Wait for pension or take a lump sum now?

Question

My wife has recently been laid off. Her estimated monthly pension payment at age 65 will be $237, OR she can take a lump sum payment of $5400 now and have no payments coming to her again. She is 31. Is it worth waiting 34 years for such a small monthly payment? Besides the pension she also has a 401K for reitirement and is currently seeking new employment. Thoughts on this?? I'm thinking the best option would be to take the lump sum now.

Answer 1

I'd wait....that $237 a month will come in handy when you're not getting much from Social Security.

Answer 2

In general, most pension plans offer a lump sum cashout which is calculated according to a 5 or 6% rate of return (ie, if you invested $5400 now and earned 5 or 6%, you would end up getting $237/month when you're 65).

That said, the big question is - do you think you can beat 5 or 6%? Many people think they can, so they take the lump sum cashout. The stock market has traditionally done 11% returns over the past 100 years, so the odds are with you.

Before you do this, make sure that if you do take the lump sum you put the money into a "qualified" account like an IRA. You're going to pay taxes on the pension money when you start taking it out, but you'll also pay a 10% penalty on top if you use it before you're 59 1/2. So I think it's best to take the lump sum and invest it in some stocks or mutual funds through your IRA, at least from a tax and return perspective.

You should look at the retirement estimates that are given her to make sure you know what you're doing. If you want to know about her 401(k) options, check out http://www.plannerconnect.com/retirement-planning-401k-401k-rollover.html.

It might be wise to take the retirement estimates to a financial planner and find out about investment services offered - I found mine at that site.

Answer 3

The lump sum would probably be better. If it was invested and sat until she was 65, she would have enough to deduct $237 for several years. I did a calculation that deducted 25% in taxes from the $5400. Then if it was invested at just 5%, and that is more like a CD rate than the stock market where it should be invested for the long term, then the resulting nest egg at 65 would last 9 years. So if it was invested in a regular IRA and therefore you paid no taxes on the lump sum, the nest egg would last 12 years and 2 months. Then you would pay taxes on the distributions just like you would on the pension, assuming her employer paid all the costs of the pension. If it was invested in a Roth IRA, the tax savings would not be as much. If you chose a mutual fund that has earned over 10% annually for the last 5 years, then that would improve the figures much more. If the fund actually returned only 9% average until she turned 65, she could withdraw almost $550 a month indefinitely.

Answer 4

I tend to agree with you with one exception. You must remember that this is her hard-earned residual savings of many years. I previously worked for a bank pension dept where $237 would have been considered a very good retirement amount for the average retiree. Yet, most Plan Participants opted for the lump sum. You need to know yourselves. If you will just take the money and blow it, and feel you can afford to do that...fine. Even blowing it on regular living expenses is tremendously easy to do.

If you are disciplined enough, you should put it into an investment source that can be earning interest for the next 34 years...I have heard the Roth IRA is very good. You have 180 days to do this. Don't underestimate the power of financial issues to ruin a good marriage. That should be your greatest priority.

Answer 5

Yes. It is possible to avoid paying taxes on that lump sum. You have to roll it over. This means that lump sum will not come into your hands - it goes straight into an IRA (Individual Retirement Account), which in your case would be tax-deferred. However, if you spend it, you will pay a penalty and pay taxes on the amount you take out of the IRA (since you're not retirement age yet). You should talk to a financial advisor about your retirement money.

Answer 6

If your wife takes the lump sum and invests it in a couple of good mutual funds in an IRA or K401, we can assume a growth of 7%,which by the time she is 64, will come to 53,880. If she then buys an annuity with it, paying 7%, her income will be 314 montly, which is better than the pension offered to her.

Answer 7

That's a tough question. Is that $5400 after taxes? if not than its really just $3800.00. If you need the $$ than you have to do what you have to do,BUT $237.00X12months is $2844.00 and if your wife lives to be 85yo ( very likely ) that will be a total payout of $56,880.00. I would have to say if you don't need the money, just wait it out. It may come in handy someday. My dad gets a pension that's almost the same thing he gets $290.00 a month and uses it to keep his boat at the marina every summer. To him it's free money! Let it Ride

Answer 8

Always get the lump sum in case the company goes belly up and files for bankruptcy. Invest the money. My mom was forced to retire from a company. She started to get a pension, and I had talk her out of it because I had been watching their stock market, and I also worked in middle management. They filed for bankruptcy within the year. She invested the money in Mutual of Omaha annuities and has tripled the money in less than 9 years.

Laying off personnel is a sure sign the company is in financial difficulty.

Answer 9

I say take the lump sum and run. My Uncle just went throught the same thing he took the money his friend's took monthly payments well guess what the company went under with there money now there trying to sue.

Get in and get out!! Take what's your's before it is to late

Answer 10

I'd take the lump sum. $237 in 34 years will be worth about 43¢, that's if we're all still here.