10 Apr Monthly pension or a lump sum?

 Q. What’s the best way to decide if I should take a lump sum for my pension or start taking monthly payments?

A. It’s a big decision that will have long-term ramifications for your financial life, so we’re glad you’re not jumping into anything.

While a monthly paycheck sounds great, if you die early, your heirs could lose out on a big nest egg.

Then there are other considerations.

“I personally feel the more you have saved up outside the pension the better candidate you are to take the monthly payments,” said Brian Power, a certified financial planner with Gateway Advisory in Westfield.

He said his concern for people who take the monthly pension, if they don’t have other liquid assets, they won’t have a place to dip in for should an emergency arise.

“The flip side to this is that I have seen people dip into the lump sum too much for non-emergency items like traveling or over spending since they think they have so much money and they’ve put their long-term retirement at risk,” he said. “So you do have to be a disciplined spender if you decide to take the lump sum without having much liquidity outside of it.”

In addition, the payments you receive from a monthly pension are very difficult to match by taking the lump sum and creating your own monthly income stream, Power said. Monthly pension calculations include a return of your principal but because the payments are guaranteed, you technically do not have to worry about depleting your investments before you pass away.

“If you take the lump sum and create your own monthly cash flow, you have to manage the amount you take from principal very carefully so you do not run out of money,” he said.

Then, if you have children and you’d like them to inherit your retirement account, you may inadvertently disinherit your kids by choosing the monthly payment.

“You will be able to continue payments to your spouse but typically not to the children or it would be a limited amount the children would receive,” he said. “Along with this thought, the sooner you — and your spouse if you choose a spousal benefit — pass away the better deal the lump sum is. The longer you and a spouse live the better deal the monthly pension is.”

Let’s dive a little deeper into monthly pension payment options.

Most qualified pension plans offer various benefit options, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

Those typically include:

a. Life Only: This will pay the benefit to the participant as long as the participant lives. Upon the participant’s death, the pension benefit ceases.

b. Joint & Survivor: This will pay a reduced benefit from the Life Only option to the participant for their lifetime. Upon the participant’s death, a percentage of the participant’s benefit, i.e. 50%, 75% or 100%, will be paid to the named joint beneficiary for their lifetime.

c. Lump sum: This provides a lump sum distribution to the participant who will have the option to roll part or all of it over to an IRA.

“If the participant is married, the law requires the pension benefit be in the form of a 50 percent Joint & Survivor annuity, which means that a surviving spouse will be entitled to 50 percent of the participant spouse’s benefit in the event the participant dies first,” Papetti said. “If an option other than a 50 percent Joint & Survivor option is selected the non-participant spouse must sign a waiver allowing the different payment option.”

Papetti said understanding your retirement income needs can help determine which if any of the pension benefits offered meets your current income requirements. You have to consider other sources of income such as Social Security and investments.

There are pros and cons to each option, Papetti said, offering this summary:

Life Only Pros                                            Life Only Cons

– Maximizes pension income                   – No future benefit upon
– Provides guaranteed income                   participant’s death
– Transfers investment risk                      – No inflation protection*
– Transfers longevity risk                          – Pension plan receives
windfall upon premature death

Joint & Survivor Pros                                Joint & Survivor Cons

– Protects surviving beneficiary              – Reduces pension benefit
– Provides guaranteed income                – No inflation protection*
– Transfers investment risk                     – Pension plan receives
– Transfers longevity risk                           windfall upon premature death

Lump Sum  Pros                                        Lump Sum Cons

– Allows potential to maximize               – Retain investment risk
income and growth with                          – Retain longevity risk
investment control                                    – Current low interest rate
– Potential inflation protection                   environment
– Provides ability to pass a benefit
to more than one beneficiary or to
other family members

* Assumes no cost-of-living adjustment

With some pensions, it may make sense to self-insure, Papetti said.

“This strategy involves electing the maximum Life Only benefit, then taking the difference between the Life Only benefit and the 50 percent Joint & Survivor benefit, and purchasing life insurance to replace the income when the participant dies,” Papetti said.

Considerations regarding this strategy include they health of the participant and if they are insurable, the amount of life insurance that can be purchased, estimated life expectancy and if there is a desire to leave a legacy to heirs, Papetti said.

If you’re not sure on any of these items, consider hiring a pro to complete an analysis of your options with your complete personal situation in mind.

Email your questions to .

The division of taxation has an online questionnaire to check eligibility:

https://www.state.nj.us/treasury/taxation/questions/senior-freeze.shtml