Financial Planning Fridays #58: Making the Lump-Sum vs. Monthly Pension Decision

Should you take the lump-sum version of your pension or choose the lifetime monthly benefit. This may be one of the most important questions you face as you start retirement.

Today, we want to simplify this and show you the process that we go through with our clients to help them make this important decision.

To start, we find your Breakeven point.

We do this by using a reasonable rate of return, usually somewhere around 6%, and find the age that you will be at when your lump sum pension equals the value of the monthly pension.

For instance, our client, in this case, would attain equal value from both the lump-sum and the monthly payout in 29 years, at age 87, assuming a 6% annual growth rate and that she reinvests her monthly pension in the same way as her lump-sum.

As you can see here, at her age 87 both pension options are worth about $6.5 Million. A higher growth rate extends the breakeven point, and a lower one brings it closer.

However, your decision may be influenced by four additional key factors:

  • Your estate plan and the importance of passing your pension value to your beneficiaries.
  • The value and type of your other retirement accounts.
  • Availability of other income sources during retirement.
  • Your anticipated tax bracket.

We incorporate all of these key elements and then use a Monte Carlo simulation to assess the likelihood of achieving your financial goals with each pension option.

In our client’s scenario, opting for the lump-sum and reinvesting it in her IRA increased her success probability by 3%.

She also preferred the flexibility and higher account balance offered by the lump-sum, allowing her to modify her income annually instead of a fixed monthly payment.

Most importantly, our client felt confident in her pension decision knowing that we had fully explored all options and that this was the optimal choice for her unique situation and goals.

We are happy to run a custom pension analysis for you or anyone important to you.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.