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Newly Retired: Should You Take a Pension Lump-Sum Payout?

If you are newly retired, you may have funds available from a pension. There are different avenues to using those funds for your retirement needs, including traditional monthly payments for a lifetime stream of income or a lump-sum payout. 


With a lifetime stream of income, a big consideration is how cost of living will affect your monthly payments, especially over time. It may not impact you for 5-10 years, but it’s important to consider 20 or 25 years down the road. A cost-of-living adjustment with monthly payments may be available with a public pension but not a privately-funded one. As a general rule of thumb, when interest rates are low like they are currently, it makes the lump-sum payout a more attractive option: Retirees like the lump sum payout because they would receive a larger amount than what a lifetime income stream would give them. However, when interest rates go up, lump-sum payouts are less preferred because the amount will decrease over time. If you choose to take the lump sum, what are the pros and cons?

Pros of a Pension Lump-Sum Payout

A lump-sum payout is a one-time payment that provides flexibility not offered by monthly payments. Here are a few of the advantages of taking a lump-sum payout:

  • It’s available to you right away. You can decide what to do with the payout by choosing to spend or invest it.
  • Option to roll over into a tax-deferred account. The payout can be transferred to an account like a traditional IRA, where the money can keep growing. Once you start to make withdrawals, you’ll have to pay taxes on it.
  • Easily passed on to beneficiaries. The lump sum can be passed on to a spouse or children directly as beneficiaries. With monthly lifetime payments, this might not be the case. 

Cons of a Pension Lump-Sum Payout

While a lump-sum payout has its benefits, it also comes with disadvantages. Here are a few to be mindful of:

  • Immediate taxation. Unless you roll your money into a traditional IRA like mentioned above, you will be taxed immediately on the amount you receive. This has the potential to push you into a higher tax bracket, and you could pay unnecessary taxes.
  • Lifetime income stream is not guaranteed. With a lump-sum payout, the retiree or investor assumes the risk associated with investing for the future, which means there’s no way to guarantee the money will last throughout your lifetime.
  • Investor risk. Even if you choose to roll your payout into an IRA, you still must pick investments in order to create income during retirement. If you have other savings or assets during retirement, this may not be a huge concern. However, if you are dependent on a certain level of income on a monthly basis, then the lump-sum payout may not be the right fit for you.

Should You Take a Pension Lump-Sum Payout?

With research, discussion, and data analytics, we can help you explore different avenues if you’re trying to figure out the best retirement option for your pension fund, including a lifetime income stream or a lump-sum payment. The lump-sum payout has pros and cons to consider, and our financial advisors are here to discuss your retirement goals and your current cash flow situation.  If you are getting ready to retire or newly retired, contact us today to make sure that your financial needs will be met in retirement. 


The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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