Web Content Viewer

Actions

Retirement Payout: Lump Sum or Installments?

Feb 09, 2018 3 min read Kate Ashford

Key Takeaways

  • A lump-sum payout puts you in the investment driver's seat.
  • Monthly payments over time are helpful if you expect to live a long and healthy life.
  • An annuity can help bridge the gap between Social Security and savings and your expenses.

 

For some people, retirement comes with a question: Do you take your savings in a lump sum, or do you take your nest egg in a series of monthly payments, in an annuity-like fashion? Most people choose the lump sum.

But this is an issue for just a portion of workers. More workers participate in a defined-contribution plan, such as a 401(k), in which the employer or employee (or both) make regular contributions. For those with a defined-benefit plan, the employer contributes all the money and offers a fixed payout upon your retirement. While the majority of public sector workers are covered by a defined-benefit plan, only 2% of private sector workers Opens in new window have one, according to the Employee Benefit Research Institute.

Between 2005 and 2010, only 27% of employees covered by a defined-benefit pension plan went for the annuity option Opens in new window, according to the EBRI.

 

 

If you are one of the workers who qualifies for a defined-benefit plan, you should consider the pros and cons of both approaches.

 

Taking the monthly payments


Why it may be a good idea:

  • It's guaranteed income for the rest of your life, so there's no way to outlive your benefits. You can rely on a steady income to help cover your expenses in retirement, even if the markets aren't doing well.
  • If you're in good health and come from a family with a history of longevity, you know you'll have enough to help cover you for the long haul.
  • If you have the choice to provide pension payments for your spouse or another beneficiary after your death, a monthly payment option could offer additional retirement security to a loved one.


Why it might not be the best idea:

  • Once you start receiving payments, they'll typically stay the same for the rest of your life, even as prices and cost of living go up. So, over time, the value of your annuity payments will decrease with inflation.
  • If you die younger than expected, you'll lose the remainder of the annuity payments you would have received. If you take a lump sum, there might be a balance to pass down to your heirs.
  • If you need a large lump sum in retirement, you can't pull it out of your pension payments. You've got a monthly check, not a large balance from which you can take a chunk.

 

Taking a lump sum


Why it may be a good idea:

  • If you manage the money well, you might be able to replicate the benefits of an annuity while keeping access to the total balance.
  • If you're in poor health or have a chronic condition that will shorten your life, taking the money in a lump sum makes more sense than counting on years of smaller payments. You'll also have something to leave your heirs.
  • You have access to your total nest egg if you need cash in an emergency.
  • You can use the money now if you have an urgent need for it.


Why it might not be the best idea:

  • Once you receive that lump-sum payment, it's up to you to make it last for the rest of your life.
  • If your investments do poorly, you may end up with a nest egg that's substantially smaller than what you'd planned on for retirement.

 

What you can do next

Ask your financial professional to help you do the math. How much can you expect to receive in Social Security, 401(k) and IRA payments in retirement? Will this cover your basic living costs? If the answer to the last question is no, it may behoove you to opt for the annuity option, so you know you have guaranteed cash to help cover your necessities.

All references to guarantees, including optional benefits, are backed by the claims-paying ability of the issuing company and do not apply to the underlying investment options.

 

Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, Real Simple and Parents, among others.

 

For Compliance Use Only:0296497-00250-00

If you secure tomorrow, you can enjoy today.

Help make sure your loved ones are protected if something happens to you, with Prudential Life Insurance.

Get a Free Quote

Web Content Viewer

Actions

Find What Interests You


Web Content Viewer

Actions

Web Content Viewer

Actions

Web Content Viewer

Actions