The Pension Lump Sum Decision We All Must Make

A trend over the past few years has been for companies to offer their more seasoned employees, who are part of a traditional pension plan, to accept a lump sum payment in lieu of monthly pension income checks. While there are a number of reasons why companies would do this, the employee receiving this offer has a big decision to make: take the lump sum or take the income checks, sometimes a combination of both.

While you may not be facing this question right now (and maybe you never will), the decision process is one that’s universal to all retirees. You see, making the “best” choice requires you to predict how long you’ll live. That’s right, predict the timing of your demise accurately and you’ll win the grand prize! Seriously though, if only this were so simple. Considering family history, lifestyle choices, future medical advances, and the proverbial hit-by-city-bus scenarios is required, it’s just something we’re not good at, unless we’re looking at a sample size of millions of people at a time. For you – and me – it feels like a barely educated guess.

If we take this to another level, this fundamental question lies at the very heart of all retirement planning. It’s the very reason for retirement planning; if you and/or your spouse live a long life, you’d better have prepared for it financially. After all, the very notion that we might run out of money before dying is the concern that drives most of our retirement planning decisions. As such, choosing how much money to allow yourself to spend each month in retirement is the flipside of the life expectancy coin.

When one of the families we serve delivers us their packet of paperwork outlining their pension buyout and lump sum options, I get to work to spreadsheet various scenarios. These scenarios highlight which option would be the best choice, given various life expectancies.

An example of pension income options might look like this:

The employee will receive at retirement:

$2,000 monthly for life, with nothing left for the spouse, should the employee die first. This is usually called the ‘Single Life Annuity’ option
$1,700 monthly for life, with 50% of that ($850) continued for the spouse until the end of their life. This is a 50% Joint & Survivor option.
$1,400 monthly for life, with none of that passing to the spouse, but a $70,000 lump sum is available. This is a PLOP, a Partial Lump Sum Option

So, if you’re married, which do you choose?

As you can imagine, or maybe you’ve already experienced this, the process of choosing can be very nuanced. Maybe the lump sum (which is almost always rolled into an IRA, tax-free) would create a legacy for your grandchildren, or would make for a nice contribution to some long term care planning. Maybe you need maximum monthly income each month and have great family history and longevity potential, thus leading toward one of the pension income choices.

Each situation is very unique, but the fundamental question is the same: “How long do we think we’ll live, and how do we wish to set ourselves up financially?” Whether you’re presented with a pension choice or not, the moment you step into a retirement planner’s office, you’re contemplating this very question.

How do I address this? My job, as the retirement planner, is to plan for you and/or your spouse to live a long life. If you don’t plan to live a long life, then don’t plan…just spend the money!

The result of planning for longevity is the fact that I may make investment and income planning recommendations for you that you hadn’t considered. In fact, the recommendations may even challenge you. Why? Most of us cannot fathom living to age 95 and beyond; that’s what other people do. You’re aware of too many dangers to think that you’ll live that long. You know what…people do all the time.

Pension choice or not, planning for longevity requires a forced (on your part) very long-term perspective. It requires some tough choices, and always some compromises. In the end though, a long-term plan helps you enjoy the years you do have, whether just a few or many, without worry of running out of money. It’s retirement planning 101, and it’s at the core of what we’re here to help you do.

Dare I say: “live long and prosper?” Too late, I just did.

All the best,

Adam Cufr Signature