The Pension Lump Sum Option

Some of the largest employers in Utah have traditionally included pensions, also known as Defined Benefit or Cash Balance plans, for employee retirement. These plans pay retirees a set amount of money monthly for the remainder of their (and possibly their spouse’s) life.

The professionals at TrueNorth Wealth are here to assist you through your financial journey as you prepare for retirement. Unlike fee-based financial advisors in Utah County, we offer fee-only services, so you can rest assured that you are receiving honest and objective financial advice. When it comes to collecting pension money, you will likely have two options. You can either use the company’s monthly sum or take a one-time, large distribution and roll it into an IRA. If you have a pension plan and are nearing retirement, or if your company is one of the many now discontinuing this type of plan, you will have to consider which option is best for you and your family.

This answer is not always easy, and counsel from a knowledgeable retirement planner is highly recommended. Nevertheless, there are many benefits that stem from choosing the lump sum option when collecting your pension money. Consider these five factors and then continue reading below as we expand on each one to help you make your decision.

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Viability

Viability of pension-type accounts depends on markets, interest rates, and company solvency. During the recession years around 2008, many companies were forced to reduce payments to retirees. When you decide to take the company’s monthly payout, you are granting control of your money to someone else and their investment decision process.

Longevity

Pension plans are designed to pay out only until your death date, although a few may continue until the death of your spouse. Regardless, any fund balance is then kept by the company for other employees. If you pass away earlier than expected, your beneficiaries will not receive remaining inheritance money. On the flip-side, if you live longer, you may be able to “game the system.” As your longevity is impossible to predict, you should consider taking the lump sum if leaving money for your spouse or children is a priority.

Investing for a Larger Return

Gains or losses in a pension plan do not affect you as the retiree, which means there is less risk if you accept the monthly payouts. However, if you are willing to assume a little risk, you will also have greater potential for return. With a lump sum IRA rollover, you have options to earn above average returns and increase your salary over time, depending on how you invest.

Inflation

When you are on a fixed income, inflation becomes a significant factor. As inflation rises, your pension money may buy less and less each year. On the other hand, investing your lump sum wisely can ensure you are protected from the inevitable future cost of living raises.

Taxes

When you are in control of your pension assets through an IRA, there is more flexibility to influence your tax bill each year. This can help minimize the effect that taxes have on your overall portfolio.

When you choose a lump sum payout at retirement, you agree to be in control of your funds and are no longer tied to your company or its accounting team’s decisions. You and your advisor decide how to allocate the IRA money into stocks, bonds, or other investments. As life happens and circumstances change, you can decide to take more or fewer funds. If there is money remaining when you pass, your heirs inherit all balance funds.

Because each individual situation is different, it is essential to consult with an expert advisor as you consider how to collect your pension or other retirement money. To review YOUR unique situation, contact our advisors for financial services in Utah County for a consultation.