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Rolling over 401k Accounts or Pensions - Should I Take a Lump Sum or Monthly Payments?

By Ozeme J Bonnette

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Published: 12Nov2009
Word count: 450
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When the time comes to retire, lots of questions come to mind when trying to decide how to collect on the fruits of our labor. Here are four reasons why I recommend taking the lump sum when rolling over 401k accounts or pensions.

(1) How safe is your employer?

You were a loyal employee and can only expect that your employer will honor the commitment to fund your retirement. However, many companies are no longer financially stable enough to make those monthly payments.

There is a Pension Benefit Guaranty Corporation that is supposed to come to the rescue, but, according to the Center on Federal Financial Institutions, this agency will run out of money in about 15 years if no changes are made.

If the agency can continue to operate, there is still a cap on your monthly payment that can be lower than what you were expecting to receive.

(2) What is the interest rate?

Most of your monthly pension payments are based on a 3-5% annual return. This barely keeps up with inflation. With rising health care costs, this can leave you in a bind. Your financial advisor should be able to help you plan for your annual cash flow needs so that your retirement as stress-free as possible.

(3) What about leaving a legacy?

Many companies will not continue to make payments to your beneficiaries upon your death. Monthly payments can be designed to allow for continued payments to a surviving spouse, but your monthly payments will also be lower during your retirement years to compensate for that request.

The inability to leave the balance of your retirement account to your heirs can also be problematic in the event of your untimely death. For example, if you choose to set up monthly payments for the rest of your life, that choice is honored whether you live 1 more year or 30 more years. Even if you were not paid out your account balance in your lifetime, the account custodian will keep the remaining balance of the account after your death.

If you take a lump sum, you can ensure that you leave any remaining funds to your family or favorite charitable organization.

(4) What about an emergency?

You may do fine with the monthly payment when everything is going well, but what happens in an emergency? With the monthly payment option, you cannot go back and request additional funds if a need arises. If you have the lump sum, you stay in control of your money.

There are many things to consider before making a decision. Since your decision is final, be sure to choose carefully. If necessary, seek out a professional to help you weigh which option would work best for your situation.

Ozeme J. Bonnette is a financial coach, speaker, and author. She began her career at Merrill Lynch, and now works to increase financial literacy. She teaches and speaks to groups and organizations throughout the U.S. She earned 3 Bachelor's degrees at Fresno State and an MBA at UCLA's Anderson School. She blogs at http://www.povertynorriches.com. Send questions and comments to ozeme@thechristianmoneycoach.com.

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