Lump Sum Distributions

Written By: Ryan Rinehart, Financial Advisor

Are you someone that currently has a pension plan with your employer? If you are and you’re getting closer to retirement, it’s likely that each year you look at two different options:

  1. If you opt to receive a fixed monthly payment for the remainder of your life, how much will that be?
  2. If you opt to receive a Lump Sum instead of the fixed monthly payment, how much will that be?

If you are someone that is considering taking a lump sum, in most cases, if you decide to continue working, you will likely see your lump sum benefit increase. However, this year a lot of employees with pension plans are noticing that “increase” isn’t always the case. This is because lump sum payments are not always consistent over time. Your lump sum pay-out is calculated by determining the present value of your future monthly guaranteed pension income, using actuarial factors based on age, mortality tables, and IRS’s minimum present value segment rates, which are updated monthly. 

Normally, this recalculation doesn’t tend to move your lump because typically interest rates don’t drastically change throughout the year. However, in 2022 we have seen a rapid increase in interest rates, which has caused many pension participants to see a negative impact on the lump sum payouts for 2023 and beyond. 

So as 2022 comes to an end and you’re reviewing your pension plan statement, don’t be surprised to see that your lump sum has declined compared to what it looked like at the beginning of the year. This change is making a lot of pension plan participants make a big decision on whether to retire in 2022 and take the larger lump sum or continue to work knowing their lump sum will be less in 2023. For some folks, this is an easy decision, and they are glad to retire now, however for those that aren’t necessarily ready to make the jump into retirement, this is an extremely tough decision. So, let’s discuss what factors you need to consider when making the decision.

  1. Are you able to retire? Have you sat down with an Advisor and reviewed your Financial Plan to determine if retirement is possible for you at the end of this year? 
  2. Are you going to be working for multiple more years? For some folks, if they decide to not retire at the end of this year but then opt to retire a few months into 2023. This can mathematically be the least efficient decision for your plan. You would be receiving a smaller lump sum, and if you don’t work the full year, the income you make that year may not make up for a lump sum reduction.
  3. Is your company offering pension buyouts? More corporations will likely offer these seeking to reduce the pension obligations on their balance sheet while paying out smaller lump sums. 

Like any retirement decision, it’s best to do what’s ideal for your individual plan. If you do opt to take a lump sum this year, you should consider sitting down with a Financial Advisor to determine how to invest that lump sum to best set you up for the future. Ultimately, as 2022 comes to an end, looking at your options for your pension is important and you may need to act fast in order to make sure you make the right decision for you. 

If you have any questions, we’d love to chat! Call us at 844-CARLSON (844-227-5766) today!

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