Retirement Lump Sum: Is it Right for You?

You may wonder if taking a lump sum for retirement is right for you. Before you retire, consider several aspects of your current financial situation and plans for the future. Your life choices will help you plan whether you should take a lump sum. Begin by creating a comparison chart and compare a lump sum with a pension payment. Sometimes seeing it on paper can help you arrive at an informed decision.

Who Should Consider a Lump Sum?

The critical question to consider is the security of your current nest egg and your pension size. People who have saved steadily throughout the years and have income through other sources may want to consider the lump sum payment. Also, those who will receive a larger pension may be in a better position to go with one payment.

Age is another important factor, if you retire later in life. You may want to take the lump sum so you can enjoy your pension’s benefits immediately. You can make provisions for your loved ones when you pass away. Once you and your spouse die, so does the pension payment plan. Another consideration is whether your pension payment plan would integrate cost of living increases into future payments. If your pension does not provide cost of living or inflation increases, you can always re-position your assets in your lump sum investment fund. By rebalancing assets you could make up for inflation and earn extra income.

Finally, you should determine the security of your employer. If the writing is on the wall that the company could go under, a lump sum is the way to go. 

Advantages of a Lump Sum

If you are an avid market trend tracker, having a lump sum payment will allow you to leverage your retirement fund. You can invest your money in funds you feel confident will perform well and can glean the rewards from your insight.

Also, income from pension payments is taxable, whereas when you opt for one lump sum you are taxed on the total amount once. Additionally, taking one lump sum payment can give you peace of mind because you do not have to worry about the stability of your company.

How to Evaluate if a Lump Sum is Right for You

Determine if taking a lump sum will provide you with a better return than what pension managers earn. Investigate whether taking a lump sum will exclude you from any early retirement incentive cash. Sometimes companies add these incentives to those who retire early, however the incentive may be removed if you take a lump sum.  

Finally, when it comes down to it, you should decide if your lump sum payment provides you with a better income stream than a pension payment. Consult an accountant to provide the most accurate analysis of your tax consequences and budget your overall pension according to what fits your life best.

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