Are you or someone you know faced with a decision around whether to take your pension or buy-out in a lump-sum or through periodic annuity payments? If so, you probably know it is a complicated decision.
- How long do you think you’ll live?
- Does the plan allow for your spouse or heir(s) to receive payment if you die?
- What is your tax situation and what will it be in the future?
- How comfortable are you with market ups and downs?
- How do the options impact your estate plan, beneficiaries, and gifting expectations?
There is much to consider, and we hope this podcast will help you better understand your options. Please reach out to talk through your options with a SWMG financial advisor.
*Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Stephens Consulting, LLC, doing business as Stephens Wealth Management Group (SWMG), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Stephens Consulting. Please remember that if you are a SWMG client, it remains your responsibility to advise us, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SWMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of SWMG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Links are being provided for information purposes only. SWMG is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. SWMG is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Please Note: Stephens Wealth Management Group does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SWMG’s website or newsletter or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Kim Waldman: 0:00
Welcome to, A Word On Wealth, a Stephens Wealth Management Group podcast focused on topics of interest to business owners as well as couples and individuals on the glide path to or in early retirement. We discuss topics of interest to you and hope to bring clarity to financial concepts and strategies that impact you in your everyday life. Without further ado, here is today's host.
Jill Carr: 0:30
Hello everyone, welcome to the podcast. I'm your host, Jill Carr, and I'm a wealth advisor here with Stephens Wealth Management Group, and I'm talking to Sherri Stephens today, who is the president and founder of Stephens Wealth Management Group, and we're going to be talking about what criteria you should consider when you're evaluating whether to take your pension as a lump sum or a series of annuity payments. This is becoming more and more a reality for a lot of people where their plans might be closing or they're evaluating whether to take a buyout and retire. Sherri, did you want to talk a little bit about why companies might be closing their plans?
Sherri Stephens: 1:12
Let's just be sure that we're clear on the type of plan we're referring to. In this case it's the defined benefit plan, and that's the type of plan where only the company makes the contributions, which is different than your 401k where you can add money. In the case of the company pension plan where you're a participant, there's a few different scenarios. As Jill mentioned, it could be that you're just retiring, you're at retirement age and typically you would get a package where you have to make a decision around a lump sum payment or monthly payments for the rest of your life, And it's a pretty big decision. They may be offering early retirement. We hear a lot about retirement packages where they create incentives for people to retire early and you would make that decision as well, or they may just be terminating the plan itself and in which case benefits don't accrue beyond that and you may have some options at that point or later at retirement. The reason we're hearing about businesses these days and companies making retirement packages and terminating their plans is to manage the long-term liability of the plan itself. People are living a lot longer and the funding liability is becoming really expensive and for some companies, once they start contributing to a 401k, they may decide not to continue the defined benefit plan.
Jill Carr: 2:47
Excellent. Thanks, Sherri. When participants are faced with this kind of decision, they're typically given the option to choose between a lump sum or annuity payments, and there's different types of annuity payments that they can choose, depending on how long they want the payments to continue for, and that changes the monthly amount. Now, to put this in some context that our listeners might understand. For example, you may have heard in terms of the lottery, where you can take the lump sum, or you can take a series of annuity payments. For example, Powerball Jackpot is $52 million, and you can choose to take that in annuity payments or you can take the lump sum option of $27.7 million. The lump sum is typically less money, but when it's that kind of money with the lottery, it's hard to see anyone taking the annuity because the lump sum is so big. It's not so cut and dry with defined benefit plans because it's smaller numbers. What we're going to do is talk about making the case for either the lump sum or the annuity. Sherri, what are some reasons that a person would want to take the annuity payment option?
Sherri Stephens: 4:05
You're right, Jill, It's not a one-size-fits-all. Everybody should do X or Y right. If you want to take the annuity option, that means you would take a monthly payment that you cannot outlive, and if you choose the joint and survivor option, it means you would get monthly payments for both you and your spouses lifetimes. It could be significant, especially if you're a younger person. If you're young and you expect a long life expectancy and your spouse is also younger and you're both pretty healthy, it probably makes some sense to consider the monthly payments if you have trust in the financial health of the company itself. In other words, is the pension that's going to be paying you those payments financially healthy? And there are reports that you're required to get annually that give you that information. And oftentimes some of these payments are insured by the PBGC, which is a government agency that will ensure up to a certain level of payments. That's an important thing to know If you want the security of a monthly payment for the rest of your life. Obviously, the annuity option is the only way that you'll get that security. You might want that if you don't have other savings to supplement. If so, security is your only income source at retirement, then having an additional guaranteed payment might be critical for your ability to make your monthly bills. If you're not worried about taxes, if you're essentially in a lower tax bracket and tax planning is not important or not going to be a critical factor, the annuity payment is an option. Obviously, the company bears the risk of the payment itself. They negotiate a rate, they guarantee the payment, and you have another layer of potentially some insurance from the PBGC. The risk is not on you to make sure that you're earning enough or managing the portfolio, And Jill's going to talk a little bit about how to do that, if you choose to. There are also annuity options that you can choose depending on whether you're married or not, whether you want a certain period of time that you want those payments to continue. I mentioned lifetime for you and your spouse, but once the payments end, that is it. There is no more balance in the account, so to speak. Also, there are different options within the annuity option, In other words, the types of monthly payments and how long they'll last. I mentioned you can choose a lifetime payment for yourself, a lifetime payment for yourself and your spouse, or you can choose a fixed number of years. All those options will drive the amount of the payment and all of them would be related to any sort of longevity concerns you may have. Generally speaking, If you are married, and you want payments to continue for your lifetime or you and your spouse's lifetime, the annuity payment may be your best option.
Jill Carr: 7:39
All right, thanks, Sherri. Now I will go into kind of the pros of the lump sum option. Basically, they're the opposite of what Sherri talked about. If you feel that you have a shorter life expectancy, for example if you have a health condition where you kind of know that maybe you're not going to live into your nineties, or if you have a dire health condition, then it might make sense to take the lump sum because you get more money now, as opposed to trying to stretch it out over your lifetime. Also, if you don't trust the financial health of the plan. S herri mentioned the PBGC, which is the Pension Benefit Guarantee Corporation, which again is a government agency. They publish reports every year that show what amounts they will insure on a pension. For companies that do have pensions. there is an amount that will be insured, regardless of if the company goes into bankruptcy or not. It will guarantee a certain amount of payment. But if your annuity payment is expected to be above that and you have doubts about the longevity of the company, then you may want to consider the lump sum as opposed to trying to take the risk of continuing with the company and, if something happens to it in the future, if you have other sources of income to take. Sherri mentioned, if you just have Social Security, you might want to take the annuity option for pensions. But if you have other retirement savings that you have built up and so you can take income from those as opposed to being reliant on a monthly check from the annuity pension, you may want to consider the lump sum, because you definitely will have more control over your investments and taxes and when and how to take out of a lump sum, as opposed to taking the annuity payment. If you wanted control over what types of investment you put your money into or you wanted to defer taxes or accelerate taxes if you're in a lower tax bracket. We often talk about this tax tsunami that's coming with the way that debt is in this country and how the tax brackets are now, and if Congress doesn't act, would they have to increase taxes in the future to pay for various things, regardless of your political party affiliation not getting into that, just there's a very real possibility that there may be some increased taxes in the future. The only way to kind of have control over this at all is to take a lump sum and roll it to an IRA and then you have the ability to do some tax planning options in order to have control over what taxes and what brackets you're in. Also, usually when you take the annuity option, you don't have a provision for inflation. Your payment is your payment, regardless of what it is now or 10 to 15 years into the future. Obviously, things go up in price, and inflation may erode the purchasing power of your annuity option, whereas if you took the lump sum option, you might have some control over investing that and to try to get ahead of that. Finally, if you wanted to leave money to any kind of beneficiary as Sherri mentioned, with the annuity options they typically end when you pass away or if you did choose the spousal option when your spouse passes away. But if you wanted to have any kind of legacy to other beneficiaries or have something that you wanted to leave as a request, the lump sum option is really the only way to make that happen, one of the criteria that you want to consider when you're debating this option.
Sherri Stephens: 11:41
Thank you, Jill, and I totally agree. If you are going to try to manage a large lump sum and create an income stream from that lump sum for your lifetime or for particular purchases or just for inflationary protection, that is a lot of expertise that many people don't have, especially with market environments like we've had lately with inflation rates, as we've had lately. If you take the lump sum in Jill's case, she's made the case for that be sure you get with an advisor. We're happy to help in that regard. We help clients make this decision all the time. In conclusion, there is no one-size-fits-all for making the decision around a lump sum or annuity option. There are benefits, pros and cons to both. Everyone is going to get Social Security. That's an annuity payment in itself. You can't outlive it and it's adjusted for inflation. If you have other resources and you don't need another guaranteed payment for your lifetime, then maybe the lump sum is going to be the way to go. You have lots of tax planning options. You have the ability to leave it to your heirs if you choose. You have the ability to take money out as you see fit. However, if you really don't have enough other resources and you really need the security of that monthly payment, then we generally recommend to people that they consider the annuity option. I hope this was helpful. Call us if you would like some help or assistance in deciding on a lump sum payment.
Jill Carr: 13:29
Thank you, Sherri. That was very helpful. Thank you all for listening. We do have a flow chart that can help you walk through some of these decisions. If you give us a call, we're happy to share that with you. Have a great day.
Kim Waldman: 13:45
Thank you for listening. If you have enjoyed this content, please share it with your friends and colleagues. And for more tools and resources on how to think about and make smart financial decisions, or to learn more about our financial advisors, please go to StephensWMG.com. That is S-T-E-P-H-E-N-S-WMG.com. This show is for informational purposes only and should not be relied upon for investment, tax, legal or other decisions.
*Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Stephens Consulting, LLC, doing business as Stephens Wealth Management Group (SWMG), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Stephens Consulting. Please remember that if you are a SWMG client, it remains your responsibility to advise us, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SWMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of SWMG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Links are being provided for information purposes only. SWMG is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. SWMG is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Please Note: Stephens Wealth Management Group does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SWMG’s website or newsletter or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
