While pensions at private companies are uncommon these days, many of today’s retirees have the option. If you’re choosing between a lump-sum payment or a pension, you have an important decision to make that could affect your retirement income for the rest of your life. Unfortunately, companies can’t offer the kind of objective and person-specific advice needed to make such an important decision. We at Madrona Financial Services can help – let’s start with what you should consider before deciding:
Do the Math:
Compare the lump sum amount to the monthly payment option over the course of your life. Calculate how much you would need to withdraw from the lump sum annually to meet your target income, and then compare it with the monthly payments. Also find out if you would be forfeiting any benefits by taking a buyout, such as health insurance. Factor in the value of these benefits into your calculations. Finally, consider the financial standing of your company and its ability to continue paying out for the rest of your life.
Consider Your Tax Situation and Estate Plan:
Consider the tax implications of both options: Would fixed pension payments increase your tax burden and prevent you from pursuing tax minimization strategies? Do you have a significant amount saved in an IRA, 401(k), or other taxable retirement account and face an increased tax burden when you withdraw funds later? And, if you want to provide for a spouse after your passing, consider how you might do this by taking a buyout, or if you have the option with your pension plan.
What if you have a 401(k)?
You likely cannot pass on your pension payments to non-spouse beneficiaries, but can pass on an IRA or 401(k) to whomever you want. If you have a 401(k), consider what you will do with it after you leave your company: you can cash out, roll it over into a 401(k) at a new company, leave it where it is, or roll it over into an IRA. All options have pros and cons and the right decision depends on your unique situation.
Would you benefit from professional advice? The right decision depends on your plan’s benefits and your unique financial situation. Your company may not be able to provide the in-depth, personalized advice you want and need, but we can. Click here to sign up for a complimentary financial review with a team member at Madrona Financial to start the conversation.
