One of the biggest dilemmas that many people are faced with at retirement--whether it's forced or voluntary - is the decision about whether to take retirement savings from an employers' plan in a lump sum or as an annuity which will give them a check for life from the insurance company. This is a decision that has to be weighed carefully. You have to look at the advantages and disadvantages of each.
Plusses of an annuity are: 1.) Income will be guaranteed and predictable. If interest rates fall and the market falls apart, it's not your problem - it's the insurance company's. 2.) Financial planning (and tax planning) is greatly simplified. 3.) You have no need for advisors; estate planning is simplified since there is no leftover inheritance to pass on to heirs.
The minuses of the annuity are: 1.) No cost-of-living adjustments (usually). 2.) Purchasing power will be diminished over time. 3.) If you don't live as long as expected, your family loses out if you have not chosen a joint and survivor or time-certain provision. 4.) It is an irrevocable decision when you select your payment option. If circumstances change down the road, you can't adjust your choice. 5.) It is not entirely risk free. It depends on the health of the issuing insurance company (i.e., that it doesn't go bankrupt).
As far as a lump sum is concerned, these are the advantages: 1) You will be in charge of your finances and income. 2) You decide how to invest it and take it out. 3) Taking the lump sum allows you to grow your assets over time. 4) It allows your spouse to earn the same retirement income that you do--not a reduced monthly check. 5) The lump sum can be a legacy for your family.
The disadvantages of the lump are: 1) Life can become a lot more complicated because of investment decision making. 2) You will have to deal with investment risk. 3) More than likely, you will have to rely on other people for help.
The pros and cons listed above must be applied to your personal situation. Here are some guidelines to help you with this decision:
If your health is poor, take the lump sum. Your monthly pension is based on a normal life expectancy.
If you don't need the money immediately, take the lump sum and invest it.
If you are a poor money manager or your spouse is, take the annuity.
If you are in heavy debt, take the annuity since IRAs and pension annuities can't be attached by a creditor.
If you are unsure of yourself, interview several financial advisors and hire one. Then make your decision.
If you are still troubled by this decision, consider annuitizing half of your retirement savings and invest the rest. You can always annuitize the rest later when you are older and have a shorter life expectancy.
A lump sum will give you a chance to beat inflation. Make sure this is a joint decision with your spouse. He or she will have to live with the effects of the decision.
Don't shortchange your spouse's pension. Think hard before you select the 50% joint survivor option, unless you know he/she will be able to live on a reduced income. Don't be selfish! You will have to "run--the numbers" before you decide. In many cases 100% is the way to go, depending on your assets.