Lump Sum or Payout: How to Withdraw When You Retire

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.

Enjoy the Show?

• Sign up for the Financial Order of Operation (FOO) Online Course!
• Sign up for our Know Your Number Course!
• Check out our Net Worth Tool!
• Get FREE downloads full of financial advice from our Resource Page!
• Subscribe on YouTube or wherever you listen to podcasts.
• Send us your questions or share your story.