There are still a few employees who work for companies generous enough to offer a pension.
Many times an employer will provide the employee an option between a monthly pension for life or a single lump sum. Deciding between these two options is both complex and sometimes frustrating. There are advantages and trade-offs to each, so how do you go about making the decision?
A monthly pension for life has some real advantages. First, you cannot outlive it or destroy it regardless of how long you live. The checks keep coming in consistently month after month with no need to worry about how the stock market is performing. For those who value security, a monthly lifetime pension is quite attractive.
The monthly pension option certainly has trade-offs as well, though. For a joint lifetime pension, once the last spouse breathes their last breath there is no residual value to pass on. And although there is security in the month to month payments, you cannot request any additional money be advanced to you. There is no real liquidity available. Finally, one must make a careful due diligence to ensure that the company guaranteeing the pension has the ability to do so for a retirement that can last 30+ years.
If you are married, there will probably be multiple pension payout options which include some form of pension survivorship for your spouse. In the event of your passing, the surviving spouse may receive 0%, 50%, 75%, or 100% of the previous pension payments depending on your election. Choosing the wisest pension option also requires wisdom.
Taking a pension as a lump sum of money is also an option for many companies. There is complete flexibility as to how to invest the money and there is full liquidity to access as much of the funds as needed at any time. For some these advantages may be their downfall as scores of investors can attest to making poor investment decisions or squandering large amounts of money too quickly.
Strictly speaking from an economic standpoint, many would say that a wise investment of a lump sum of money provides more in the long run than monthly pension payments, but there is no certainty to the outcome of a lump sum.
A third option for investors to consider is that the lump sum can be divided between some measure of growth investing in some measure of principal protected or private pension funds.
There are no rules about having to aggressively invest a lump sum of money. Investors certainly have the discretion to take all or a portion of the money and purchase a private pension in the form of an annuity which provides lifetime income, the same as the monthly pension option from work would.
The advantage of taking a lump sum of money and dividing it between growth and protection is that you get to decide how much goes into each instead of having to make a binary decision of all-protected or all-growth.
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