Lump sum Vs Pension

Lump sum Vs Pension.

In this episode, Chris Berry answers the question: Lumpsum distribution versus keeping the Pension?

Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm. Register via this link or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

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Episode Transcript

Lump sum distribution versus a pension. Welcome to Berry’s Bites. Please join our host attorney and financial advisor Chris Berry. So let’s say you’re working you’re offered a lump sum buyout or do you take the employer-sponsored pension. 

The pension will guarantee income for your life for maybe life plus a spouse or life plus a spouse and term and they’ll give you some different options or you can take it as a lump sum roll it over to your IRA and now take control of it. I would say just in my practice over the past it’s been kind of 25 would take the pension. 75 would take the lump sum but I tell you and having these discussions with clients 90 are taking the lumps on buyout maybe only 10 are taking the pension. 

The reason for that I think is first of all understand with the lump sum you have a lot more options because if you just take the straight pension it’s almost like social security where it’s great that you have this guaranteed income, but typically that pension doesn’t have any cost to living adjustments and then also there’s not much you can do with it once you flip that switch you’re stuck you can’t make any changes versus if you take the lump sum you roll it over to an IRA now you have a lot more options you have a lot more control so that’s one piece of it the second from a tax standpoint. 

Understand if you flip on that pension now you’re gonna be taxed on that forever versus if you take a lump sum especially if you think taxes are going up in the future you could take the lump sum now it’s an IRA now we could do Roth conversions or move it out of the IRA pay the tax and now from a tax perspective you can have a much more tax efficient retirement as well as what you leave as a legacy the next generation. And then next from a long-term care planning standpoint understand if you take that straight pension and all of a sudden you need nursing home care all that money goes to the nursing home versus if you’re at a lump sum it we could protect that money and then next why people take the lump sum is if you and your spouse passed away and you didn’t take say a term in 10 years after that that pension’s gone versus if you were to lump sum it out maybe it’s 800 000 or a million pre-tax. 

That would be money that would be left to the next generation so I would say prior to say five years ago three quarters of my clients would take the lump sum one quarter would take the pension now almost every conversation we have and again we’re completely agnostic as it comes to like our planning strategies we always figure out what are your goals figure out the best strategies and then pick the right tools either way like we want to make sure whatever we’re doing is in your best interest so but that said when we have these conversations it’s almost always taking the lumps out but again I’m not saying everyone take the lump sum I’m saying just walk through the conversation the decision tree and understand what you’re getting into that’s our approach make sure we’re educated on the decisions and then make the right decisions. Thank you 

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