but you Yeah.

At risk, there is no immediate liquidity, which means that if you take the lump sum instead of monthly

payments

, you will have a lot of money and you may need that money to do something, maybe it will be to pay off some debt or something else , make it a The good and the bad, but you will not have immediate liquidity because once you activate those payments there is no turning back and then you change your mind later, generally there is no inflation adjustment in the monthly payment that everyone sends you months, so when you retire if they send you $2,000 a month, well, that $2,000 a month will be $2,000 a month even in 20 years, when inflation eats away at your purchasing power and you have no fair potential asset growth when you die depending on what

option

do you take?

The payments disappear and there are no assets left, so your assets have no real value. How about we take a lump sum? How about we just take all that money and not have to worry about whether the company can live up to its promise? now the advantages of that are the complete opposite, you have liquidity, if you pass away there will be money there potentially for your family, you have the opportunity to earn dividends and grow assets so you can keep up with inflation, but what are the advantages? disadvantages of that? taking the lump sum, well, now you have the burden of I have to manage these things I have to go invest them Studies show that investors generally drastically underperform when investing because that is a whole different world of behavioral problems, rather than financial, to be afraid and sell and then get. greedy and getting into things that are too aggressive, you're going to have to take all that out and figure out how you're going to invest that wisely and you're also going to have to decide well if I want to take some of that money because it's there in that account.

I can see it and I want to take this trip or buy this house or whatever else you can do, whether you accept that, hey, that can hurt you in 20 years, when you're old and need the money right, if you do fun things from the At first, you could sacrifice your future because you spent it on something you're saying right now. I mean, that's natural human behavior. You will have to accept all that. There are advantages. The disadvantages of doing this, so how do you create a framework to determine if it makes sense for you? Here are the things I consider on the checklist to make that determination.

What do we analyze? What is the pension payment? The relative monthly payment. to the amount of money that we are actually receiving in a lump sum, there are many times that from a withdrawal rate calculation, you are actually paying a good portion of what you would pay, that would be very difficult to replicate. I love some investment scenarios. Sometimes I'll be honest with you, it turns out that it makes sense to take the pension simply because the numbers work that way. Another thing to consider is: what are your spending needs? You know that people live differently.

You may need to have the monthly payment to allow you to keep other assets in place and not have to withdraw other assets. Yes, that is a consideration. What is your life expectancy if you are not very healthy and have a history of short life expectancy? Heck, you might want to consider leaning more toward lump sum because you might not have the benefit of all the payments to do that to see it work well, so that's a consideration. I think one of the most important is what your entire balance sheet looks like and how many assets you have.

Do you have outside of this possible lump sum or income opportunity? What do you have in taxable assets? What do you have in tax-deferred assets? What do you have in Roth assets? That will influence which avenue you choose in terms of choosing the pension option. Another consideration is what income streams you have if you plan to continue working or if you have a lot of other passive income streams, whether it's investment properties or other types of things, it may not make as much sense to activate an additional income stream that you want. That lump sum to get into an IRA In order to increase your confidence in your investing skills, you need to be sure that you have a process or are surrounded by someone who does have a process to help you make the right decision.

Be a good asset manager because there are many ways you can shoot yourself in the foot and then the last thing, what are your wealth transfer plans? Do you know if leaving a huge estate is an important goal or the most important milestones are an important goal? Also, given these other factors that may lead you more to agree to a lump sum, as you can see, there is no easy button. I'm making this decision the way I always think about it, a lot of times we try to make decisions that are tactical, right. I have this problem, so I try to solve it at this level.

If you have a good decision-making process and you follow a process that focuses more on the strategic level, what ends up happening is that these tactical decisions become much easier. so check out the resources below if you're enjoying Roger and want to hear more, subscribe on the subscribe button and you'll be notified when it happens. I'd love to hear your comments below on what you think about this bump. payment option versus sum, especially if you're worried about the company, okay, until next week, this is Roger Whitney, helping you hopefully not only create a great retirement but a great life.