Retirees often do not think how they will allocate their retirement distribution until they are directly faced with the responsibility. For example, many retirees wonder if it is best to take a company pension in a series of payments each month or in one fat lump sum.
Each option has certain benefits and disadvantages. Some people like the idea of getting a check each month even if the stock market takes a nose dive. However, opting for the payments can also make living rather difficult, especially if you need a sizable amount of cash for an emergency.
Financial planners suggest that taking a lump sum gives a retiree more financial flexibility and enables them to invest their money so they won’t outlive it. However, even choosing this option can be a daunting task, especially if you end up making some investments that yield miserly returns.
In order to make a decision, start by looking at the expenses you’ll need to meet as a retiree. That means creating a retirement budget. As you look at your expenses, separate the essential costs, such as housing expenses, food and health care, and taxes from the discretionary costs, namely entertainment, dining and traveling.
Next, look at the income you’ll receive to cover your basic living costs, such as Social Security. If Social Security is enough to cover most of your basic costs, then you may not need to obtain money from your retirement account or pension. In this case, it may be best to take the lump sum and invest it, covering your basic necessities or discretionary costs by withdrawing specific planned amounts from the lump sum total.
However, if your Social Security income does not meet your essential costs, then taking monthly payments may be a better alternative for you. Think about the amount of flexibility you can handle financially or whether you want to follow a structured plan. Your decision to choose either a lump sum or payments will primarily hinge on what you receive from other income sources especially Social Security.