When you retire, your employer may offer to pay a lump sum payout for your time with the company or a monthly pension amount until you die. Before choosing your pension payment method, consider the fiscal advantages and disadvantages. Depending on your lifestyle and investing abilities, one plan could work better for you than the other.
When you choose to accept your lump sum payout after you retire, the company for which you worked writes a single check and completes its end of the bargain. Opting for a pension places an obligation upon the company that it must meet for years to come, if it is still operational. As a retiree, your pension depends upon the financial stability and success of your former employer. The Pension Benefit Guaranty Corporation of the United States covers some of your pension if your former employer fails to meet its obligations, but the guaranteed amount might not equal the amount you were promised originally.
The financial control between a lump sum payout and a monthly pension is different because of the amounts involved. With a lump sum payout, you can invest the money immediately into a Roth IRA, a savings account, a CD or a mutual fund. Because the lump sum is a large cash amount, it gains larger returns than that of a monthly pension. A monthly pension, however, regulates the amount you might be tempted to spend and fixes your income for budget purposes.
When you receive a lump sum payout from your company, you typically pay taxes on the amount once. Even if you roll the lump sum into a Roth or traditional IRA, you do not pay taxes until you withdraw the full amount. The only instance where you pay additional taxes on your lump sum is when you receive income from investments made with the money. Your monthly pension is subject to yearly income taxes for as long as you live. The total tax amount could be higher or lower, depending on inflation and tax rates.
Death and inflation are two of the biggest considerations when choosing between lump sum payments and monthly pensions. Inflation over a period of time is almost always a positive percentage, meaning that $100 now might equal $70 10 or 15 years from now. Ask your employer if it adjusts your pension through the years to account for inflation. When you die, your monthly pension payments cease. If you want to leave an inheritance for your family, a lump sum might be more suitable in the event of unforeseen circumstances.
Aaron Marquis is a University of Texas graduate with experience writing commercials and press releases for national advertising agencies as well as comedy television treatments/stories for FOX Studios and HBO. Marquis has been writing for over six years.