Deciding whether to take a lump sum or a monthly pension payment is a complicated calculation that depends on factors you can’t control. Among them are your longevity and the number of investment returns you might earn on a lump sum distribution. In addition, some regular pension payments include cost-of-living adjustments and may be insured by the Pension Benefit Guaranty Corporation.
Tax-Deferred
A lump sum allows you to invest your money tax-free and benefit from lower rates of return than the pension plan would use. This can be important if you think interest rates are falling or your employer could be acquired. Taking a Boeing pension lump sum requires careful asset management to avoid putting the money into risky investments. Consider whether you are willing to manage the investment or have a trusted financial adviser. If you take the lump sum, your pension will be reduced by an amount determined by your employer’s actuaries based on the average life expectancy of retirees. This can impact your lifetime income, so it’s worth considering carefully. You should also factor in any other sources of retirement income you will have.
Flexibility
The decision between pension annuity payments and lump sum distributions is major. It is often made without objective financial advice and is typically irrevocable. The amount you receive each month in a lifetime payment plan is based on actuarial calculations that consider your current age, how long you’re expected to live, and interest rates set by the IRS. These numbers are just estimates, however. If you choose to take a lump sum, you assume the responsibility of investing the money and making it last throughout retirement. Market fluctuations and interest rate changes could significantly impact your investment returns. This is a risk that many retirees need to be more comfortable taking.
Longevity
A lump sum offers a higher potential return, but it’s unclear how much money will last throughout your life unless you are an investment expert. Managing a large sum’s also more challenging, and many people who take lump sums spend it too quickly. A regular pension payment is guaranteed for your lifetime and, in some cases, the life of a surviving spouse. It may also include cost-of-living adjustments and indexed to inflation. The lump-sum option typically represents the actuarial net present value of your future monthly payments discounted to today. But, the amount will decline as interest rates rise, and if you take it before age 59 1/2, you will pay a 10% early withdrawal tax penalty.
Security
The monthly pension payment or lump sum offer is based on actuarial calculations, which consider how long you can expect to live and interest rates set by the IRS. But that calculation doesn’t consider personal factors like family history or health. A lifetime monthly pension can be comforting because it provides a consistent income stream. But if you don’t have a good family history of longevity, a lump sum could be better for you because it allows you to control your investment risk. If you opt for a lump sum, consider purchasing an immediate annuity with inflation protection. Otherwise, you could be disappointed if the Federal Reserve’s expected series of interest-rate increases reduces the value of your lump sum payout.
Investment Options
As with all personal finance decisions, you must decide what is best for your situation. If you are comfortable investing on your own or with the help of an adviser, and you can make a better return than the pension’s current payment option, taking a lump sum may be the right choice. However, it would be best if you also considered your spending habits. You need a strategy to ensure your investment portfolio produces enough income to cover your expenses to avoid depleting the lump sum. It is a difficult decision that should be made with the help of an objective financial adviser. Also, with interest rates on the rise, the present value of your lump sum might shrink. The future is unpredictable, so you should do your homework now.
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