Taking your lumps in retirement

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Retirement brings about a series of decisions for seniors. One of the most vexing is the decision whether to take retirement benefits as an annuity or as a lump sum.

The Consumer Finance Protection Bureau (CFPB) recently released a guide to help seniors make a more informed decision that can have a major impact on their retirement income. The 8-page guide is for consumers considering a lump-sum payout from a traditional pension plan.

Risk in taking the lump-sum payment

The CFPB says, “When employees choose a lump-sum payout instead of a monthly pension payment, the responsibility for managing and investing the pension money shifts from the employer to the employee. For some people, this is a daunting task and could put them at risk of outliving their money, or losing their money due to poor stock market performance, bad investment advice or fraud.”

What’s the takeaway?

One takeaway from the guide is that there can be errors in the calculation of the lump-sum pension benefit. The guide references the Department of Labor (DOL) list of the 10 Common Causes of Errors in Pension Calculation.

The guide also explains how a pension counselor can answer questions about your pension and help you solve problems like errors in the calculation of your payout. It provides a link to finding free advice from a nonprofit or federally funded pension counselor.

Can you do better away?

Retirees think they can do better by taking the lump sum and buying a private annuity.

The CFPB guide says, “If you want an annuity that gives you regular guaranteed monthly income, you’re generally better off staying with the monthly-payment option within your pension plan. A similar annuity from a private company will usually cost you more because it charges to cover costs like a commission to the person who sells it to you.”

Momma needs a new pair of shoes

Retirees with a corporate pension plan typically have a choice between a joint life annuity and an annuity based on just their life span. In general, women have longer life expectancy then men. A male retiree making the decision to base the pension on his life expectancy may be doing his spouse a disservice by dramatically reducing her retirement income should he die before her.

It’s called personal finance for a reason. These choices are personal. My advice is that you get to the point where you are comfortable with your decision whether or not to take a lump-sum distribution for your pension benefits.

If you took a lump-sum benefit, do you regret the decision?

Follow me on Twitter: @drdonsays