Lump Sum Vs Annuity For Retirement

Retirement can be another uncertain chapter in a person’s financial life.  Investment options such as 401K’s, pensions, and Roth IRAs all have benefits and drawbacks for individuals entering the golden years of their lives.  Which is the best option for you?  Which is the best option for your family?  Your spouse?  These are all tough questions that must be planned for when choosing between a 401K lump sum vs annuity or a pension lump sum vs annuity.

It is important to take into consideration all potential outcomes of post retirement years when making a decision such as this.  Many pensions from companies and governments stop paying after the beneficiary or their spouse dies leaving no money for heirs.  This phenomenon can be magnified if individuals should die shortly after retirement with only the chance to draw a handful of checks.  On the other side of the coin, if retirees accept a lump sum payment from their 401k or pension plan, the chance always exists they could outlive their savings.  Cashing out a pension all at once will mean you have to be sure that it will last 25 or 35 years (or longer).

Another important consideration is your expenses while you are retired as well as other resources that you may have available.  Many retirees can draw on social security; however, these payments are typically not enough to cover even half of a persons expenses such as housing, food, entertainment, etc.  While social security payments are adjusted for inflation meaning they can maintain their buying power over time, the checks are generally not enough.  In this case, annuity payments may be a better choice.  IRA balances are not adjusted for inflation and the value of your money is dependent on market conditions.  Taking a lump sum and experiencing a serious market downturn sometime after retirement could put finances in a bind.

All of the retirement options discussed above are good choices only when they fit into future goals for an individual.  It is impossible to plan for every possible contingency and even the most well laid plans and carefully calculated decisions turn out to be wrong.  Taking things like health, lifestyle, life expectancy, future market conditions and plans for after you are gone from this world should all be weighed and considered when making the choice of a lump sum versus annuity.  Using multiple sources of income such as social security, 401K’s, as well as retirement income funds you may have built up can help hedge the risk of either running out of money before death or not having anything to leave to future heirs.