Annuity vs Lump Sum: What’s the Right Choice?

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    Are you planning on joining the 50% of Americans over 55 who are in retirement? If so, there’s an important, potential tricky, question you may have to tackle.

    Will you opt for an annuity or lump-sum payment from your pension? 

    Deciding between an annuity vs a lump sum is a critical decision, one that can affect you for the rest of your life. What’s more, there isn’t always a clear-cut answer on what’s the best option to take.

    Ready for some good news? We’re about to walk you through the pros and cons of a pension lump sum vs an annuity so that you can make an informed decision.

    Continue reading to find out about all the things you need to consider before deciding to settle for a steady monthly check, or take the money and run. 

    Pros and Cons of a Lump Sum Pension Payout

    Depending on your retirement plan, your employer might offer you a lump sum payment when you retire. There are various incentives for companies to offer this, such as future savings on pension administration fees.

    Typically, employers will offer you a pension payout than is roughly equivalent to the total value of your annuity over the remainder of your lifetime. However, before you consider accepting a lump sum annuity payout, you should always do your own calculations to see if it lines up with the potential value of the annuity payments you’ll foreseeably receive. 

    If you’re wondering how to calculate a lump sum to see if it’s worth considering, one way you can do this is via an annuity calculator.

    However, there are more factors to consider than just the value of the annuity vs lump sum payment. This is also a decision that can affect your financial well-being considerably. Therefore, it’s best to also consult a wealth management professional

    As far as the pros and cons of lump sums go, the main pro is that a lump sum pension payout offers you ultimate financial flexibility. You are free to allocate your money as you wish.

    You can choose to use some of it to cover outstanding debt or help finance a home. You can also invest the money in an annuity with more attractive returns, or in dividend-paying stocks. 

    When you pass away, you can leave the remainder of your pension lump sum to your heirs. 

    The main drawback of opting for a lump sum payment is that you might run out of money. A liquid, lump sum of cash is easy to burn through if you’re not careful. You will also be more vulnerable to economic downturns if you opt for a lump sum annuity.

    Pros and Cons of Annuities

    If you opt for annuity payments, you’ll be assured a reliable source of income for the rest of your life. In some cases, these payments (or a portion) can even pass on to your spouse after your death. 

    You also don’t need to worry about swings in the market. 

    On the downside, you won’t be able to enjoy any flexibility over your money. 

    One common concern around annuity payments is the risk that they might disappear if the employer goes bust. This is generally only a material concern if your employer is in a volatile industry. 

    Annuity vs Lump Sum: Key Considerations

    Statistics show that sticking with an annuity is often the wisest move for a lot of Americans. According to reports, retirees with pension income were far more financially stable than those who opted for a lump sum. 

    However, this doesn’t mean that opting for a lump sum payment is always a bad idea. Here are some of the key considerations to think about. 

    Your Age

    One of the things to think about when deciding between an annuity vs a lump sum is your age. If you are still relatively young and likely to have a long retirement ahead, then an annuity might be the better option. 

    Your Needs

    Besides your age, you also need to factor in your other needs. For example, is your pension your only source of retirement income? Or do you have other types of pensions or investments to support you?

    If you’re relying solely on one pension, keeping the annuity might be the wisest option.

    Your Spending Inclinations

    When deciding between an annuity vs a lump sum, be honest with yourself about your spending inclinations. Are you highly disciplined around money?

    Or are you inclined to impulse spending or high ticket temptations, or more extravagant holidays? Do you often feel compelled to help your children financially?

    If yes, a lump sum payment might not be the right choice. 

    The Value of Your Lump Sum

    Another thing to think about when weighing up the pros and cons of annuities vs lump sums is the value of the lump sum involved. If the lump sum is likely to be worth more than the total you’d receive in annuity payments, you might be better off receiving a lump sum that you can enjoy or pass on to loved ones. 

    Additionally, if your employer is in a volatile industry, and your lump sum payment is over a certain threshold, there is a chance you could lose part of it if the company goes under. 

    If an employer goes bankrupt, and the types of pensions they offer include defined-benefit plans, these are usually covered by the PBGC. However, the maximum annual benefit they cover is set by law. In 2022 the threshold is roughly $74,455 for a 65-year-old retiree.

    If you retire early, or the plan benefits a survivor, then the maximum covered benefit is lower. 

    If your plan is worth less than the maximum annual benefit, then you don’t have to worry about losing it through employer bankruptcy. If it is higher, then you might want to look at lump sum payment or a split option. 

    Your Health Insurance

    Before you take a lump sum payment, you should also double-check the fine print on any company-sponsored health coverage. In some cases, company-covered coverage halts if the employee opts for a lump sum payout. 

    If this is true in your case, then you must calculate the cost of additional self-paid health coverage before taking a lump sum payment.

    Your Investing Capabilities

    Finally, you should also consider your investing capabilities when weighing up the pros and cons of lump sums vs annuities. If you have a good understanding of investing and the financial markets, then taking a lump sum payment and re-investing it might be a savvy move. 

    Alternatively, if you have a trusted financial or investment advisor, they might be able to work with you to maximize your money and gain more upside. 

    On the other hand, if you have little-to-no experience with investment, and don’t have a trusted financial advisor, your pension might be best left in the annuity. 

    Do You Need Help Deciding Between an Annuity vs a Lump Sum?

    Depending on your circumstances, deciding between an annuity vs a lump sum can be complex and stressful. It’s a decision that can have repercussions far into the future. 

    The best way to ensure you make a savvy choice is by consulting a financial advisor who specializes in retirement planning. 

    Here at Bogart Wealth, one of our wealth management specialties is helping people plan for retirement. 

    Contact us today to book an appointment. 

    Work with a financial advisor who puts your needs first.

    Want to talk first? Call us at
    (866) 237-0121

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