Have you recently received a pension buyout offer? If so, you need to decide if you should take the buyout, which could provide you with a potentially large lump sum, or continue accepting your regular pension payments for the rest of your life.
It’s a big decision; your choice needs to be based on your individual circumstances. As you weigh your options, you’ll need to consider a variety of key issues, including the following:
• Estate considerations. Your pension payments generally end when you and/or your spouse dies. But if you were to roll the lump sum into an Individual Retirement Account (IRA), and you don’t exhaust it in your lifetime, you could still leave something to your family members.
• Taxes. If you take the lump sum and roll the funds into your IRA, you control how you’ll be taxed and when, based on the amounts you choose to withdraw and the date you begin taking withdrawals. (You must start taking a designated minimum amount of withdrawals from a traditional IRA when you reach age 70½. Withdrawals taken before age 59½ are subject to taxes and penalties.) If you take a pension, you may have less control over your income taxes, which will be based on your monthly payments.
• Inflation. You could easily spend two or three decades in retirement, and during that time inflation can really add up. If your pension checks aren’t indexed for inflation, they will lose purchasing power over time.
• Cash flow. If you took the lump sum and converted it into an IRA, you can withdraw whatever amount you want (as long as you meet the required minimum distributions), but you’ll have to avoid withdrawing so much that you’ll eventually run out of money.
Before making a decision, weigh all the factors carefully to make sure your decision fits into your overall financial strategy. You will probably want to consult with your financial and tax advisors. Ultimately, you may find that this type of offer presents you with a great opportunity — so take the time to consider your options.
This article was written by Edward Jones for use by your local Edward Jones financial advisor.
Information provided by Patrick J. Franke, Financial Advisor, Edward Jones, 3520 Ingersoll Ave., Des Moines. 515-255-9641.