fbpx

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

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. 

Untitled design 48 | Bogart Wealth

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.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com


Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.
Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

latest posts

Stay up to date with our most recent news and updates!

Work with a financial advisor who puts your needs first.

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

  • This field is for validation purposes and should be left unchanged.

You are now leaving the Bogart Wealth, LLC / Bogart Wealth™ (“Bogart”), website and entering a third party website that we do not control.

Bogart is not responsible for third party websites hyper linked our website, and does not guarantee or necessarily endorse any content, recommendations, products or services offered on third party sites.

In addition, third party websites may have different privacy and security policies than Bogart. Therefore, you should review the applicable privacy and security policies of any third party website before you provide any information.

Ok