About 50 percent of all> traditional pensions allow workers to take a lump-sum distribution at retirement. But experts are divided on whether that s a good idea. How to weigh the options.
Many advisers argue that taking a lump sum and investing it can be a hedge against inflation, since many pensions lack cost-of-living adjustments. It s also the best way to convert a pension into money for heirs, experts say, because most pensions restrict retirees from transferring regular payments to anyone but a spouse.
For the near future, there s another factor in favor of lump sums: Because of the formula that s widely used to calculate a pension s value, today s low interest rates translate into high payouts. All else being equal, says Jeffrey Harwood, a financial adviser in Woodland Hills, Calif., it s a sweet time to be cashing out.
Compared with other options, company pensions are a relatively cheap way to get retirement income, says Alicia Munnell, director of the Center for Retirement Research at Boston College. Pensions have lower costs and fees and thus higher payments than most commercially sold annuities. Calculators like those at www.esplanner.com allow workers to plug in variables like life expectancy and inflation rates to see whether a lump sum or a monthly payout will serve better in the long run.
Taking a lump sum can also create tax complications: If the retiree doesn t roll it over to an IRA or something similar, it can be taxed like income, and those who take the sum before age 59.5 may face a withdrawal penalty.
Retirees who get a lump sum may prefer not to manage a big pot of cash. Some advisers recommend rolling some money into a low-fee, immediate annuity whose payouts cover basic expenses in other words, converting it back into a pension. The site ImmediateAnnuities.com lets users compare rates.