Long-time employees face this non-revocable and permanent choice upon retirement. While the security of lifetime income can be comforting, there are several trade-offs to consider.
Do I want to rely on the company’s future financial strength? How long will I live? What will inflation do to my pension income over time? What happens if I die? Should I take a lower amount to protect my spouse? What happens if they die? Do I have a choice to take a lump sum and control how and when I spend the money?
Pension distributions are limited to lifetime income options without future inflation adjustments. Additionally, If the income beneficiaries die early, there is often no remainder. Many companies offer a “lump-sum distribution” to effectively buy the retiree out of their pension obligation. This amount can be transferred to a traditional IRA tax-free.
There are several advantages to taking the cash.
Freedom to invest the money, timing and adjusting your income and protecting your heirs. Lump-sum buyouts are calculated using a specified interest rate, so in the current low-rate environment it increases the lump sum payout value.
Once you start a pension, you’re locked in. From an IRA, you might take an increased amount until you start Social Security, allowing you defer and increase your Social Security payment for both you and your spouse. If you have a life event, you can adjust IRA distributions. You cannot adjust a pension. You may downsize your home, get an inheritance, or need to spend a chunk of cash on a new car or family need. A lump sum allows flexibility a pension cannot. Plus, when you die there is likely an inheritance, which a pension does not offer.
Integras Partners separates lump sum funds into different IRA’s, keeping money for short-term needs conservative while allowing assets needed later to grow. Having more time for the remainder to stay invested reduces market risks. Having control of the funds also protects your heirs. Employing good strategies should increase both lifetime income and protect your family.
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Most importantly, a “lump-sum rollover” gives you the peace of mind to truly enjoy what you’ve worked so long to earn.