fbpx
U

Lump Sum or Payout: How to Withdraw When You Retire

February 27, 2015

Lump Sum vs. Monthly Payments

This week, your Money Guys tackle a question often asked by their clients in regards to retirement planning: “Should I take a lump sum payment, or a monthly pension payment?”

While the question seems simple on the surface, the decision involves more factors than you might think.

Brian and Bo walk listeners through the same decision-making process they offer their clients. They cover the pros and cons of each option, as well as the factors (and math) you need to take into consideration when making the decision.

This discussion was inspired by a Fidelity article on the lump sum vs monthly payment debate. The Money Guys are adding their own valuable thoughts and experiences on the subject today.

The Monthly Payment Option

The clear benefit of this option is that you’ll be guaranteed a stable source of monthly income from your date of retirement until you pass away. You also have the option to include your spouse in the deal so that they continue to receive payments after you pass away.

There are a few downsides, though:

  • You need to be able to count on the company continuing to exist, and we’ve already seen many companies struggle to continue paying pensions for their employees.
  • You need to take inflation into account!
  • Receiving a monthly payment limits your ability to afford an unexpected, large expense.

The Lump Sum Payment Option

The clear benefit here: flexibility. You receive a large sum of money and are free to invest some of it, take some of it to fund your monthly retirement expenses, or assign the money to be left to your heirs.

But there are downsides here, too:

  • You’re responsible for making this money last throughout your retirement.
  • Your money is then subject to market fluctuations (if you invest it), so therefore not as stable as monthly payments.
  • You’ll need to roll your payment into an IRA or employer qualified plan to avoid the distribution being taxed as ordinary income.

How to Decide? Do the Math

This is an extremely individualized decision, but Brian and Bo do their best to generalize the factors you need to take into account. You have to ask yourself if you have enough guaranteed monthly income for retirement, what your life expectancy is, and whether or not you want to leave an inheritance behind.

You can also use the formula Brian and Bo use for clients to help you decide — they share it within the episode.

Again, there are many factors to consider but by staying informed, you’re better equipped to make this decision. It’s one many people face, and this episode is a must-listen if you’re close to retirement and figuring out how to fund it.

Most Recent Episodes

Dave Ramsey vs. The Money Guy: Which Strategy is The Best?

Dave Ramsey has an incredible legacy of helping folks get out of debt and take control of their financial lives. We agree on a lot of things, but there are a few points of contrast. In this episode, we’ll discuss differences between The Money Guy Show and Dave Ramsey...

Top 4 Financial Mistakes We Saw This Year! (2022)

We saw some wild financial mistakes this year during the bear market. From making extreme changes to portfolio allocation, chasing the hot dot, and using too much leverage, we’ll talk about some of the biggest financial mistakes we saw in 2022 in this episode.   In...

How Millionaires Build Wealth! (With Dave Ramsey)

Join us for a very special episode as we welcome personal finance radio host and influencer Dave Ramsey to The Money Guy Show! There’s so much misinformation out there about building wealth. We had the pleasure of having a great conversation about how millionaires...

Do These 4 Things with Your Finances BEFORE 2023!

There are unique financial opportunities available at the end of the year - especially this year with the market down. In this episode, we’ll talk about what you need to do with your money BEFORE 2023! In this episode, you'll learn: What you need to do with your money...

How to Win When the Financial World is Burning!

Lately it’s felt like the financial world is in chaos, with rising interest rates, a falling stock market, and high inflation. Let’s talk about how to focus on what you can control and how to minimize the time spent worrying about what you can’t control. In this...

Financial Advisors React to RIDICULOUS Money Advice on TikTok!

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

Loss Harvesting: Why Wealthy People Love It (And You Should Too!)

Tax-loss harvesting: what is it and should you be doing it? In this episode, we’ll cover everything you need to know about tax-loss harvesting, including whether it makes sense for you, how much it could save you in taxes, and how to eliminate the downside of loss...

The Market is Crashing! (Where Should You Put Your Money?)

The stock market has not had a great year so far. You might be asking yourself, “Since the market is crashing, where should I put my money now?” In this episode, we’ll discuss how to invest when the market is dropping and how to make the most of your money. In this...

Will Rising Interest Rates Tank the Economy?!

The Federal Reserve is raising interest rates to combat inflation, and many are concerned about how it will affect the economy. In this episode, we’ll discuss what rising interest rates means for your wallet and how to make the best of it. In this episode, you'll...

How to Be Wealthy By Age! (Can You Catch Up?)

How much does it take for you to meet your retirement goals by age, and what are some common traps your peers fall into? Learn more about how to be wealthy, mistakes to avoid, and exactly what a little extra saving can do for your retirement income. In this episode,...