Your pension plan may give you the option of taking your full pension in a lump sum when you retire. When you choose a lump-sum payout instead of a monthly pension payment, you replace a lifetime monthly payment for a one-time payout. A lump-sum payout can give you the flexibility of choosing where to invest or save your money, and when and how much money to withdraw. However, it also shifts responsibility from your employer to you for making your money last and protecting it from a variety of risks ranging from inflation to fraud.
Here are things to know and do if you have the option of taking out a lump-sum payout on your pension:
Proceed with caution: This is a one-time choice. Consider your health, and your overall retirement income and needs. If you are married, consider the long-term financial well-being of your spouse.
Ask your employer or plan administrator for more specific information about your payout options and their requirements and deadlines. Ask if your plan may allow a combination of payouts.
Detect and correct errors in your lump sum calculation: Mistakes can happen. Many factors determine your lump -sum payment amount including your age, years of work, your earnings history, taxes withheld, and the terms of your plan.
Take a look at your most recent pension statement, and verify that the information used to calculate your lump sum matches.
Plan for tax consequences: You will pay taxes on your lump-sum payout. Your lump sum money is generally treated as ordinary income for that year. For this reason, your employer is required to withhold 20 percent on the amount.
In addition, you could pay a 10 percent early withdrawal penalty tax if you have not reached age 59½.
If you don’t need all the money immediately, consider rolling it over into a qualified retirement account within 60 days of taking the lump sum. A qualified retirement account will protect your money from an early withdrawal penalty and defer income taxes until you take money out.
Make your money last: You and your spouse may spend 20 or more years in retirement. For example, if you decide to invest or save your money the value of your lump sum can erode over time due to fees and commissions, poor stock market performance, and inflation.
Protect your money from fraud and scams: Scammers and fraudsters often target older consumers. Be wary of anyone promising high investment returns and low risk, and pressuring you to act quickly.
Take your time. Verify information, ask questions, and seek advice from trusted professionals, family, and friends; this will help you spot a fraud or scam.
Plan ahead: Timing your retirement or separation date is the easiest way to maximize your payout options and the amount that you can get under each one of them.