Pension Possibilities: IRA Rollover? Buy an Annuity? Or Take the Payout?
Making your decision on the type of payout you receive in retirement requires considering these four factors.
![](https://cdn.mos.cms.futurecdn.net/ywBG26nMmR7pLGCPFyQdqA-415-80.jpg)
Pension decisions aren’t clear-cut, and they can have serious consequences for you and your family.
Take some clients of mine, for example. The husband, age 65, wanted the highest monthly payout he could get, so he chose a 100% single life option of $2,100 per month. With that type of payout, the payments would end when he died. The joint life option he could have chosen would have paid only $1,800 per month. But although the payments were lower, his wife would have received the same amount once he passed away (and keep her quality of life).
A year and a half later, he was diagnosed with terminal cancer.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’re contemplating retirement, it’s in your best interest to be proactive and research the different benefit payout scenarios available to you. According to the Employee Benefit Research Institute, only 2% of employees participate in a pension as of 2014 (compared to 28% in 1979). If you’re one of the fortunate, you could receive a stable, consistent amount of income per month for your entire life as well as a spouse’s.
On the other hand, several employers offer a lump sum option instead of lifetime payments, which might be a wiser option for some retirees (more on that in a bit).
Some people choose to take a lump sum and roll it into an IRA, managing the investments on their own terms. Others may take a lump sum and use it to buy an annuity held within an IRA. They receive a lifetime of guaranteed payments, similar to the lifetime payments that a pension could offer, but with more flexibility and control since you can choose from a plethora of companies. Of course, before going that route, you’d want to compare how much lifetime income the annuity you could buy from an insurer would compare to the lifetime income from your employer's pension.
4 Areas to Consider When Making Your Choice
To determine which path to take — whether you opt to take a lump sum and invest it yourself in an IRA or decide to take lifetime payments, either through your employer’s pension or by taking a lump sum and buying your own annuity instead — here are a few considerations to guide you:
- What is the overall financial strength of the company providing you guarantees? Annuities and bonds are rated through large credit-rating agencies, such as Standard & Poor's, Moody's, and Fitch Group. Ratings range from “AAA” (highest grade) all the way to “C” or “D” (considered junk). Weigh the ratings for the company your pension plan uses against those of the companies available to you on the open market if you were to take a lump sum and buy an annuity on your own.
- What is your health (and your spouse’s health) currently?
- How does the option you’re considering help your spouse or other heirs? For annuities and pension lifetime payouts, for example, typically, you'll get higher payouts with a life-only option. However, your payments would stop when you die, and your spouse would get nothing. Your payments would be lower if you opt to have them continue for your spouse, but spousal payouts are important for many married couples.
- What are the potential tax implications (e.g., will your Social Security benefits become taxable?) with a guaranteed income stream?
Lump sum considerations
There are several reasons why people might opt for a lump sum. If you can foresee a shorter retirement due to illness, it may suit you to manage a lump sum on your own, vs. taking a guaranteed lifetime income over a diminished lifespan. If you’re not married, then you should consider an IRA instead of a pension since there is more flexibility to pass the remainder to another family member or a charity.
In addition, if you’re confident in your nest egg and just want more control, a lump sum could be for you. For example, I have a 62-year-old client who is single and well-prepared for retirement. His benefit statement shows that at age 65 he could get a $1,200-per-month benefit, or he could take a lump sum of about $165,000. He is choosing the lump sum, because although the lifetime payout amount could be significantly higher over time, he doesn’t need the income and would rather have more flexibility and manage when he takes withdrawals.
On the other hand, a lump sum transfer to an IRA most likely will come with market risks, depending on what you do with it and who you choose to manage it. Considering the recent stock market fluctuations, managing a portfolio might not be a great idea. Not to mention that choosing this option can jeopardize a spouse’s lifetime benefit in comparison to other plan options.
Thoughts on annuities
If your main concern is a reliable income stream, then you may be better suited for the lifetime payments, whether from your company’s pension plan or by taking a lump sum and buying your own annuity. Certain annuities (e.g., fixed, fixed-indexed and immediate annuities) give retirees the opportunity to relax and not stress over daily market instabilities, and benefits can pass to a chosen spouse or heir. The main concern is their ability to keep pace with inflation.
Here’s how one client of mine came to his decision to buy an annuity. This man, who is married, has a pension through his employer with a single life option of $1,560 per month, a joint life option of $1,236 per month and a lump sum option of $250,000. His objective is to not only pass the same monthly benefit to his wife but potentially leave a remainder benefit to either his children or grandchildren. By transferring the $250,000 lump sum to an IRA and purchasing his own annuity, it will provide $1,004 per month ($232 per month less than his employer’s pension), but after he and his wife both pass away, their children or grandchildren will receive the remainder of their accumulated value. This scenario provides flexibility and possibly a benefit for their heirs.
As you can see, there are many moving parts to consider, and sometimes getting creative by involving other financial vehicles, such as life insurance, can increase your options or avoid future problems. For example, if couples want to go with a 100% single life option, they also could purchase a life insurance policy for the difference. Had my client who later discovered he had terminal cancer opted for this, his wife would’ve received a $150,000 death benefit.
In conclusion
So, the bottom line is that a suitable candidate for a lump sum would be someone who has all their income needs met for retirement and who wants to effectively plan for lower taxes in the future. On the other hand, a likely candidate to take the lifetime payments of a pension would be someone who will need the income to supplement Social Security or who anticipates the lifetime payout being higher vs. transferring and self-managing it.
The advice from a competent financial adviser will help you properly assess if a lump sum option is the right fit. Don’t forget to evaluate your goals, health, heirs, tax consequences and the plan for the unexpected.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth LLC, in the Orlando, Florida, area, offering strategic financial planning services to business owners, executives, retirees and professional athletes. Carlos is a nationally syndicated columnist for Kiplinger and has contributed, been featured or quoted in over 100 publications, including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and several others. He's also been interviewed on various radio and television stations. Carlos is trilingual, fluent in both Portuguese and Spanish.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published