A pension is a retirement account that can help provide a steady income for you for life. While monthly pensions are popular with many people, others prefer getting a lump sum retirement. Determining which one is best for you can be a challenge. Here are a few things to help you decide.
Lump Sum Retirement
Getting a large lump sum for your retirement is very tempting. The thought of getting all of that money at once is exciting. You have probably never had that much money at one time and the image of having so much money at once is nice. However, it might not be in your best interest.
For one thing, when you get a large lump sum like that, you will immediately have to pay a large amount in taxes. You will have to count that money as income. As a result of that, you will be thrust into a higher tax bracket. This means that a large chunk of the money will go directly to the government.
Another problem that you may run into is figuring out what to do with the money. If you take all of your money in a lump sum, there will be no more money generated from the pension fund. Therefore, you either have to make that money last or reinvest it in something and hope that it brings you a return. If you lose the money in risky investments, you will have nothing left to live on. Most people are not good at budgeting when they have a lot of money. One way or another, the money ends up getting spent.
When you get to retirement age, having a monthly pension check coming in can be very helpful. With your pension funds that you have saved up, you have the option of buying into a lifetime annuity. This annuity can provide you with an income as long as you are alive. The more you invest in the annuity, the larger your monthly payment will be. Therefore, you have to decide exactly how much you can live on and plan accordingly.
Getting a check on a monthly basis is much easier to budget for. When you know that you're going to be getting something each and every month, it takes a lot of the pressure off of you. You don't have to worry about where the next dollar will come from as it is always coming in.
Another benefit of using this method is the tax savings. When you are living off of your monthly pension check, you will usually be in a lower tax bracket. Compared to getting all of your retirement money at once, it will be much less. Therefore, you will pay a lower percentage in taxes each year. Whenever you can save money on your taxes, you should definitely take advantage of it. This method allows you to get a consistent payment and save on the money going out.