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T&E TALK: Pension Payouts - Lump-Sum or Annuity?

Scott T. Ditman, CPA/PFS 04.04.2016 | T&E TALK

Estate planning and retirement planning go hand in hand. The presumption here is that the more wealth you set aside for retirement, the more you’ll have left for your family after your death. One tough decision that retirees face is choosing the best option for receiving payouts from a pension plan.

Lump sum vs. annuity
Some defined benefit pension plans give retirees a choice between receiving payouts in the form of a lump sum or an annuity. If you have other sources of retirement income, taking a lump sum distribution allows you to spend the money as you please. Plus, if you invest the funds wisely, you may be able to achieve better returns than those provided by an annuity.

On the other hand, if you’re concerned about the risks associated with investing your pension benefits, an annuity offers guaranteed income for life. (Bear in mind that guarantees are subject to the claims-paying ability of the issuing company.)

Single-life vs. joint-life payouts
For annuities, most pension plans require you to choose between a single-life or joint-life payout. A single-life annuity provides the plan participant with monthly benefits for life. The joint and survivor option provides a smaller monthly benefit, but the payments continue over the joint lifetimes of both spouses.

Deciding between the two monthly options requires some educated guesswork. You’ll need to consider several factors — including your and your spouse’s actuarial life expectancies as well as factors that may affect your life expectancies, like current health conditions and family medical histories.

Choose wisely
If you have a choice and need help choosing the right pension payout, contact me at sditman@berdonllp.com or your Berdon advisor. We’d be happy to help assess which payout will help you best fulfill both your retirement income needs and your estate planning goals.