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Wednesday, June 18, 2014

Should You Take the Lump Sum or the Pension?

Source:  Capital Pixel
Lump sum or pension?  As usual, it depends.  If you are worried about the market and if providing for your spouse is a concern, then you should probably lean in the direction of taking it.  If, instead, your attitude is that you can do better in the market and/or your spouse can fend for him/herself (after all you'll be dead and won't have to listen to it on a daily basis), then the lump sum might look better.  ;)

There are a few things to know.  This is actually an area of potential conflict--even in the world of the pristine, fee-only, registered investment advisor acting in a fiduciary capacity.  This is because recommending you take the company pension, i.e. annuity, means less assets under management for him or her!

For most people, I recommend taking the pension (you should know that I'm a fan of Social Security) and, in fact, choosing the survivor option.  The survivor option will be a little less but will give you peace of mind that the surviving spouse will have that income stream.

I do recommend a bit of research to compare the offering rate with other single-premium, immediate-pay annuities out there.  After all, you can take the lump sum and buy your own monthly income stream. You can start here:

annuity information.

First look at the payout.  You will give the insurance company a certain amount (your lump sum), and they will give you a monthly payment until the last spouse dies.  How does this compare to the company payout?  This is a fairly easy comparison, although they always throw in some complications to confuse you.  For example, beneficiaries will receive promised payments under some annuities if you both pass away within 5 years.  A second consideration is the health of your company and the insurance companies you are looking at.  Make sure you understand your state insurance funds protection.  You'll, hopefully, be looking forward to a number of years of payments; and the state insurance could come into play.

A third consideration could be the low interest rates available today.  If you are patient and take the lump sum for a couple of years, your payout would be considerably greater if interest rates rise.  This is because higher rates mean higher payout; but also, the older you are the higher, the payout.

A caveat emptor:  be careful in dealing with insurance company people especially on the subject of annuities.  They'll flash their pearly whites, flatter you to the point of embarrassment, and sell you a high-priced product you don't need.  Keep repeating that you are only interested in a single-premium, immediate-pay annuity.

The genesis of this post is

the article by John Hechinger of Bloomberg: "Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers."

To me, this article is misleading and highly confusing.  It creates the impression that rolling over a 401(k) is something retirees and others shouldn't do when, in fact, it many times is the very best thing they can do to get away from excessive fees and poor investment choices.  In the article, it is not clear whether the author is talking about the lump sum from the pension or the 401(k).  Anyway, it is worth reading to pick out the errors and fuzzy thinking.  I definitely agree with the bottom line:  taking a lump sum and putting it into a broker recommended oil and gas venture is a bad idea for just about everybody!

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