Does Taking a Lump Sum from Your Retirement Plan Make Financial Sense?

The importance of a comprehensive and coordinated financial plan is recognized and understood, offering customers a holistic package that focuses on processes and people as much as product. Retirement planning is crucial in an ever shifting economy and in a society where people are living longer, healthier and more fulfilling lives after retirement than ever before. An issue currently facing many people leading up to retirement, particularly those with a typical 401(k) plan held with their employer, is whether or not to take your retirement as a lump sum, or live on the monthly pension plan, or a mixture of both? Of course the answer will depend on the individual financial circumstances of the beneficiary of the retirement plan, and so whether or not taking a lump sum will make financial sense depends on a variety of factors. Talking to your financial advisors at Trustway will help you make sense of your options and the financial consequences of your preferred choice, and this article will give an overview and insight into some of the factors that may have an influence on your final decision. Your retirement plan after all may affect not just your future comfort in the golden years of your life but also the wealth you are able to pass on to your descendants, and so these are decisions that need to be taken with care, particularly in an uncertain economic climate with fluctuating annuity rates.

The Lure of a Lump Sum

After a long working life in which you have invested and saved carefully, the temptation to withdraw a lump sum from your retirement plan is obvious. As well as being able to invest your money in a possibly more lucrative IRA (Individual Retirement Account) a mutual fund or to purchase a commercial annuity, there is the option to use some of your money to take that long retirement cruise you have been looking forward to, pay off any debts, in particular on property and maybe even help out with the grandchildren’s college fees. Particularly in the United Kingdom who often take their economic lead from the States, it is becoming standard practice for retirees to take a tax-free lump sum (usually twenty five per cent) from their pension fund on retirement. As points out, withdrawing your pension fund in a lump sum can give you better control over your money and the freedom to reinvest. It does indeed seem to make more sense, particularly if the rest of your funds is reinvested into an IRA that offers better monthly returns than your original plan. However, caution is to be advised here before automatically assuming this is the best option.

The question of whether to take your pension as a lump sum was a hotly debated one last year after General Motors and Ford gave their employees the option to withdraw their funds in this way, where they had previously offered only a standard pension plan. This move on the part of both GM and Ford was no doubt prompted by their desire to save money in the future by clearing these future obligations. For those who are soon to become retirees however financial advisor Leon LaBrecque from Michigan advises anyone considering this to look carefully at their options, taking any other savings and assets into account, as some older employees may find they will be financially better off in the future by sticking with their original plan – particularly if they should significantly outlive the average life expectancy.

Options for Retirees

Those who choose to stick with their guaranteed monthly pension are of course opting for a fixed dollar payment for the rest of their life. The financial security this offers should not be underestimated and so any decision on withdrawing all or even partial lump sums should be taken carefully with a view to the long-term future. Retirees who have little savings apart from those they have ploughed into their pension may find that taking their retirement funds in a lump sum can leave them short changed in later life and this of course can be a disastrous outcome for the elderly. Be aware, however, that sticking with your pension means it will not increase with inflation and there will be no equity from it to leave to any descendants. It is important therefore to draw up a realistic forecast with your advisor of the sum you need to live comfortably for the rest of your life, taking into account the amount of Social Security benefit you will be entitled to. However for retirees who have other savings or income the risk involved is not as great and in this case, particularly with the help of a good financial advisor who can guide you towards the best investments for the current and future market, the option to take the lump sum may be very attractive. After investing some or all of your funds into an IRA, part of this can then be used to purchase an immediate-pay annuity that will offer you a moderate pension for life, and the remainder could be invested into mutual funds for growth. If your employer offers you the option to take a partial lump sum such as those popular in the UK it may be possible for you to keep the growth portion of your funds in your 401(k), offering you the best of all worlds. The lump sum option may be particularly attractive if you feel you are in poor health and have a shorter than average life expectancy, but if you have a spouse and your retirement plan includes a joint-and-survivor pension then this also needs to be taken into account.

Clearly it is not a decision to be taken without sound financial advice and forward planning, but with care and attention and a comprehensive plan it is possible to make decisions that will see you and if applicable your spouse into a comfortable retirement and old age. Trustway is able to offer both a competitive and individually tailored retirement plan that addresses all your needs included tax and estate matters, thereby customizing your plan to suit your individual financial circumstances. For more information, contact us.

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