Retirement Options: Lump Sum Payment or Monthly Income
by Arthur Andrews
If your company gives you the option of a lump sum payment for retirement or monthly income for life, which should you choose? The answer depends on multiple factors, such as your health, your life expectancy, your survivor benefits, and your risk tolerance.
Monthly Income for Life?
Here is an oversimplified example:
Bill is 56 years old and his company has offered him a lump sum retirement payment of $250,000 or a regular monthly check of $1,500 for life.
Go to the Actuarial Life Table at ssa.gov and you will see that the average life expectancy for Bill will be another 24 years. This would result in monthly payments of $1,500, totaling up to $432,000. (12 months X $1,500 X 24 years = $432,000).
How Long Will You Live?
On the surface, the $432,000 (spread out over your lifespan) sounds like a good option, but if you die after one year, you only get $18,000, and if you live to be 100, you get $792,000.
Therefore, if you are married, you should consider how an early death could affect your spouse. Some plans give the surviving spouse anywhere from 0% to 100% of the monthly check. (Check with your plan administrators to see what your options are concerning survivor benefits.)
If people in your family have a history of dying young or you are terminally ill, taking the lump sum might be the best option for you.
A Real Life Example
I had a friend who took the lump sum payment thinking he could do better investing the lump sum than getting the smaller payments over time. He put it all in Washington Mutual stock and lost it all. Others, I am sure, have done well with their investments. A lot depends upon your risk tolerance, and other assets you may have to help you make ends meet.
I would advise consulting with a Certified Financial Planner for advice. Make sure he has no stake in the conclusion, such as selling you stocks or mutual funds. You may also want to consult with a lawyer who specializes in "aging options."
(Life expectancy is longer for women, so take that into consideration, if you are female.)
Note: Information from this article is not intended to be a substitute for advice from a lawyer, financial planner, therapist, or other professional. Please consult a professional for specific advice.
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