Pros & Cons of a Lump Sum Vs. a Monthly Pension

Written by dennis hartman
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Planning for retirement is a complicated process, and there's no single best way to manage your savings and retirement benefits. Your retirement plan may include a pension from your employer, social security income, a retirement savings account and personal savings or investments that you plan to spend when you no longer have the income from a full-time job. However, each of these options carries certain risks and forces you to make decisions about how to save.

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Types

If you expect to receive a pension from your employer you may need to decide between several types of pensions that are available through the program. The two major categories are lump sum pensions and annuities. A lump sum is a one-time payment based on your income level and employment history with the company. An annuity is a monthly payment based on the same factors that continues for as long as you live. Joint and survivor annuities are those that continue to supply benefits to your spouse even if you are deceased.

Advantages

Each type of pension payment plan has its own advantages. With a lump sum pension you'll receive a large cash payment all at once, which will allow you to invest some or all of the money, or make a large purchase such as a new home or pay for a vacation. Annuities, on the other hand, provide you with a steady, regular payment that you can use to pay for your basic expenses. Annuity payments, along with other forms of retirement income, may make it easier to follow a monthly budget or savings plan as you did while you were working. CNN Money notes that research has shown retirees with regular income from an annuity are happier than those without it.

Drawbacks

Every type of pension also has its own disadvantages. Lump sum payments force you to manage the money responsibly, saving some of it for future expenses or investing it for the short-term and hoping for a profit. Annuities make it more difficult to save for a single large expense, since you'll need to set aside a small amount from each check for an extended period of time. Annuities also don't increase even as inflation occurs, which means the money you receive each month will be worth less in the future than it is when you start drawing your pension.

Considerations

Your personal financial situation and retirement plans may dictate which type of pension you take. For example, if you expect to receive regular income from an IRA or 401(k), it will be easier to take your pension as a lump sum. Annuities are useful if you retire relatively young and in good health, since they'll continue to pay you for as long as you live. In addition, companies that go through bankruptcy or financial hardship may reduce their pension benefits. If your company has an uncertain future, a lump sum may be the best bet to guard against losing your pension down the line.

Alternatives

Taking a lump sum pension and opting for an annuity are just two of the options for funding retirement. If both you and your spouse work, one of you can take a lump sum while the other takes an annuity, giving you the best of both worlds. You can also combine the benefits of each type of pension if you take a lump sum and spend some of it while investing a large portion of the money in an IRA, which will issue you a monthly payment that provides the same regularity and certainty as an annuity.

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