Saturday, September 23, 2000
Savvy strategies
Lump sum or monthly payments? Depends
Problem: You're retiring and don't know if a lump-sum distribution to an Individual Retirement Account or a monthly payment from a company pension is better.
Strategy: It depends on how fast the money is growing, and how fast it could grow elsewhere.
Kevin Walsh, a certified financial planner from Niehaus Financial Services, says to first determine the rate of return offered on the various monthly payment options.
Also, calculate the rate of return assuming you live either five years longer or five years fewer than life expectancy. This gives a range of returns required on a lump-sum distribution to equal or beat the monthly payments.
For example: Say your company quotes you a $600 per month pension and your life expectancy is 20 years. The lump sum offered is $80,000. This gives an annualized rate of return of 6.58 percent. If you use 25 years, it increases to 7.67 percent. If you use 15, it drops to 4.2 percent. Consider, too, any cost-of-living adjustments to your monthly payment your company may offer.
The issue becomes whether you can beat these returns taking the lump sum and investing the money yourself. If your rate of return is high, say 10 percent, you should probably take the monthly payments, as it is a virtually guaranteed rate of return. If the rate of return is low, say 5 percent, rolling over the lump-sum distribution to an IRA may make more sense. You will have control over how the money is invested and may be able to do better than what the monthly payment offers.
The rollover option could be more attractive if you have no current income need, and monthly payments would only increase your tax burden. The money could be invested and grow tax-deferred in your IRA for use later in retirement or passed on to beneficiaries.
Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.
Planners: Share your unique strategies with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati, OH 45202 or e-mail ahiggins@enquirer.com.
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