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Pension – Take The Lump Sum Or Monthly Payments?

Lump Sum or annuity

I’ll take the Lump Sum!

All right! I finally got my pension estimates back from Fidelity. Last time, I was leaning toward rolling it over to an IRA, but let’s crunch the numbers and see if this plan still makes sense.

pension lump sum or annuity payment

First of all, the lump sum looks much better if I take it out January 2013 instead of December 2012. I’m not exactly sure why it took a miraculous 60% leap, but this is much more tempting now than when it was under $10,000.

Just by looking at the table here, I guess that the best date to receive the Lump Sum would be 1/1/2013. If I choose annuity instead, the better benefit commencement date would probably be 1/1/2039 when I’m 65.

If I take benefit before the age of 65, I would most likely invest the money. Let’s be optimistic and assume 7% rate of return. We’ll remove the first column since 12/1/2012 has already passed.

pension lump sum or monthly payments

As I thought, if I take the Lump Sum in 2013 and invest it at 7% ROI (return on investment), I would have $98,382. That is almost twice as much as if I’d let Fidelity hold it until 2039. The important point to note here is the 7% is not guaranteed at all. If the rate of return dropped to 5% for instance, the result would be $58,642.

The other choice is to take the annuity now and invest $66/month. At 7% ROI, I could accumulate $58,487 by 2039 AND keep receiving $66 for the rest of my life.

Anyway, I think we can eliminate one choice right off the bat – the 1/1/2014 column. It doesn’t seem to offer any advantage. The choice would be to either take it now in early 2013 or wait until 2039. If I take the benefit in 2013, it would be much easier to just take the Lump Sum and rollover to my IRA. For this reason, I would also eliminate the annuity option in 2013. It would be a pain to invest $66 per month.

The bottom line is if I can invest the Lump Sum and beat 5% ROI, then taking the benefit now is a better option. I can always buy an immediate annuity later when I get closer to retirement if I want guaranteed income. Today isn’t the time to buy annuity anyway because the interest rate is so low. Perhaps a good opportunity to buy would present itself in 15 years or so and I can jump on that. Or I can just take 4% withdrawal from $98,382 which is $328/month when I’m fully retired. That’s actually quite close to the projected annuity when I’m 65 ($356.)

I guess it really depends on your personality. I like to be in control of my own investment. If I didn’t have an investment strategy that I’m already following, then I would just leave it at Fidelity and take the annuity in 2039. However, I’m pretty sure I can beat 5% over 26 years (delusions of grandeur?) and that’s why I’m going to get the paperwork going and rollover the Lump Sum into my IRA.

After crunching the numbers, it seems like if you are planning to invest the money and have a long horizon, taking the Lump Sum is the winner. On the other hand, if you are fully retired and are planning to spend the money, it’s a better idea to take the guaranteed monthly payout.

What do you think?

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 19 comments… add one }
  • Linda August 1, 2013, 2:47 pm

    Hi Joe,
    Did you end up taking the lump sum? I am in a similar boat. Less than $10k if I take a lump sum. My pension is no more since I left the company, but my amount stays at a pretty steady stream unlike your big jump from 2024 and 2039. Thanks!


    • retirebyforty August 1, 2013, 9:45 pm

      I decided to leave it. It’s a little diversification and it is increasing in value.
      If the amount stay the same, then I would just take it out.
      Good luck!

  • Financial Samurai December 16, 2012, 11:38 am

    That is kinda weird you’d get a 60% bump by just waiting until Jan, 2013! No brainer to wait.

    I suggest reducing that 7% return down to 5% or maybe even 4%. New normal = lower returns!

  • Rod J. Rogers (@FreeAgentRogers) December 15, 2012, 7:13 pm

    It’s a different world than mine. I’ve set up a business and expect it to take care of my retirement. Invested in rental real estate, now selling it owner financed to pick up some extra cash.

    • retirebyforty December 15, 2012, 11:58 pm

      Will you still run your business after retirement?

  • Michele December 15, 2012, 3:22 pm

    I’ve followed your blog for awhile now and to be honest I consider us to be kindred spirits. I am 42 years old and left my stressful corporate job in July 2011, after 12 years in the trenches. I experienced many of the same emotional ups and downs that you did and was thrilled to read that you had decided to give your notice. A belated congrats to you! After taking almost a year off, I am now back to work in a much less stressful job only working 3 days a week, so I guess you could say I’m semi-retired by 42.

    Ironically, I too just had to make a decision regarding a lump sump pension pay out about a month ago. As opposed to you, I ended up choosing the option of waiting for the annuity.

    Here was my reasoning:
    – I am going to get roughly a 5.90% return within my former company’s pension plan over the next 23 years. If it was less than this, obviously the decision would have been more difficult.
    – The amount of my lump sum represented only about 5.3% of my overall retirement savings.
    – In today’s world, obviously 5.90% return is not too bad, so I figured that even if the future proves out that I could have gotten 7+ % return on this money, I’m not going to sweat it. Every portfolio needs different types of investments and I now just include that future monthly annuity into my official retirement planning nest egg. In the future, I’ll continue to adjust my other savings accordingly, knowing that this annuity is a set investment for me.

    Keep up the good work!

    • retirebyforty December 15, 2012, 11:56 pm

      Thanks for reading! It’s great to hear from fellow semi-retiree. 🙂
      5.9% isn’t bad at all and you don’t have to lose any sleep. If the pension is worth 5% of my portfolio, I would consider annuity more as well. $365 in 26 years doesn’t sound like much though.

  • My Own Advisor December 14, 2012, 6:03 pm

    I like the lump sum on 1/1/2013.

    Take the money, invest it wisely and let it grow until you need it or want the cash.


  • jim December 14, 2012, 12:28 pm

    I wonder if they run the pension #’s annually and for whatever reasons 2012 and 2013 diverged significantly? For example if they base the pension amount on the market returns in some way then a good / bad year might cause the numbers to jump.

    Or… you quit in 2012 right? Maybe theres some adjustment or payment due this year still that you’ll get credited with at the end of the calendar year.

    *shrug* Can’t help but wonder whats behind that 60% jump.

    • retirebyforty December 14, 2012, 11:02 pm

      Yes I quit in 2012. I’m not sure why either, but I’ll take it. 🙂

      • JayCeezy December 15, 2012, 8:53 am

        I believe the numbers are calculated using January 1st; doesn’t matter that you would take it December 15. This same issue exists with quite a few retirement calculators, including the most famous one available free through Vanguard for Admiral customers. It works great when you are 5 years or more away from retirement. But when you are less than six months away, the ‘current year figure’ still calculates as if it were January 1 and the near-term data becomes worthless. Still, a good problem to have.:-)

        Really enjoying your journey in retirement Joe, thanks for sharing it.

        • retirebyforty December 15, 2012, 11:52 pm

          That would explain a lot. Good thing I didn’t rollover in 2012. 🙂

  • jim December 14, 2012, 12:26 pm

    That is odd that simply going to 2013 would increase your lump sum 60%. Seems ‘too good to be true’ and I wonder if there is some error there? Lets hope not and its just a quirk in how the pension rule works.

    It does seem given the situation that taking the lump sum in 2013 is your best choice.

    If someone wanted a guaranteed life benefit without risks then waiting to age 65 to take the annuity might be a good choice too. A safe, risk free investment that grows 5% a year ain’t bad.

    I think the choice is also between whether or not you want to manage the money and take some risks in hope of a larger reward or if you want to have a guaranteed lifetime benefit without risk.

    Also, I’d assume every pension will differ with different variables so other people might have better or worse value in the lump sum versus annuity depending on the pension system rules.

    • retirebyforty December 14, 2012, 11:02 pm

      It does sounds too good to be true. I got the December 2012 estimate first and then I ordered the rest.
      I doing more research into annuity and there is a place for it in a retirement portfolio. I’ll be open to building an annuity ladder starting in 10 years or so.

  • krantcents December 14, 2012, 12:21 pm

    I like the lump sum too on 1/1/2013. The only reason to even look at the other choices is if you want the assurance of a number. The difference makes it worth the risk. After all you have about 25 years till 65.

  • Lance @ Money Life and More December 14, 2012, 7:03 am

    I think I’d take the 1/1/13 lump sum myself. I wonder how fidelity calculates all of their numbers and why there is a major jump between 12/1/12 and 1/1/13… maybe there is some sort of vesting kicking in.

    • Elizabeth @ Broke Professionals December 15, 2012, 1:57 pm

      I am wondering the same thing, Lance. I’d love to hear Fidelity’s explanation for such a huge increase.

      As for the ROI, I think 5% is probably feasible – glad you didn’t insist on 7%. I hate to say it, but I think those days are gone.

    • Dividend Growth Investor December 17, 2012, 8:20 pm

      I second the concerns about 60% jump in one month. I would contact the recordkeeper and discuss your benefits before making any decisions. In addition, it might also be helpful to look at the Summary Plan Description (SPD) of your retirement plan, in order to gain an understanding of the method used to get to your retirement benefit. You might be surprised, but sometimes companies make mistakes in calculating your annuity benefits.

      In addition, although it does not sound like much, $127/month for life starting 2024 or $350/month for life starting in 2039 might be a safety net for you just in case. It would be an equivalent to owning You never know what the next 27 years will bring to investors. In addition, it might make sense to keep annuity as a potential way to diversify your income streams. I would have personally invested the lump sum in dividend growth stocks, but since I have almost no fixed income exposure, I might as well keep annuity..

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