Are you considering a lump sum pension payment? Here’s what to know and why to act fast.


Workers considering taking a lump sum payment from their employer pension in retirement shouldn’t wait much longer to decide, as the series of interest rate hikes planned by the Federal Reserve are expected to reduce the size of the payment.

Lump sum payments are calculated by determining the present value of your guaranteed future monthly pension income, using age-based actuarial factors, mortality tables published by the Society of Actuaries and present value segment rates Internal Revenue Service minimums, which are updated monthly. .

This means that there is an inverse relationship between interest rates and lump sum pension payments. When rates are low, the calculated payment would increase because it takes a higher initial sum to arrive at the same future value of your lifetime monthly payments. As interest rates rise, as they do now, it takes a lower initial sum to arrive at the same future value of those monthly payments, so the lump sum buyout decreases.

Why are these dynamics crucial to understand now? Companies sometimes offer lump sum pension buyouts to retired or near-retirement workers and former employees with vested pension benefits who have not started taking monthly payments. This reduces the total liability and risk within their plans, according to Oleg Gershkovich, pension liability specialist at Voya Investment Management.

With interest rates rising, more companies are likely to offer pension buyouts, seeking to reduce pension liabilities on their balance sheets while paying smaller lump sums, Gershkovich said. “If the rates are higher, sponsors may want to do it more intensively,” he added.

However, accepting a lump sum payment carries considerable risks, Gershkovich said, citing a study published in February by MetLife. In an online survey of 1,911 Americans between the ages of 50 and 75 last fall, the insurance giant found that 34% of retirees who purchased a lump-sum buyout from their defined-contribution plan exhausted that amount in five years.

That’s why financial professionals say that in most cases retirees would be better off collecting monthly payments for the rest of their lives and the lives of their spouses, if a survivor benefit is available, said Gershkovich. These monthly checks provide longevity protection, ensuring seniors don’t deplete their assets during a long retirement, he said. Once workers receive lump sum payments, he adds, “they are required to make that money last, which is a risk.”

Seniors with limited assets and those concerned that they or their spouses are spending too freely should probably opt for the security of monthly payments, said Wayne B. Titus III, managing director and investment adviser at Savant Wealth Management. . According to


survey, 79% of retirees who took a lump sum made at least one major purchase, such as a vehicle, vacation, or new or second home, within a year of getting their money. Monthly payments can act as a “guardrail” and limit such spending, he said, giving seniors a clear picture of what they can spend each month.

Still, Titus said, there are times when taking the lump sum payment is the right move. Elderly people in poor health, for example, may not live long enough to collect much money in monthly payments, and taking the lump sum may allow them to leave more money for heirs, he said. Single retirees can also opt for the lump sum since they don’t have to worry about what would happen to a spouse if they died, Titus added.

Some pension plans have capped benefits, so workers who have spent most of their lives with the company might not earn higher monthly payments by staying. In those cases, it might make sense to retire early, before interest rates rise further, take the lump sum and work elsewhere, Titus said.

Wealthy seniors can opt for the lump sum as they have other assets besides their pension and social security, so they can afford the added risk of investing their buyout and seeking a better return. , said Titus. Likewise, seniors who plan to work full-time or part-time may want to invest some of their lump sum, knowing that their regular paychecks will help them weather a downturn in the market, he said. added.

Concerns about inflation may also make the lump sum attractive to seniors. Assuming an annual inflation rate of 3%, a monthly payment of $2,000 today will equal approximately $1,107 in 20 years, according to online inflation calculators. So retirees should sit down with a financial adviser and calculate whether it “makes sense to take the lump sum and try to get a better return over a longer period of time,” Titus said.

Mark Charnet, CEO of financial planning firm American Prosperity Group, said that “more often than not” he recommends clients take the lump sum. Putting that money in an indexed annuity, which offers a return based on the performance of a specified market index, may be a better option, he said.

Indexed annuities provide principal protection and the possibility of investment gains when the market rises, serving as a hedge against inflation, Charnet said. However, seniors should be aware of the high costs associated with many annuities and understand the details before purchasing one, he added.

“It’s something that could be a phenomenal opportunity as opposed to a fixed income pension,” Charnet said. “But I have to beat the board to make that recommendation. Unless I can show equal income today and higher income tomorrow, it’s very hard to compete with what they already have, which is guaranteed and will come forever.

Using a lump sum to purchase an annuity might make sense if retirees are concerned that their employers may not be financially stable. Private sector workers should ask if their companies participate in the Pension Benefit and Guaranty Corp., which will cover part of their monthly benefits if their employer’s pension fund becomes insolvent.

Last month, Democratic Senators Patty Murray of Washington, Tina Smith of Minnesota and Tammy Baldwin of Wisconsin reintroduced a bill that would require pension plan sponsors to provide detailed information to participants about proposed pension buyouts. The bill, known as the Inform Act, includes provisions that would require sponsors to provide a comparison of the benefits participants would receive if they took the buyout or accepted monthly payments, as well as an explanation of the how the lump sum was calculated.

Gershkovich of Voya Investment Management said the bill would help seniors “make an informed decision” about lump sum buyout offers. Workers can also take advantage of online educational resources, including this document from the Society of Actuaries.

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