If you’re ever in a position where you’re offered to take your pension as either a lump sum or a monthly payout, which should you choose? Black Enterprise spoke with Leon LaBreque, an attorney, CPA, CFP® and CFA, as well as CEO of LJPR LLC, to gain some insight into this matter.
BLACK ENTERPRISE: Under which circumstances would a company offer a lump-sum pension payment?
LEON LABREQUE: In the past, corporations didn’t offer lump sums too often. Today, it’s becoming unattractive for employers to have monthly payouts because they are trying to avoid future liabilities. They prefer to give employees all the money up front. They give the employees all the money to shift the risk of the market from the employer to the retiree. During the course of that time, money is put away in a bank account. If the market doesn’t do well, the company has to make up the difference and that’s a liability to the company. Recently, companies have been obligated to report these liabilities. The companies don’t want to do this and they don’t want the risk, so they are getting rid of their pension plans. Twenty years ago, most companies had defined benefits, now they have defined contribution plans.
BE: Is it best to take a lump-sum pension payment or should you opt for monthly disbursements?
LABREQUE: I’ve counseled about 60% to 65% of my clients to take the monthly payment, and about 40% to take the lump sum.
Here’s how to decide on whether or not to take the lump sum:
- Life expectancy. How long are you going to live? The shorter you live, the better the lump sum looks automatically.
- How important is this money to you? If you raid the money, it’s hard to replace. If you’re living off your pension, then you should take the monthly distribution.
- Who is the money for? Is it for a legacy? Are you working during retirement and you don’t need the money? If you don’t need the money, then a lump sum does make sense, because it continues to grow.
In general I have counseled more people to take the monthly payout.
BE: If you decide to take a lump sum, where is the best place to invest this money?
LABREQUE: Either a Roth IRA or a mutual fund is the best choice. A Roth IRA has tax-free withdrawals. With mutual funds, the key is to diversify over all different kinds of funds. The idea is to not have all your eggs in one basket so that you don’t take on too much risk.
BE: What are some disadvantages of taking a lump-sum payment?
LABREQUE: All of the responsibility shifts to you. You or someone you hire are now responsible for your investment returns. Second, if you have a discipline problem when it comes to money, you might not be a good candidate for the lump sum. You have to discipline yourself. However, if you have self-control, one of the benefits of the lump sum is that your sum continues to compound.