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Retirement Plan Distribution: Is Lump Sum or Annuity the Best Path For You?

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    A pension can raise an important question in retirement: lump sum or annuity? The choice you make can have far-flung effects on you and your beneficiaries and must be considered carefully. There are pros and cons with lump sum or annuity retirement payments. This guide will examine both types of retirement payments in detail.

    Lump Sum vs. Annuity: Here’s What You Need to Know

    Lump sum distribution involves a one-time payment from your pension administrator. It gives you access to a large sum of money that you can spend or invest however you choose.

    Annuity distribution, on the other hand, involves a stream of payments over an extended period. A fixed annuity provides regular periodic payments. Variable annuities deliver payments that can fluctuate based on the performance of investments tied to them. 

    Some people prefer lump sum distribution, since it gives them greater control over their money. The distribution ensures recipients can save or spend their funds without restriction. Others prefer annuities since they offer more stability in retirement. An annuity lets retirees receive steady payments for a set period of time. 

    Those who are debating between lump sum or annuity retirement distribution should consider both options closely, because maximizing the comfort and security of their retirement years hangs in the balance.  

    Lump Sum or Annuity: Factors to Consider 

    It can be tough to decide which method is right because several considerations can affect the overall return. There is no simple answer that fits everyone. Factors to consider include:

    1. Life Expectancy

    The average worldwide life expectancy is 75 years for women and 70 years for men. People in good health may prefer an annuity that offers regular payments until they die. Those in poor health may get more value out of a lump sum payment, and they would be able to pass any remaining funds on to their heirs.   

    2. Investment Returns

    Some businesses offer a partial annuity that allows you to collect a portion of your pension as a one-time payment. You can then use this sum to purchase a separate annuity from a private company. It may be beneficial to take a lump sum payment and roll it over to an individual retirement account (IRA). 

    3. Risks With Your Pension Provider

    Evaluate the credit rating of your pension fund or annuity provider. People who are concerned about their pension provider’s financial situation or ability to pay may want to choose a lump sum. Those who feel good about their pension provider’s ability to provide consistent payments in retirement may want to select an annuity. 

    There is one thing everyone wants to avoid in retirement: outliving your retirement funds. If you plan to live to 80 but make it to 90, you could be in for some difficult financial times in your later years. 

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    7 Tips to Help You Choose Between a Lump Sum or Annuity

    Choosing between a lump sum or annuity is a life-changing decision, but it’s also a chance to make a financial plan for the rest of your life. Whether your retirement funds are fairly abundant or somewhat minimal, your decision can make a difference in how you live out your years. Here are tips to help you decide between both options. 

    1. Get a Physical Exam

    Meet with a doctor and undergo a health assessment. This gives you insights into your current health and any medical issues that can affect your life expectancy. Continue to undergo regular health assessments, so you can identify and resolve medical issues before they escalate. Your health and life expectancy are a major factor in deciding between an annuity and a lump sum payment.

    2. Examine Your Retirement Savings and Investments

    Determine how much you have saved for retirement and the performance of your retirement investments thus far. Consult with a retirement planning expert to evaluate your retirement savings and investments and plan accordingly. 

    3. Evaluate Your Debts

    Consider your debts and how long it may take to pay them off. A lump sum payment may be used to help you quickly pay off your debts. Paying off debts that have high interest rates can often provide a solid return on your funds.

    4. Review Your Inheritance

    Take a look at your inheritance and how much money will be left to your beneficiaries. If you choose a survivor benefit with your annuity, you will be able you pass your lifetime income on to a beneficiary if you die before you collect your full retirement savings. A lump sum payment can be passed on to whomever you choose after you die.

    5. Calculate Your Retirement Income

    Use the free lifetime income calculator from the U.S. Department of Labor. The calculator lets you estimate the amount of monthly income you will receive when you stop working and begin to receive annuity payments. You can compare this figure to the amount you will get if you choose a lump sum payment. 

    6. Find Out Your Lump Sum Payout Amount

    Request your one-time payout amount. This is usually calculated based on the average lifespan of retirees and when they stop working. You can evaluate the lump sum total in relation to annuity payments.

    7. Assess Your Retirement Expenses

    Ensure that your retirement income is sufficient to cover your housing, health care, and other basic expenses. You can set up a budget that outlines your monthly retirement expenses. The budget can then help you determine how much money you will need to cover these costs.

    Once you have done your homework on the above items, it should become clearer which path to take on this decision. A financial advisor can be instrumental in ensuring that you have planned carefully and weighed all the necessary factors.

    Common Benefits and Risks of Lump Sum and Annuity Payments

    There are benefits and risks associated with any decision. Lump sum and annuity payments in retirement are no exception. A few things to keep in mind:

    • One-time payments offer the flexibility to use your retirement funds in any way you’d like. 
    • The payments can be used to reduce or eliminate debts, and can even be passed on to a beneficiary.
    • The flexibility of this type of payment may be preferable to some, but there are downsides you need to consider. 
    • You may outlive your retirement funds if you opt for lump sum payments. 
    • There is also the responsibility that comes with having to manage your available funds in retirement: If you spend your funds too quickly, for example, you risk running out of money. 
    • There are many factors to consider relative to a one-time payment. 
    • The same holds true with annuities, which can be a terrific option for those who want a steady income throughout retirement. 
    • The annuity can even be used to provide lifetime income to a beneficiary. 
    • This method offers greater financial stability than a lump sum payment, but there is far less financial flexibility. 
    • An annuity won’t necessarily pay benefits to a beneficiary unless you have a death-benefit provision. 
    • It is not guaranteed to provide sufficient funds to cover medical bills or other expenses in retirement, either.  

    Research is key when it comes to lump sum and annuity payment options. Those who learn the ins and outs of both options can choose the right one to optimize their retirement income. 

    Contact an Expert With Questions About Lump Sum and Annuity Payments

    There is no need to leave your retirement savings and income to chance. You can use the aforementioned tips and recommendations to assess lump sum and annuity payments in retirement. It can also be helpful to build a retirement strategy with a wealth management advisor.

    Bogart Wealth has wealth management advisors on staff who can help you plan for retirement. Contact us to speak with an expert about your retirement planning concerns.

    Work with a financial advisor who puts your needs first.

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

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