Not all Pension Payouts are Created Equal

Dear Retirement Adviser,

My wife will be retiring in the next three years or so. She has the option of taking either a monthly pension of between $2,500 and $3,000 or a lump-sum buyout of between $600,000 and $800,000. Which is the smarter way to go? If she takes the lump-sum option, how does she protect the money? Additionally, we both have military pensions and are eligible for Veterans Affairs medical care.

Thanks,

-- Greg Grapple

Dear Greg, It's a difficult question, but estimating your retirement income needs and how they will be met in retirement is a good first step in deciding whether your wife should opt for the lump-sum payout or stay in the pension plan.

How the pension is structured also makes a difference. Is there a cost-of-living provision that will raise the monthly benefit over time? That type of inflation protection is very expensive to purchase if you're buying an inflation rider on an annuity.

The "bird-in-hand" argument would have her take the lump sum in a trustee-to-trustee transfer to an individual retirement account, so she could continue to defer income taxes. If there's any concern about the financial viability of the employer and its pension plan, then taking the lump-sum payment eliminates any risk associated there.

My recommendation is for you to hire a financial planning professional, paying an hourly fee for the work. You can discuss your life goals in retirement -- your retirement income needs as well as which decision makes the most sense to accomplish those goals.

If she decides to take the lump sum, you'll want to work with the financial professional to determine how the money will be invested to keep it safe while maintaining its purchasing power over time.

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