Carle is terminating their pension plan, leaving many people deciding between annuitizing their pension or taking a lump sum.
The choice between receiving your benefits as a stream of payments (annuity) or as a lump sum that you will then have to invest yourself and withdraw from is a complicated one. Every situation is different, and this decision should only be made with respect to a financial plan and your unique personality. There are many things you need to consider, some are purely financial and can be fleshed out by crunching numbers, and some are personal and can only be decided based on what makes you feel better.
The Financial Considerations
1) Spending
The first consideration is straightforward: which option provides you with higher monthly spending. To make this comparison, you must determine what you could withdraw from a portfolio the size of the lump sum you would receive. Everyone’s withdrawal rate will differ depending on their time horizon and how their portfolio is invested.
2) Estate
There is a chance of leaving behind an inheritance for your heirs by taking the lump sum, investing it, and withdrawing from that portfolio. This is not the case with most immediate annuities.
3) Income Reduction When First Spouse Passes
An income stream based on withdrawing a certain amount from a portfolio does not have to reduce because one spouse passes away. Unless you get a joint and survivor annuity, your benefits will go away or reduce at the death of first spouse.
4) Other Income Sources
If you have other guaranteed income streams such as social security, a good portion of your financial needs may be covered by guaranteed income streams already, making it more desirable to take a lump sum to invest for potential upside in lifestyle and legacy.
5) How will the lump sum be invested?
If you would invest the lump sum almost entirely in bonds or money market funds, you may be better off taking the pension. Though it is hard to make blanket statements, generally speaking, the higher the ratio of stocks in your portfolio, the higher likelihood of being better off taking the lump sum.
The Personal Considerations
1) Do you have the expertise and discipline to manage a lump sum?
If you plan on taking a lump sum, you must have the knowledge required to develop a properly diversified investment portfolio and the emotional ability to stay invested through turbulent markets. You also need the expertise required to know how much you can withdraw from your portfolio without running out of money.
2) Do you have a plan for who will manage your portfolio when you are no longer able?
If you can manage your own portfolio now, who will manage it as your cognitive ability declines as you grow older? Does your spouse have the ability to manage the portfolio if something happens to you? Do you have a competent, trusted advisor that can manage the portfolio for you if/when you’re unable to manage the portfolio on your own?
3) Do you want to leave an estate?
This is an emotional decision as well as a financial one. If you highly value leaving money behind to take care of family members or give to a favorite charitable cause, you will probably want to take the lump sum. If that’s not important to you, you may be more likely to choose the annuity option.
4) Which option gives you greater peace of mind?
Some people feel better receiving “guaranteed” income instead of taking withdrawals from an investment portfolio that fluctuates. That is completely understandable, especially for those who will have the ability to do everything they want with the guaranteed annuity and won’t really benefit from any additional income an investment portfolio may provide.
Few people have the expertise to make this decision themselves
As you can see, there are a lot of factors to consider when making the annuity vs. lump sum decision. Some of the considerations involve making calculations, like how much you can withdraw from an investment portfolio, that few people have the expertise to make themselves.
Consulting a financial advisor can be very valuable to people wrestling with this decision. They can help you make this decision by giving you an idea of how much you can spend from an investment portfolio the size of your lump sum given your time horizon and how the portfolio is invested. They can also provide you with a concept of the estate you could potentially leave to your heirs with an investment portfolio instead of an annuity.
If you are one of the many people here in town who have had their Carle pension terminated and need to make this decision quickly, feel free to schedule a free pension vs. lump sum consultation with one of our advisors today. We have decades of experience helping people make decisions like this and would love to help!