Stone Eagle Financial, LLC
10268 W. Centennial Rd.
Littleton, Colorado 80127
While it is possible to take a lump-sum payment, invest it wisely, and benefit from the situation in various ways, it’s important to remember that you are fully responsible for making that lump sum last throughout your entire retirement.
A number of corporations today are offering lump-sum payouts in place of monthly pension payments. While the IRS once protected pensioners from making risky moves with their pension plans, the Treasury Department recently reconsidered these protective policies. Corporations have been able to go full steam ahead on de-risking practices that reduce liabilities through lump-sum payouts.
A lump sum is tantalizing because it’s a large amount of money. Still, according to a study done by the Treasury Department, most retirees lose a lot of that and end up suffering financially as a result. A lump sum is essentially one large payment in place of monthly payments that pensioners would otherwise get for the rest of their lives. Indeed, these one-time lump sum payments are much lower than what pensioners would receive through their monthly lifetime pension checks. Years ago, the Treasury Department noted these flaws in the de-risking practices of corporations offering lump-sum payouts. The government tried to create rules to stop the practice but was unsuccessful.
There are a number of potential issues to consider before accepting a lump sum payout in place of pension payments. While it is possible to take a lump sum, invest it wisely, and benefit in various ways, remember the payment must last throughout your entire retirement, and no one knows how long they will live. A traditional pension offers guaranteed lifetime monthly payments to have lifelong guaranteed income regardless of market fluctuations or other similar investments. However, retirees may have little recourse if the company files for bankruptcy or goes out of business.
Pension income is pre-tax. In other words, accepting a lump sum may need to be rolled into an IRA, 401(k), or 403(b) or risk being pushed into a higher tax bracket. Another option is to purchase an annuity to provide an ongoing monthly income stream. When choosing an annuity, look closely at the company’s credit ratings and read the contract carefully. Ask questions to make sure you fully understand the terms and conditions of the product you wish to purchase.
You should consider your personal situation and health. Consulting a trusted financial professional might be a wise decision in planning for retirement in any situation. However, if you have chronic health issues or difficult personal circumstances, it might be strongly suggested. They can help with inheritance questions, tax considerations, and any other planning questions you might have.
Accepting a lump sum has many implications for future financial security and taxes. Retirees and those planning to retire soon may want to consult with a trusted financial advisor to create a customized plan tailored to their specific needs and those of their families. Resisting the urge to jump at a lump sum payout before determining if it is right for you is a wise path forward and allows you to retire with confidence.
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