Lump Sum or Annuity: Which Should You Choose at Retirement?
Does your employer offer a traditional defined-benefit pension plan that guarantees you a monthly pension payment for life?
If so, congratulations are in order—such plans are becoming scarce these days. The trend toward 401(k)s, 403(b)s and other defined-contribution plans means that more and more workers must rely on their own savings and investments to supplement their retirement income.
In this article
- Life Expectancy
- Other Factors: Income Needs, Health, Taxes and More
- What About Both?
- Use a Reasonable Estimate
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However, with a defined-benefit plan, you’ll likely face a challenging choice at retirement: whether to take a qualified one-time lump-sum payout—which can be rolled over directly into a traditional IRA—or to receive a monthly annuity payment for the rest of your life or, in some cases, even longer.
The decision becomes even more perplexing when your annuity payout options include:
- Single life payment. This is usually the highest monthly amount.
- Single life with term certain. You receive a little less each month, but if you die before the specified term is over, payments continue to your beneficiaries for a preset number of years.
- 50% joint and survivor. You settle for a lower monthly payment to make sure your surviving spouse gets monthly payments for his or her life that are equal to 50% of your original annuity.
- 100% joint and survivor. You get an even lower monthly payment but, in return, your surviving spouse gets 100% of your annuity in monthly payments for his or her life.
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