When Your Company Hands You a Retirement Option...

Question: My employer is offering an option to receive guaranteed income now or at 65, or taking a lump sum on the retirement plan. Any thoughts? -Katie T.

Answer: We always recommend to get a complete physical before making an irreversible decision on your retirement. If your health is suspect, a lump sum could be best. The advantage of taking monthly income is that it’s guaranteed and you do not have to manage the money. The disadvantage is that if there is inflation, you will lose purchasing power on your monthly income. In addition, you cannot accelerate the payments. With regards to taking the monthly income now or taking it in the future, we normally calculate what rate of return you would need to provide you with a monthly income. As this monthly income generally stops at your demise, it is impossible to know what option will work out best for you. We normally recommend using life expectancy based on your health and adding 5-10 years to it to determine the rate of return. For example, a 55 year old female in perfect health could expect to live, on average, an additional 32.8 years.* The same 55 year old female who smoked and was in poor health could expect to live, on average, an additional 18.9 years. In both cases, again, we would add 5-10 years onto it just to be sure.

The last few calculations that we did for clients who wanted monthly income, we found that the options from their pension plan were more attractive than those that were available from commercial annuities. This is not always the case though. In the event that interest were to rise in the future, an annuity from an insurance company might give you better benefits.

For a lump sum distribution we normally recommend to roll it directly into an IRA in order to defer the tax. The advantage to this option is that you would have control of your money and when you are ready to take the money out, you would have numerous options including purchasing a guaranteed account at that time if interest rates were favorable. Another point to consider is when you pass away, if there is any money left in the account when choosing a lump sum, this money could be passed on to family, friends, or charity. With the first option of guaranteed monthly income, any funds would be left to the insurance company.

Of course, please be sure to speak to your advisor to carefully consider the differences between your company retirement account and investment in an IRA. These factors include but are not limited to changes to availability of funds, withdrawals, fund expenses, fees and IRA required minimum distributions. Please contact us in regards to any questions or concerns you might have. Call to schedule your free retirement check-up. You may reach the Retirement Doctor at eja@retirementdoctor.com or 1-800-406-1595

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