Should I Take My Pension as an Annuity or Lump Sum Rollover?

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In this episode of Ready for Retirement, we’re talking about pensions and how you should take your pension when you retire.

Questions Answered:

Should I take my pension as an annuity or lump sum rollover?
What are the pros and cons of each?
When might both make sense?

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Episode Timeline:

03:13 – Key points to consider when choosing your pension type

22:42 – Summary of key takeaways

Key Takeaways:

Golden Question:
- Should I take my pension as an annuity or lump sum rollover or both?
Key Points to Consider
- Which option will make you more money? If you take the lump sum as a cash distribution, you’re going to pay taxes on the entire amount. If you roll over the lump sum to an IRA, it will be tax-free and you can take distributions from there.
- Choosing your pension type will also depend upon implied growth rates.
- When you take the lump sum as a rollover, not only are you looking at the income that it can create, but you also still have the remaining base portfolio balance that you own and control. With an annuity, there’s no portfolio you have control over, it’s just income.
- What is the annuity amount as a percentage of the lump sum? What are the cumulative withdrawals of each? These will show you which option might make more sense (which option will pay you more each year without the risk of running out of money).
- When you look at the internal rate of return (IRR) each year, ask yourself: Could I do better than that by taking a lump sum? If you could roll that money over and grow it at a higher rate, your portfolio would generate excess returns for you. If you grew it at a lower rate, you would come out behind.
- Risk tolerance – Returns are not guaranteed. The longer your time horizon, the more likely those returns become. With an annuity, you don’t really have to worry about this. If your risk tolerance is very low, an annuity may be the best choice for you. If your risk tolerance is very high, you may want to lean towards a lump sum.
- Beneficiaries – If you have children or heirs or charities you’d like to eventually give your pension funds to, there are downsides to annuities. If you die, those funds go away. A lump sum will be your best option.
- Tax planning – Annuities are consistent income streams, but if you try to implement Roth conversion strategies, your annuity becomes an income floor that pushes you up into a minimum tax bracket, making it harder to do tax planning. Listen to Ep #98 to learn more about this.
Summary – What to focus on moving forward
- At the end of the day, you want to know what’s going to put more money into your pocket over the course of your lifetime. That comes down to growth rates and growth rate equivalents.
- Keep in mind your personal risk tolerance, desire for beneficiaries or charitable donations, and tax planning.