For Millenials a pension is a quaint reference to yesteryear. Those nearing retirement are in a different boat. They may just be lucky enough have an employer provided pension and having one can make a huge difference in their retirement security.
But understanding how to think about a pension may be just as foreign to the Boomer as it is to the Millennial. In fact, pensioners don’t often realize a pension is an asset, and assets require a plan to maximize their potential.
In fact, this simple shift in viewpoint – moving the pension from the employee benefit column to the asset column - drastically simplifies the answer to the question many retired workers are facing: “Lump sum or lifetime income?” This happens when employers give former employees a choice about having their pension as a lump sum instead of as a lifetime income. The question allows you to place a value on your pension and makes planning less of a dart throw.
Choosing between a lump sum or a lifetime income involves some tough intangibles. Your monthly income from a lump sum payment that you invest will almost certainly be less than a monthly pension payment. But there is value in the flexibility of cold hard cash that a monthly check can’t provide.
Further, if you don’t live as long as expected, your heirs lose out. Once you go, the pension goes, too. Alternatively, if you know you’ll die young, you can spend more money from a lump sum than from a monthly pension.
A lump sum allows you to consider these factors. But research tells us a combination of retirement savings and annuity income gives your money the best chance of living at least as long as you do. So even if you opt for the lump sum, sinking a piece of it into an annuity can help stretch those dollars.
On the flipside, a guaranteed monthly income is a something many retirees can only dream of. If you’ve got cash for flexibility and emergencies, the monthly payment may offer the most value. But you must be sure the fund is healthy. Even the smallest lump sum is worth more than a bankrupt pension.