Lump Sum vs. Annuity?

The Trouble With Taking a Lump Sum Pension Payout

Excerpt:

Congratulations! You’re one of the shrinking number of Americans who have earned the right to a pension—guaranteed income for life for you and maybe for your spouse as well. Just make sure you don’t give it up too easily. That’s a real risk. Up to half of companies with pension plans, say experts, give workers the option of taking their pension as a lump sum. On top of that, 47% of corporate plans, including those from Boeing and Hewlett-Packard, either have just made or will soon make pension buyout offers to vested former employees, benefits firm Aon Hewitt reported earlier this year. Driving those offers are IRS rules expected to make buyouts less favorable for employers within a year or so. Lump-sum checks, often in the hundreds of thousands of dollars, are tempting. Fifty-eight percent of employees take buyouts, and the share taking the lump-sum option at retirement is likely higher, says Aon Hewitt consultant Ari Jacobs. Pension industry experts and consumer advocates, however, say that for most workers the traditional pension is a better deal. So before you decide, think this over:

When to Take Steady Payments:  If you or your spouse is in good health and has a family history of longevity, lean toward taking the monthly pension. The advantages: The money lasts for life. If you make it to age 90—and 28% of 65-year-olds do—you’ll still be getting that check. And, in exchange for smaller benefits, your spouse can continue to receive half or often all of those monthly payments after your death. So if you’re a man and your wife survives you—on average, she will—she’ll get cash for life too. One downside: Unlike Social Security, most private pensions don’t adjust for inflation, so your purchasing power will diminish over time.

Comment: I chose the annuity option with 100% benefit to my wife if she survives me. It was the lesser of the amounts but we viewed it as the most conservative of the options. Image source.