There’s a reason so many seniors file for Social Security at age 62 rather than wait. That’s the earliest age to sign up for benefits. And even though waiting on Social Security results in larger monthly checks for life, a lot of people opt to claim benefits as soon as they can.
Similarly, you may find yourself in a situation where you’re eligible for a pension from work you can either cash out for a lump sum right away or collect in monthly installments. And you may be torn over what to do.
That’s the situation we have in this Reddit post. Our poster can take a $24,000 lump sum payment now, or sit back and collect $100 a month for life.
It’s hard to know what the best option is. So I think anyone in this boat should ask two key questions.
What’s my life expectancy?
Simple math tells us that to collect $24,000 in total from a pension at a rate of $100 per month, you’re looking at 20 years. So one question it would pay to ask yourself in this scenario is how long you think you’ll live. If you expect to live much longer than 20 more years, then it seems like the monthly checks would put more money in your pocket all in.
On the other hand, if your health declines and you don’t end up living another 20 years, then taking the lump sum could result in the larger total payday. Without a crystal ball, it’s hard to know.
What can the money do for me now?
Another question to ask yourself in this situation is whether taking the lump sum could improve your life in the near term. Maybe you really need to replace your car, but your credit just took a beating and any loan you sign is going to result in a painfully large monthly payment. If your $24,000 payday can cover the cost of a car, it could have a major impact.
Or, maybe you’ve recently read up on investing strategies and want to put them to work, only you don’t have the funds to dive in. If you put the money into a successful investment portfolio, you could grow $24,000 into three, four, or five times that much.
You should also know that your lump sum payout doesn’t have to buy something. It could just make your life easier.
Say you’re burned out and want to leave your job. With $24,000 in your pocket, you have the leeway to take a career break or even pivot to a new field.
Switching industries may result in a pay cut since you’d conceivably be starting from the bottom and working your way up. But with a large cushion, you can probably pay bills for a while on a much smaller paycheck without risking debt.
All told, it’s a tough call — especially if you’re looking at larger numbers than the poster above. So one think you may want to do is ask a financial advisor what they think.
A financial advisor can run different break-even scenarios and help you decide what’s best. And if you decide to take the lump sum and invest it, they can help you put together a mix of assets that’s poised for growth.
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