I had a recent client case which I thought was worth sharing which is illustrative of when it can be advantageous to take a lump sum over a monthly pension.
Roger and Ingrid (not their real names) are ages 60 and 67, respectively. Ingrid is retiring this year and Roger plans to continue to work for another six years until his full retirement age.
Ingrid, working for Kaiser Permanente, has an option of taking either a monthly pension or a lump sum. When we reviewed the options, the following information became compelling in regard to choosing between the two…their need for monthly income to supplement their Social Security benefits lasted only during Rogers working years (6 more years).
Because of this, it made less sense to take a monthly pension income. They could not turn the monthly payments off when they didn’t need them anymore, nor could they keep this income from increasing their taxes and causing more of the Social Security benefits from becoming taxable.
By taking the lump sum, they were able to cover the short-term income gap with the lump sum funds and have this lump sum money available after they covered the income gap time for other purposes.
Now they have:
-The flexibility of how much or how little to take out in the subsequent years to control taxation of income and Social Security.
-The ability to do Qualified Charitable Distributions out of the lump-sum for their regular giving to reduce annual income taxes (where giving the same amount out of their cash flow from the monthly pension would not have had the same impact).
– More potential pass on value to charity or heirs in the event of the premature death of both spouses.
For a previously written article on some of the advantages of the lump-sum over the monthly pension, click here
If you have any questions please feel free to contact me.