Lump Sum or Payout: How to Withdraw When You Retire

Lump Sum vs. Monthly Payments

This week, your Money Guys tackle a question often asked by their clients in regards to retirement planning: “Should I take a lump sum payment, or a monthly pension payment?”

While the question seems simple on the surface, the decision involves more factors than you might think.

Brian and Bo walk listeners through the same decision-making process they offer their clients. They cover the pros and cons of each option, as well as the factors (and math) you need to take into consideration when making the decision.

This discussion was inspired by a Fidelity article on the lump sum vs monthly payment debate. The Money Guys are adding their own valuable thoughts and experiences on the subject today.

The Monthly Payment Option

The clear benefit of this option is that you’ll be guaranteed a stable source of monthly income from your date of retirement until you pass away. You also have the option to include your spouse in the deal so that they continue to receive payments after you pass away.

There are a few downsides, though:

  • You need to be able to count on the company continuing to exist, and we’ve already seen many companies struggle to continue paying pensions for their employees.
  • You need to take inflation into account!
  • Receiving a monthly payment limits your ability to afford an unexpected, large expense.

The Lump Sum Payment Option

The clear benefit here: flexibility. You receive a large sum of money and are free to invest some of it, take some of it to fund your monthly retirement expenses, or assign the money to be left to your heirs.

But there are downsides here, too:

  • You’re responsible for making this money last throughout your retirement.
  • Your money is then subject to market fluctuations (if you invest it), so therefore not as stable as monthly payments.
  • You’ll need to roll your payment into an IRA or employer qualified plan to avoid the distribution being taxed as ordinary income.

How to Decide? Do the Math

This is an extremely individualized decision, but Brian and Bo do their best to generalize the factors you need to take into account. You have to ask yourself if you have enough guaranteed monthly income for retirement, what your life expectancy is, and whether or not you want to leave an inheritance behind.

You can also use the formula Brian and Bo use for clients to help you decide — they share it within the episode.

Again, there are many factors to consider but by staying informed, you’re better equipped to make this decision. It’s one many people face, and this episode is a must-listen if you’re close to retirement and figuring out how to fund it.

5 Investment Mistakes Couples Make

Investment Mistakes Couples Make

Have you talked with your spouse about your investment strategy, or what the purpose is for your investments? Investing can be tricky enough alone, but it’s extremely important to include your other half in investment decisions so that you’re on the same page about how your money is being put to work.

If you haven’t yet discussed investing with your partner, you should read on to be aware of the common investment mistakes couples make so that you can avoid them.

Mistake #1: Only One Spouse Has Contact with a Financial Advisor

It doesn’t matter if one of you is more comfortable with the idea of investing. Both of you should be attending meetings and calls with your financial advisor because you’re in this together. You both have an equal stake in how your portfolio performs.

In the event that something happens to the spouse handling investments, the other will be lost when it comes to picking things back up. Avoid this burden by working as a team.

Mistake #2: Not Being Clear on Common Goals

You should be investing with a goal in mind — whether you’re aiming for early retirement, funding your children’s college expenses, or saving up for a down payment on a house in five years.

Are you and your spouse in agreement on your investment goals? If you haven’t talked about investing beyond “it’s the right thing to do”, then you should. Otherwise, you might face an issue down the road where one spouse wants to withdraw money early from a retirement account for an expense that was never discussed.

Mistake #3: Investing Without Being Informed

Just because your investments might be managed by someone else doesn’t mean you should blindly follow their advice. You should absolutely know what you’re investing in and be a part of the decision process.

Never be afraid to ask your advisor questions. They should be able to answer them honestly, and they should want you to understand the reasons behind their investment decisions.

Mistake #4: Not Taking Advantage of Employer Matching Contributions

Do you and your spouse have a 401(k) retirement plan offered through your employer? Are you contributing enough to receive the amount your employer will match?

If you don’t know the answers or aren’t sure, you need to look into this. You could be leaving free money on the table. You should be able to ask your HR department about the details of your retirement plan.

If you’re not sure what matching contributions are, here’s an example of how they work: If your gross annual salary is $75,000 and your employer matches contributions up to 6%, then that means you have to contribute 6% ($4,500) of your salary for them to match that contribution.

If you only contribute $3,000, then you’re missing out on $1,500 from your employer. Likewise, anything above $4,500 won’t be matched, but you’ll still be funding your retirement.

Mistake #5: Being Unaware of How Your Advisor is Paid

One of the biggest mistakes you can make is hiring an advisor without knowing how they get paid. Are they fee only, do they get paid a commission, or a hybrid of both?

This is important because you want to ensure there’s no conflict of interest when your advisor recommends certain products to you. If they make a commission off of sales, then they might not be looking out for your best interests.

You should also check to see if your advisor is a fiduciary. If they are, then there’s no doubt they’ll be acting in your best interests, as financial fiduciaries are required to do so upon taking an oath.

To avoid these common investment mistakes couples make, remember that investing requires teamwork. Neither of you should be working alone when it comes to financial matters.

If you don’t have confidence in your knowledge of investing, you can always learn from the many resources available to you online. Building wealth through investing will ensure a successful financial future, and it’s not a matter to take a backseat on.