Dear Ms. MoneyPeace:
I was laid off during the pandemic. I had only a few years at the company, but I earned a small pension. Upon my release, I was offered the option of receiving a lump sum payout or monthly payments, or waiting until retirement age — 15-plus years — to start collecting. The lump sum would be about $11,000, and the monthly annuity would be about $40 — and double that in retirement.
Could you please provide insight as to which option could yield the best return?
— Mr. A little something is hopefully better than nothing
Dear Mr. A:
I am sorry to hear about your layoff. Know that even small amounts of money add up in the long run.
I don’t have a crystal ball, so I can’t know the best return; however, I can help lay out your options. The temptation is to take the money and run, though there are a few questions to ask yourself:
- How is your health?
- What is your risk tolerance?
- What is your goal?
- Do you need the money now?
The answers will get you started on making a decision.
In the meantime, do the following:
First, figure out what else you have for retirement money and estimate your time till retirement. You do not say how old you are, but I am guessing, with the 15-year option, you are around 50. You have time to save more for retirement, but you hopefully have built up some retirement savings that is already heavily invested in the stock market through a retirement plan. Consider how prepared you are for retirement by using a calculator to get an estimate.
After losing a job and the retirement contributions, the numbers from the calculator will reveal the answer objectively. Typically, there are three possibilities: You need to beef up savings, you will be OK if you keep saving at your current pace, and you do not have enough for retirement.
Second, consider your current needs. Taking the monthly amount now means that in 15 years, you will have withdrawn only $7,200 ($40/month for 15 years). And that is without calculating the effect of inflation. Yet, if you are still without work, that $40 could fill your car’s tank with gas each month. Or, if you like guarantees, taking it now may be best for your stress level.
Another possibility is that you do not need the money so much to live on, as you have prepared for retirement. In that case, you may want to take it out monthly and enjoy it. Just be aware that there will be taxes. If you chose to take it out monthly, you may put it in an investment, whether a brokerage account or Roth IRA, when you could just roll it over directly.
Third, if you know you need more for retirement, then you can do nothing or invest it in an IRA. If you choose to invest the $11,000, you will be assuming the risk. Be sure that you roll it directly over to an IRA so it won’t be taxable income. Then, invest the funds thoughtfully as part of a retirement investment strategy.
If you leave it with the pension fund, you will be guaranteed a future income, but the company is assuming the risk. Be sure to keep the company informed of your current address, so they can find you when the time comes. So, even though $80 a month in 15 years sounds like a minuscule return, according to the Rule of 72, you would be receiving a 4.8%.
Finally, before you do anything, ask a few more questions. Don’t assume that monthly payments are the only way to claim this pension. Many retirement plans will allow you to take a quarterly or annual payment amount. That $480 arriving each November may help with holiday shopping. Waiting means that same $80 could arrive quarterly in time for a water bill or a clothing splurge. Or enable you to plan your cash flow as you need in retirement.
Whatever you do, do not assume that the rising stock market of the past 15 years will be the same in the future. (The stock market has averaged around 7% annually.) There have been periods of stagnation — in the 1960s into the ’70s, for example.
Overall, use this opportunity to seek advice and review your retirement plan, long before you retire.
Where to find this advice? Often the company handling the investments will provide a free meeting to employees, even former ones. They can explain your options in more detail.
Or choose an hourly planner. Finding a professional you can consult periodically does not mean you have to have significant assets. Plus, you can check in when you feel you need to.
Almost every investment firm makes its money from assets under management, meaning they will want more money in the form of a lump sum. Be sure that the adviser is a fiduciary with your best interest in mind.
You are not alone among Americans who lost a job and now must decide what to do with the benefits. I am all for striking a balance between enjoying life and being prepared for retirement with a sound financial plan. Take the time to put a plan in place.
CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.