Many employers offer pension plans distributed either in the form of an annuity payment or a lump sum. The best choice varies depending on your individual situation and can negatively impact your portfolio should you pick the wrong option. Michael Garry, the author of Independent Financial Planning, joins the Wealth Summit to discuss the best way to handle pension plan distributions. -Lump-Sum Pros and Cons -Annuity Pros and Cons -Everyone is different The most important thing to understand about pension plans is that there’s no universally correct answer—each situation is unique and depends on the individual circumstances of you and your family. All choices are actuarially equivalent, meaning your company has spent a great deal of time calculating the amount of both the lump sum and the annuity payments to ensure both choices would come out as close as possible. The lump-sum pension distribution option gives you the freedom and immediate money access. Under proper management, it will equal the annuity amount. Additionally, you can roll it over into an IRA tax-free. Also, the account can be passed down to a beneficiary, unlike annuity payments which stop immediately upon your death. The negative side of accepting a lump sum includes the opportunity to spend the money too fast. Finally, the lump sum includes the potential for losses from bad markets or unwise investments. Consider how desperately the money is needed when choosing an annuity. The majority of the amount will be locked up for many years. The annuity option is a good choice for those who are foreign to investing. If talk of stocks and bonds scares you, go with the safe, consistent payment plan. The good part about annuities is you are guaranteed a steady stream of income for life. However, the amounts are fixed, disregarding inflation. You could lose up to a quarter of your purchasing power in just a decade. Additionally, there is no residual value to the pension once you die. Your beneficiaries have no access to the money. If you have other steady streams of income, take the lump sum, especially if you have access to quality investment and planning advice. Forsake the annuity option if your life expectancy is less than average—the earlier you die the less money you and your money will see. Finally, take the lump sum option if interest rates are relatively low. The calculation for the benefit or payment is much higher when interest rates are low. Choose the consistent annuity payments if you have a long life expectancy and need a steady retirement income. Also, if you have minimal investment experience, the annuity is a better option. There is less risk of the potential loss. Neither option is completely right or wrong. Like so many financial decisions, it depends almost entirely on your individual situation. If you’re unsure of where to go from here given the advice in the video, seek out an honest financial advisor to help you sort through the varying factors impacting your pension plan distribution....(read more)
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