If your employer offers a defined-benefit plan, otherwise known as a pension, you will be able to start receiving your retirement benefits after you have stopped working. This will help in your goals for your retirement years and assist in maintaining the quality of life acceptable to you. However, at the time of retirement you will be faced with a crucial decision to either take your retirement benefits in a single lump sum payout or receive a regularly occurring annuity payment.
Difference between lump sum and annuity
Choosing a lump sum will enable you to receive all of the funds accumulated in your pension account right away in a single payment. On the other hand, going with the annuity option will provide you with multiple payouts which could be weekly, monthly, quarterly, or annually.
Advantages of a lump sum payment
There are numerous advantages to choosing a lump sum payout from your pension. One of these benefits is with a large single payment you will be able to pay off any large debts you still owe much more quickly. Also, money left over from the lump sum payment can be left to your heirs. Additionally, with a larger amount of money from your pension you will be empowered to invest more money sooner which can enhance your returns on your investment endeavors.
Disadvantages of a lump sum payment
Of course, there are also disadvantages and risks associated with choosing a lump sum payment from a pension upon retirement. Since you will not have a professional money management firm managing your funds in a pension account, you will be responsible for managing your money. It is possible your money will run out due to mismanagement of funds, potentially diminishing your quality of life during retirement.
Advantages of an annuity
Instead of a lump sum you may decide to go with an annuity which has its own advantages which need to be considered. With an annuity you will be able to count on having a steady stream of income through your retirement years. Also, you will be able to pass along this income to a spouse or another heir.
Disadvantages of an annuity
On the other hand, there are disadvantages to choosing an annuity which you may want to be aware of when planning your retirement. With an annuity you will have less flexibility from a financial perspective. Also, there is a possibility you will pass away before collecting all of your accrued benefits. There are some annuities that will not pass leftover funds along to other beneficiaries in the case of your passing away. Additionally, if you have a serious illness or medical condition, the annuity payments may not be enough to cover your medical expenses.
Should you choose a lump sum or annuity from your pension?
Whether you choose a lump sum or annuity is a crucial decision to make when deciding what to do with your pension upon retirement. You will want to consider your life-expectancy which can depend on whether or not you are relatively healthy. Also, how much income you have from other investments and retirement accounts should be considered.