Help a Reader: Should She Take a Lump Sum or Monthly Pension Payout?

Here's a comment left on my post titled Best of Free Money Finance: Retirement Posts:

I have been scanning (quickly) your topics on retirement/income and notice that most of the postings are about 401k issues. Well, I have already used that option up! I am trying to make a decision on my pension money from the company where I worked for 27 years. I am 60 and only employed part time and have many problems keeping up with things like property taxes and utilities plus I need some fairly expensive repairs done to my home and property. My options for the pension money are lump sum and monthly checks. I am really worried about what to do and have concerns that my family (a mother and a sister) will not get any of the money if something happens to me because the beneficiary rules on the plan.

Can you shed some light on this dark view?

Like with the post yesterday, I told her I'd ask my readers and they would give her some advice. What do all of you think she should do -- or at least what issues should she consider?

Comments

[lorax]

Two thoughts: it's possible to look at this analytically. What is the pension payout rate? Is it indexed to inflation? What is the lump sum amount? How much would she get if she invested the lump sum entirely in 10 or 20 year treasuries? If she can get close to (or beat) the pension payout rate in interest alone, she should go for the lump sum. She might even look into investing in an inexpensive balanced mutual fund that does most of the work for her.

But it's also possible to look at this emotionally. Is she likely to blow the principal on something, and be left with nothing but SS for retirement?

[CIWOOD]

Someone who has trouble keeping up with financial obligations probably should not be investing. However, in order to leave an estate, a lump sum is perferable because a pension payout stops when you die although you can choose from several options if they are available in your pension. If she can split her money, maybe 50% in guaranteed payments and 50% in Vanguard Wellington (vwelx), Vanguard Star (vgstx), or Vanguard Wellesley (vwinx--most conservative) would minimize her financial management problems and provide for an estate and extra money for repairs.

[Dus10]

lorax, exactly!

I would do the same thing with Social Security, too. Take the early distribution, and invest it ALL. The reduction in benefits will more than be covered by the return you will get off of the first few years of distributions.

There are various options to consider, but she probably does stand a good chance to do as well, or better, by taking the lump sum and investing it. And that way, she can take care of the beneficiary problems, as well. And that is another way to look at the early distributions from Social Security. You are very limited in who can get survivor benefits from Social Security... if you take the early distributions and invest them until you reach the normal full retirement age, that money can give you a nice return and can be setup with a broader range of beneficiaries.

[Duane Gran]

If the person is working part time for the same company where the pension resides, check into whether there is a break point at 30 years where the benefits are higher. The added three years of seniority may make a difference in the calculations.

This is ultimately a question of whether to annuitize the pension (the normal route) or take the investment into your own hands. It is a gamble on how long you will live, which is anyone's guess. As lorax points out, you have more survivorship rights investing a lump sum distribution but the risk is that the money will run out before you die, in which case there isn't anything to pass on.

[Lord]

She should probably compare her pension payout to a Vanguard annuity to see if it is reasonable. Also it need not be an either or decision. Perhaps investing some and annuitizing some would be best. She should also compare her personal life expectancy to the average. If she doesn't expect to live that long, an annuity doesn't make much sense. Investing can be challenging though if she has never done it before.

[Chris]

I would choose the payout, not the lump sum. This part

"plus I need some fairly expensive repairs done to my home and property"

tells me she will be very tempted to use the money towards bills/repairs rather than invest it and draw from the interest.

[Matt]

Take the payout, while you still can. Being offered up-front investable cash for a defined-benefit pension plan is like a gift from God, since you will almost certainly outlive your employer's pension system. For that matter, they could lay you off tomorrow and you'd get nothing.

But be careful you don't start spending the money on current consumption. If this money is going to support you, it has to be invested in assets that generate cash flow.