Retirement 101

My plan will let me take a one-time lump-sum payment. Should I take it?

You need to carefully consider all the pros and cons before making this decision. What’s best for you may be entirely different than what is right for someone else. Here are some reasons you might decide to take your money as a lump sum:

• You (and your spouse, if you have one) have poor health and don’t expect to receive many monthly payments before you die.
• You want to have immediate access to your money so you can use it any way you want.
• If you invest well, you might be able to have both the income you need and some left over to pass on to your beneficiaries.
• You want to delay using the money and paying taxes on it. With a monthly retirement payment, you’ll owe federal income tax on the money you receive. With a lump sum, you can roll your money into an Individual Retirement Account (IRA) and you won’t be taxed on the money until you take it out. The federal government usually requires you to start taking some money from your IRA no later than April 1 of the year after the calendar year you reach age 73. The Required Minimum Distribution age will increase to age 75 starting in 2033.  
  

On the other hand, many retirees have personally experienced the downsides of lump sums:

• You (and your spouse, if you have one) may live much longer than you expect.
• Having access to all your retirement money makes it easy to quickly spend it all.
• You need to decide how to invest and withdraw your money so you have enough to last the rest of your life. Even if you enjoy investing, there may be a time when you’re no longer willing or able to manage the money on your own.
• If you don’t invest the lump sum wisely or there’s a market crash, your money could be gone long before you are.
• Taking a lump sum without rolling it over to a tax-sheltered IRA can put you in a higher tax bracket for the year, leading to higher income taxes than you expected.