To save money and improve their competitiveness in the market, GM is offering some retired workers a one time, lump sum payout instead of monthly checks guaranteed for life. Other companies may follow and retirees are being called upon to make a difficult choice of whether or not they should accept the payments. As we have often said, with this or any other financial decision, the answer is: it depends.
Why lump sum pension payouts are becoming popular
Financial planners will be available to help retirees make the choice. That is itself a factor that needs to be considered in the decision. Professional planners come at a price and their annual fees along with other costs associated with managing the money will reduce the value of the pay out. However, with pensions, there’s a lot more money and security at risk.
That’s why considering both sides of the lump-sum payout proposition is so important.
The first question advisers will answer is how the lump sum compares to the financial payout. If you get a $100,000 payout instead of a $500 a month check for life, it might not be worth taking the money. You would need to generate 6 percent a year on $100,000 to replace the income from the pension, and that could be difficult to do.
If you a young retiree, the steady income for life could be worth more than the payment.
There might also be a short-term drop in income. Most planners will advise their clients to withdraw about 4 percent of their assets each year, or less. That would mean the income in the first year should be $4,000 or $2,000 less than the monthly checks.
It is assumed that the principal will grow and the annual income will rise as it does, but as the stock market has demonstrated recently, your next can get chopped in half pretty quickly. That would have a very large impact on both current and future income if that were to happen shortly after receiving the lump sum.
While there are other factors to consider and a great deal of math involved in finding the best choice for you, a reverse mortgage could help in the decision.
With a reverse mortgage, you could use the equity in your home to offset a temporary decline in income. This is actually a strategy independent research recently showed could be the best way to increase retirement income. We can provide a copy of this research to you or your financial planner to help with any financial decisions you face – just give us a call at 1-800-991-4613 and ask to learn more about the reverse mortgage process.