These days, most private sector employees don’t have a pension they can fall back on. That’s why so many people have to allocate money from each paycheck to retirement savings.
But in this Reddit post, we have a couple with a pension coming their way. And they’re not sure how to manage it. Specifically, they’re not certain whether they should cash out the pension right away versus collect monthly payments on it.
It’s a tough decision. But it’s important to navigate it carefully.
The details
The couple in this Reddit post are a 52-year-old woman and a 51-year-old man. The woman is now at a stay-at-home parent after a long career, while her husband plans to retire at 60.
They have a child whose college costs can be covered by a 529 plan they’ve saved in. By the time the husband gets to retirement, they expect to have a $4.8 to $5 million portfolio, not including home equity.
At that point, the husband will have access to a pension. He can take it as a lump sum of $2.9 million or collect monthly payments of $15,600. There’s no cost-of-living adjustment on the pension.
The couple is also looking at $65,000 in Social Security per year once they turn 67. And the husband’s job will give them health benefits until they’re eligible for Medicare.
The husband is interested in taking monthly payments on the pension. But the wife thinks the lump sum is the better deal because there are no cost-of-living adjustments, and she thinks the pension won’t hold up well to inflation.
The couple also wants to leave significant assets behind to their child. And they’re wondering what the right course of action is.
How to decide between monthly payments and a lump sum
First, let’s get an obvious observation out of the way. This couple is in a fantastic financial position.
They’ve clearly saved well, but they’re fortunate to be eligible for such generous benefits. And it’s not just the pension — it’s also the health benefits that can help them bridge the gap until they’re able to get Medicare.
The couple is also in line for a nice annual benefit from Social Security. Granted, Social Security is facing cuts. But even so, that would still leave the couple with a nice annual check starting at age 67.
There are pros and cons to taking a lump sum out of the pension versus waiting and collecting monthly checks. With the lump sum, the couple gets more flexibility to use the money for the things they want to do and the needs they have.
If the husband is retiring at 60, it’ll be seven years until they can collect Social Security. (It’s possible to claim benefits at 62, but they’ve stated they want to wait until 67 to avoid a reduction to those monthly checks,) Getting the $2.9 million up front means they can spend that money and leave their portfolio alone to pass on to their child.
Plus, the couple doesn’t know how long the spouse will live. If they take the lump sum and the husband passes away at a young age, they could come out ahead financially.
What the couple needs to do is conduct a break-even analysis. And that calculation is simple. They just have to divide $2.9 million by $15,600. The result is about 186 months, or about 15 and ½ years.
So what they should ask is: Do we think the husband will live past age 75 and 1/2? If so, then the monthly payments might make more sense unless the couple wants the money up front for a specific reason.
That said, no one can predict their life expectancy. Taking the lump sum might seem like the safer bet, and that’s okay. Plus, if they get the money up front, they can invest it and potentially turn it into a much larger sum in total.
It pays to get help
All told, the couple here is in a great financial situation. If they’re struggling with this decision, it’s best for them to consult a qualified financial advisor.
A financial advisor can run different calculations and help them decide whether to take the money as soon as possible versus wait. An advisor can also help the couple maximize their portfolio so they’re able to tap it for income as needed or meet their goal of passing on a lot of money to their child.
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