Q: My husband has recently retired. We are facing the decision of whether he should opt for a very sizable lump sum pension or the monthly annuity. We have been cautious investors over the years, but very prudent with our money. We have spoken with several wealth management firms and respect their insight, but are unsure if they are being forthright with us about what we perceive as uncertainty in the U.S. as well as global economy. We are now weighing what appears to us as unnecessary risk and the desire to be wise stewards of our good fortune.
Marge
A: You're right to be cautious. There isn't an easy, straightforward answer. This is one of those choices where you don't get the opportunity for a do-over if you change your mind.
Two players in this decision would like you to take the lump-sum option. The employer, who gets to remove the liability from its books. Wealth management firms and financial planners typically get some business managing the money, which is usually transferred tax-free into a tax-sheltered IRA.
What about the employee? The advantage of a lump sum is control over the money. With the pension you'll receive an income for the rest of your life (and your surviving spouse if you choose the joint-survivor clause, which I recommend). You can't outlive the income. However, your heirs won't inherit the pension. The pension income is taxable each year it's received. The pension's purchasing power will erode over time since payments aren't protected against inflation.
The lump sum is rightly popular among the very well-heeled, people with plenty of assets outside retirement savings plan. The primary financial concern of these retirees isn't running out of money in their elder years. The big issue is how best to transfer wealth and resources to children and charities.
You'll want to make a guesstimate about your health. The shorter your expected life expectancy the more attractive the lump sum, and vice versa.
My bias leans toward taking the pension for many retirees with the option of a choice. With a pension you get a monthly income just like a paycheck. The gyrations in the market don't really affect you. You don't have to manage the money or hire a professional to do it. Most importantly, along with Social Security, a pension is a hedge against a long life.
