When I Retire: Lump Sum or Pension?

Mar 26, 2021

As a financial advisor working in Florida, I am frequently asked “should I take a pension or lump sum?” and the answer varies from person to person. This is a popular topic with my clients nearing retirement age. Participants in the Florida Retirement System (FRS) can elect to participate in the pension or the investment plan, and they can change their election and opt to go from the pension to the investment plan. There are similar pension buyouts offered by other public and private entities as well.

When asked, “Should I switch to the investment plan?” my answer is always the same. It depends. My job is to provide my clients with the information they need to make the best decision. While one person thinks taking a lump sum is a better option than a pension, the next believes the opposite is true. Guess what? Both clients may be right as it is a personal decision involving many factors.

The individual’s discipline with money is one of the most important factors that influence my recommendations for my clients. If you choose the pension plan, you (and your spouse, if applicable) will get a check every month for the rest of your life. If you spend the entire monthly amount, you must wait until next month’s payout. However, with a lump-sum distribution, you can access the money anytime you need it. If you lack discipline, you can cause significant harm to your portfolio by withdrawing large amounts before the money has had time to grow.

The amount of income needed and other revenue streams also affect deciding what option is best for you. If a client has a solid savings account, they may not have to rely on the monthly pension payouts. I also have many clients that work for the state and have 403b’s and 457 plans that help provide additional financial stability.

I use Raymond James’ Goal Planning and Monitoring software and create two scenarios for clients facing this decision. In one scenario the client chooses the pension, and in the other, they choose the lump sum. After inputting the income needs and additional accounts, I show the client both outcomes, we look at the expected success rates of each, and I answer any additional questions. At this point, the client can make an informed decision on which option is best.

If your pension has a buyout option, I recommend talking to a financial advisor that will go over your options with you so you can make the right decision for your future. Be honest with yourself and take the time to weigh the options carefully. This will ensure that you are making the right decision.

Authored by Jay Poole, AAMS®