Financial Planning, Retirement Issues


Should I cash out my pension?

Should I cash out my pension?My company is offering a lump sum payout of my pension. II am wondering should I cash out my pension? The payout is $261,000 and can be rolled over to a traditional or Roth IRA. Will I have to pay taxes on a Roth rollover? If I don’t take the payout, one option is to receive $1,577 monthly in a single-life annuity starting at age 60. I will turn 60 in December and my wife is one year younger. We will continue working until at least age 62. My wife and I currently have $700,000 in retirement savings (mostly traditional IRAs) and plan on working at least another two years. We are debt free except for our home mortgage of $215,000. Should I take the payout or stay with the monthly payment? — Carl

Re: Should I cash out my pension?

The advantage of taking a lump-sum payout is that you retain full control over those assets. And unlike an annuity, you can pass any leftover money to your heirs when you die. But taking the pension in a lump sum also means that you’ll be responsible for managing those assets. Consumers in this situation need to ask themselves whether they want the responsibility and risk of handling this money, or whether they want the certainty that comes with a guaranteed monthly pension. The answer to the question in part depends on how you deal with risk and whether this kind of investment will keep you up at night. Many people will prefer the certainty of an annuity vs. the uncertainty of the stock market.

Life Expectancy and Should I cash out my pension?

One other factor to consider is your life expectancy. If you’re in a great health and feel confident that you’ll outlast the life expectancy used by your pension administrator to calculate your pension, then the annuity might be a better option. However, single-life annuities come with a drawback: that money ceases to be paid out when you die. For that reason, you may  to switch to a joint-and-survivor annuity if you opt not to cash out. Although your monthly payment would be smaller, those payments would continue to your spouse if you die before her.

Consumers should also note that rolling over a lump-sum pension payout to a Roth IRA would trigger taxes on the full amount. Because your tax bracket is probably higher now than it will be when you’re retired, you’re likely to be better off deferring that tax bill for now and rolling your pension assets into a traditional IRA.

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