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What to consider before taking the lump sum

Benefits for beneficiaries

When you die, the money that's left goes to your heirs. The company annuity ends when you and/or your spouse dies. Your children get none of it. If you take the lump, your spouse gets the money after you die, and when she dies, your heirs get whatever remains.

When lump sums are not beneficial

In some situations, though, taking the lump sum would force you to leave money on the table. For example, many companies subsidize early retirement in order to get workers to leave their jobs. They aren't required to factor in the value of the subsidized retirement when they calculate the amount of the lump sum option some companies offer to retirees. They do have to tell plan participants about the relative value of a subsidized benefit compared to the lump-sum payout.

It can be hard to read the required explanation, but get help. Sometimes getting the subsidized benefit gives the company's early life annuity participants as much as 50 percent more, the Pension Rights Center points out.

Also, lump sums can be difficult to manage even among seasoned investors. Older people run the risk of mismanagement due to poor heath, particular if Alzheimer's disease becomes an issue.

"The wheels start coming off as people age. When you have dementia, you don't know that you are falling off a cliff," says Robert Katch, president of Manchester Financial, based in Westlake Village, Calif. "People make mistakes that they don't know they are making and they end up in a mess."

And some people, even with all their senses intact, cannot manage to hang onto money to save their lives.

The trade-offs between taking a monthly pension check or the lump sum should be analyzed in great detail. If you find yourself in this situation, be sure to hire a qualified financial planner to help you run the numbers and consider various scenarios before you make a final decision.

Back to: Making the pension decision


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