David Totah, CFP®, Partner and Senior Wealth Advisor

As a corporate executive or senior management professional nearing retirement, you may be faced with a crucial decision between the two primary pension options: lump sum pension vs annuity. While both options have numerous advantages and disadvantages, the decision depends on various factors, such as your current lifestyle, financial goals, family circumstances, and retirement plans.

In this post, we'll dig into the pros and cons of each option to help you evaluate which one best suit your needs. We'll also cover essential considerations, such as risk tolerance, inflation, cash flow planning, and estate planning. Whether you're leaning toward an annuity or a lump sum, read on to learn more.

Evaluation of both options:

An annuity is a payment plan that provides you with a fixed monthly income, usually for the rest of your life, in exchange for a lump sum payment. A lump sum pension, on the other hand, is a one-time payment that is typically rolled over into an IRA for tax deferment.

An annuity provides a steady stream of income that can be advantageous if you are risk-averse, have little other retirement income, don't want to manage your money, or don't have a spouse or partner to share the funds. It can also offer a guaranteed income with the option of a joint and survivor benefit to ensure that payments continue to your spouse or partner if you pass away.

However, an annuity also has its downsides. The payment is generally not adjusted for inflation and may not keep up with inflation or provide for increasing lifestyle/spending needs. In some situations, annuities provide a lower rate of return compared to investing the same amount of money in stocks or mutual funds.

A lump sum pension, on the other hand, offers a one-time payout that's often invested with the hope of earning higher market returns. This option gives you greater flexibility to manage your money, invest it as you see fit and adjust it to meet your changing needs. However, it also has market risk and requires active management and attention to ensure the money lasts.

Consideration to risk of outcomes and lifestyle:

When evaluating an annuity or lump sum pension, you should also consider your risk tolerance, lifestyle, and current and future income sources. If you have a high-risk tolerance and want to actively manage your money, a lump sum pension may be a better option for you. However, if you're risk-averse and want a reliable stream of income for life, an annuity could be an option.

Additionally, your lifestyle needs may factor into your decision. If you have significant financial obligations, such as paying for a child's education or caring for aging parents, you may need to consider a lump sum pension, which can provide greater liquidity and cash flow to meet immediate expenses. However, if you want to manage longevity risk an annuity could be an option.

Consider the impact of inflation:

Inflation may erode the purchasing power of annuity payments, decreasing their true value over time. While some annuities offer cost-of-living adjustments, these provisions may raise the cost of the annuity to unaffordable levels, making them less attractive. A lump sum pension, on the other hand, offers the potential to earn a higher rate of return and potentially grow the value of the funds, providing protection against inflation.

Cash flow and expense needs planning:

When choosing between an annuity and a lump sum pension, you should also evaluate your cash flow and expenses. An annuity provides a consistent monthly income stream to help bridge any gaps that may exist between your other income sources and your expenses. In contrast, a lump sum pension offers more flexibility to match your expenses more accurately, but it can also deplete your funds if not managed properly.

Estate planning consideration:

Finally, consider any estate planning decisions you need to make when choosing between an annuity or a lump sum pension. If you plan to leave a legacy to your heirs, a lump sum pension may provide greater financial resources than an annuity. You may also want to consider how your decision may impact your spouse or partner, who could continue to receive annuity payments after your death.

Ultimately, the decision between an annuity and a lump sum pension depends on your unique financial situation, risk tolerance, lifestyle, and future plans. Evaluating these factors can help you determine which option offers the most benefits for you. Consider working with a financial advisor to help you determine which pension option best helps you achieve your retirement goals. Regardless of which option you choose, a careful evaluation and planning strategy can help you make the most of your retirement years.

At Exencial Wealth Advisors, we are here to help you evaluate your options and create a retirement plan that will support you throughout your golden years. Contact us today to learn more about how we can help you secure your financial future.

Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial or legal advice. Please consult with your financial advisor for personalized advice.

Exencial Wealth Advisors is an SEC-registered investment adviser.  Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.