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Deciding whether to take a $400,000 lump sum or monthly pension benefit of $2,000 requires calculating the relative value of each option. Generally speaking, the sooner you can receive the lump sum, the more value it will have since you can invest it over a longer period. The monthly payment option may be more valuable if you expect to live a long time after you start receiving benefits. Other factors include inflation, your additional sources of income and how prudently you can manage a large sum of money. A major financial decision like choosing between a lump sum or monthly payout can benefit from the assistance of a financial advisor.
Sometimes companies with pension plans offer current and future retirees the option of receiving a large one-time payment instead of a series of smaller payments usually administered on a monthly basis. These buyouts represent a way for companies to manage their risk while also offering some potential advantages to retirees.
Deciding whether or not to accept a lump sum offer involves evaluating a number of factors. Some of these – such as the dollar amount of the lump sum or the monthly benefit – are clearly specified up front. For other key variables, such as the investment returns that can be expected or future inflation, the assessment has to rely on educated guesses about future developments.
