Should I Take A Lump Sum Or The Annuity Payments?

Question: I’m leaving my current job and have been given a couple of options concerning my retirement plan there.  Should I take the lump sum and move on, or should I take the annuity payment? Eric G. from Fullerton, California

Answer: Great question Eric, and one that does not have a perfect “one size fits all” answer.  First of all, when you leave an employer, sometimes they offer you a lump sum option that you can transfer to a personal IRA to manage however you see fit.  Typically, they also offer a choice that would provide a lifetime income stream that you could set up for you and possibly your spouse as well.  Your situation seems that they have offered both options, which is a good thing so let’s take a look at a good way to make this once in a lifetime decision.

Taking The Lump Sum

This is the obvious decision if income is not needed immediately, or if you feel that you can manage the money better than a typical annuity transfer of risk strategy.  Don’t be convinced to buy an annuity for growth, because annuities are not growth products in my opinion.  Most agents disagree with me on this and point out variable or indexed annuity strategies for growth, but they are not living in contractual reality.

Too many times I see 100% of someone’s lump sum amount going into a deferred variable or indexed annuity as a one size fits all solution.  In most cases, it makes no sense to put all of you eggs into one basket, and this certainly applies to annuities.

Taking The Annuity Payments

If you need income right now, or want to set up a lifetime payment that includes a spouse, then you need to shop for the best guarantee available.  When a company offers a payment option, they are in essence offering a Single Premium Immediate Annuity payment guarantee.  The primary difference is that the company you worked for is backing up and guaranteeing the payment instead of an insurance carrier that would stand behind an immediate annuity payout.

I typically find that most companies guarantee a higher payout than if you rolled the lump sum to an outside annuity carrier and purchased a Single Premium Immediate Annuity.  This isn’t true 100% of the time, which is the reason you need to shop the company’s guaranteed payout amount with outside immediate annuity quotes.  It’s a real simple choice from there, because you just need to choose the highest contractual guarantee.

As a minor caveat to this easy contractual decision, you also may want to make sure the payout structure is what you want.  What I mean by that is some companies might offer a higher payout, but with no death benefit or cost of living increase.  Single Premium Immediate Annuities can offer 10 to 15 different ways to structure payouts and guarantees within the policy, and most companies only offer a handful of options.

Do Your Homework And Ask One Question

Like any one time decision, take your time and do as much homework as needed for you to make the correct choice.  The one question to ask yourself when presented the choice between taking a lump sum and an annuity payment.  That question is a very simple one….”What do I want to money to do, and when do I want that to happen?”

From that question and subsequent answers, you can conclude whether an annuity solution is suitable and appropriate for your specific situation.  It may or may not be, and always go with your own instinctual gut feel and not be influence by someone trying to sell you something.

I offer my congratulations to you that you even have the choice of receiving a lump sum or a lifetime payment.  Either way, you have won and have a choice that American’s would love to try to answer.

Originally published 11/7/2013 by –