Retirement choice – lump sum or monthly check?

  • April 18, 2016

Originally published in the News Star and the Shreveport Times on Sunday, April 18, 2016.

Question: My company is going through a downsizing and my job has been eliminated. I’m going to have to find another job, but now my old employer is giving me a choice to take my retirement from them in a big lump sum of money now or as a regular retirement check when I hit 65. Which is better?

Answer: You need to keep going with your question.

Retirement Ahead Sign

Rather than ask, “Which is better?” may I suggest, “Which is better for me?”

First, congratulations that you are even being given this choice. It sounds like your old employer has a defined benefit retirement plan – one that promises a certain level of benefits once you retire. For most workers, this has historically meant a check a month for the rest of their lives.

A few decades ago, however, large employers began realizing how expensive these plans were to fund and maintain, and some began making arrangements to get out of them ASAP. One way to do that is take advantage of disruptive events (such as recessions, lay-offs, mergers or buy-outs) that provide a convenient excuse to either drop the plan or give employees an incentive to opt out of it.

One common strategy is to offer employees a “buyout package,” either in a special offering or at the time of their separation from service.

In most cases I’ve seen, a pretty fair choice is offered: the worker can keep the original promise – they can get a check a month for the rest of their lives. Employees are also usually offered the option to include a spouse in these benefits at some level.

As an alternative, companies may offer that same worker a lump sum benefit to be paid now, which financially and actuarially is equal to the monthly checks for life, beginning at retirement.

In order to be equal, the recipient of the lump sum would be able to invest the money in a similar fashion as the pension fund would have, and generate for themselves a check a month for the rest of their lives. Their checks would last as long as they would, but there would be nothing left over at the end.

At least, that’s the way it works on paper.

For the sake of this discussion, let’s assume that what I usually find would also hold true for you – that both options is “equal” – at least on paper.

So if they are equal, how does one make the choice?

By taking each of those options and overlaying it into your own life, personality, circumstances, temperament, talents and goals. In other works, this choice needs to be made in the context of a financial plan.

What other assets do you have besides this lump-sum-or-monthly-check choice? If this and Social Security are all you’ve got for retirement, you may make a very different decision than would someone who has Social Security, this retirement option…and $1,000,000 in the bank.

What is most important to you – your lifestyle or your legacy? Are you most concerned with your own retirement income security? Do you desire to leave a family legacy to those you love? Are you planning to leave it all to a research hospital one day?

What is your appetite for risk and return? For most of us, whatever appetite we may have had for investment risk in younger years decreases as we age. Most crave certainty and will give up the potential for gain to get it. But that may not be you….just be sure you understand the nature of investment risks and that you and your spouse can live with your choice.

My advice – don’t try to choose between lump-sum now or a check a month later. Choose to do a financial life plan, based on more than just finances – based on your whole life.

Then let that planning process reveal the right choice… for you.

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Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at bmoore@argentadvisors.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.