In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss one of the most common and important financial decisions in pension and retirement planning—whether to take a pension annuity or lump sum. They explain how this decision can impact your overall retirement income planning, legacy goals, tax strategy, and long-term financial flexibility. This isn’t a one-size-fits-all answer, and they dive into the detailed considerations that retirees should think through.

Listen in to learn about the pros and cons of pension payout options, such as taking a monthly pension annuity with survivor benefits or opting for a lump sum pension that can be rolled into an IRA. You’ll also hear real-life examples of clients who made different decisions based on their financial situations, including tax strategies like Roth conversions and opportunities for guaranteed retirement income outside of the company plan. If you’re asking, “Should I take a pension lump sum or income stream?” this episode is essential to retiring comfortably.

In this episode, find out:

• Key differences between a pension annuity and a lump sum.
• How to leverage a pension rollover to IRA for flexibility and tax advantages.
• The role of spousal coverage and legacy planning in pension decisions.
• Risk and reward considerations for managing pension in retirement.
• How to evaluate which option supports your personalized retirement checklist.

Tweetable Quotes:

“There’s no one-size-fits-all when it comes to pensions—your decision must be based on your entire retirement picture.” – Murs Tariq

“Pension choices affect your income, taxes, and legacy—we help people analyze their options to secure their retirement.” – Radon Stancil

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Welcome to Secure Your Retirement Podcast. Murs and I are very, very happy to be
able to talk with you today on topics that are something that we run into quite
often. And today is one that we do run into quite often in our world when we’re
working with our clients or those that are looking to retire. And it really kind of
comes around this idea of a pension. And here’s the question. Should you take a
pension as an annuity or as an income stream or take it as a lump sum? And that’s
a pretty big question that people have. So just to give you a little bit of
context, if you retired from a place where you actually could get a pension, some
places that are common for that is this if you work for the state of any state or
the federal government or a company like IBM and maybe GSK or some common ones that
you might have the option or a pension. And the way that’s worked is you’ve put
money over into that pension. Your employer has contributed over into that pension.
And now what you will get when you get ready to get to retire, you can get a
statement saying if I retire now or I retire in a couple of years, what would be
my income? And I could take that income or it will tell you could take a
certain amount as a lump sum. And so the question comes out, which one is better
for me? And that is not as easy as saying one or the other. There are pros and
cons, there’s things to think through, there’s scenarios that we have to run. And so
when people come to us and they ask that question, what we say is that’s a great
question. We need to look at your options. We need to do some analysis. We need to
take you through the risk. We need to take you through the pros and cons so that
you can make a truly educated decision. So today, what we want to do is kind of walk
you through that format so that it’s kind of in your mind as to what that all
might mean. So now what I want to do is just kind of go in and what we’re going to do
is we’re going to say, what are some of the options? So Merce, can you kind of walk
us through what some of those options look like? – Yeah, absolutely. And I was just
thinking as you’re talking, you know, that if we do this podcast in 10 years,
while today we are saying we see this quite often or having to make this decision
quite often,10 years from now, I don’t know that this question may not
exist anymore. I don’t know because a lot of us know that pensions are kind of
going away, but the clientele that we work with, they may be the last few that are
getting the option for pensions outside of just federal government and stuff like
that. But anyways, that was just a side thought that I was thinking as we’re
talking. So when it comes to options around pensions, you’ve got Really two,
if we make it simple, you’ve got two options. One is you take the option as an
annuity payment or some element of a income stream. And then the other option would
be, and if it’s allowable, and I think in most cases it is allowed, some do not,
but in most cases you have the option for what’s called a lump sum option or
basically you take the value of the pension account for yourself. So there’s things
that you would want to think about for sure on the annuity option or the lifetime
pay type of option. I would call it bells and whistles. So the first option that
you would have is to take an income stream based off of what is called single
life. And that in most cases is going to be your highest possible potential payout.
But if something happens to you, there is nothing left. There is no account value.
It just, it goes away. It doesn’t go to your heirs or beneficiaries or spouse.
And then why I say bells and whistles, if we attach bells and whistles to it, like
I want to cover my spouse in the event that I passed away, or I want to maximize
for myself, but then maybe 50 % of what I was receiving goes to my spouse if I
pass away or 25 or 75%. So there’s a lot of different options when we start to
elect for covering the spouse in that pension decision if we’re taking as an income
stream. And so to me, those are the bells and whistles basically saying, hey, the
more risk that you’re transferring to the company to cover someone else’s life, in
most cases, the less benefit that you’re going to get because it’s now It’s not
just covering you, it’s covering someone else for the duration of both lives. And
when you think about it that way, yeah, of course, if I’m asking them to do more,
it’s going to cost me some way somehow. And so there are things that we would
absolutely want to consider when it comes to taking the annuity option, same as with
the lump sum. So let’s say you say, no, I don’t want to, I don’t need the income
stream, I’d rather just take the asset, The value of it one misconception is
hey if I take it lump sum I got and I put it into my bank account I’m gonna
have to pay tax on it and that’s the only way to do it. That’s It’s a way to do
it It would be the most uncommon way to do it the more common way that I think
it’s forgotten about is that you can actually roll it Into an IRA to avoid any of
that taxation just like you would roll a 401k into an IRA And that that avoids the
taxation on it. Now you’ve got full flexibility to manage it. So those are really
the two big ones is Do I take it as an income stream? Does that fit my financial
plan the best or do I take it and put it into my own IRA so I can invest it
myself Yeah, I was just going to say on that point to some of the things we look at
is let’s just say that you’re looking at it and you’d think Well, I kind of like
the idea of having an income. There’s really a third thing that we will do
depending upon how that looks is that we could say well what if I took it out of
the company plan and what their income is and I went and looked for another vehicle
like another insurance based annuity that would give me a guaranteed income and what
we find that way is that I don’t lose some of the benefits that I would lose if
I took the single life annuity. So for example, if I take the single life annuity,
and let’s just say I said, I’m going to based on my life, I’m not going to do
spousal benefit, and I would take it for one year and die, it’s over. If let’s say
I had a lump sum value of $500 ,000 just to make it easy, then I got this income
about and I take it for one year and for whatever reason I die, my beneficiary is
yet nothing. So then, so some people would say is, well, I’m going to put it on
my spouse. Well, now I maybe I take it and then my spouse passes away as well
early and maybe five or 10 years and my beneficiaries get nothing. We can move it
over to vehicles that will give you guaranteed lifetime income, but it really kind
of draws down on the principle so that if I did pass away early, the balance will
go to my beneficiaries. So it’s not always just do I want income or lump sum. It
could be like, Like, do I want some income in the current location or do I want
to compare income outside of the current location? So again, that’s why we talk
about this needing an analysis when it comes to that. Now, one of the things we
talk about is that I told you we’ve got pros and cons, right? So if I take the
money out and I say I don’t need the income, I just want to take the money out,
invest it. Well, what’s my risk? Well, I could lose some value if the market’s down
if I invest it in something that’s got risk on it. So there is some things that I
gotta think about, but usually if somebody is saying I want the cash balance, I
just want to take the money out, pretty much what that translates to is that they’ve
been a really good saver and they don’t need that guaranteed income. They go, no,
I’ve got enough assets that I’m going to be able to be fine without needing that
guaranteed income. If I’m in a scenario where I say, no, I need that income because
I don’t have much savings out of that. Well, then now we need to look and say,
which place am I going to get the most income with the most options? And I think
that’s the really important thing. Oh, by the way, I’ve got to say this, there are
outsider external vehicles that would not only give you income, but could give you
some benefits if you were to have something like a long -term care type scenario.
Like say, for example, you needed help with two activities of daily living, it could
actually double your income for a number of years and you still have lifetime income
that you cannot get in an accompany plan. So there are some really key benefits
there as we look at this, but I’m going to just kind of go back and forth with
you on this, Merse. Here’s some key questions that I think that we have to think
about. So these are questions as you’re doing this to just consider. Number one, do
I have guaranteed income sources if I’m kind of making this decision. So again,
this comes back to, I think, income sources, but also assets. So if I’ve got enough
assets that I’m not going to pull down my assets very much, that’s called pretty
much guaranteed income sources, right? But I could have, you know, a lot of income
coming in from maybe already a pension that maybe one of the spouses is taking, or
I’ve got good sizeable So security, whatever that might be, we just really need to
do analysis on how much secure income do I have. Right. And another big one to
consider as you’re asking yourself which decision do I make. And this one’s not
truly fair, but you can make an educated guess around life expectancy. You know,
if you do not have a strong life expectancy in your history or you just have a
feeling, you know, the amount of times we’ve been in meetings and someone say, yeah,
I’m not living that long, you know, I don’t know where you get that feeling from,
but you kind of know. – Or you got a health issue. – Or you got a health issue,
right? And so the life expectancy is shorter. It may lean you towards, well, I
don’t need to take the lump, I don’t need to take the income annuity guaranteed for
life. I may as well preserve that asset. So that somebody gets benefit of it by
taking the lump sum, taking what I need while I’m living, but then I leave some of
it behind in some way somehow. Another big one is, well, do I have desires to
leave money behind as a legacy type of plan? The traditional income pension type of
annuity is not doing anything around legacy planning, whereas keeping it at as a
lump sum could be. If you’re going to lump sum route, you got to find a way to
manage it, right? So do you work with an advisor or not? The big thing that Raiden
talked about as we do a big analysis on how do we want to invest money that we’re
investing? We talk about risk, we talk about safety, and how do we fill those
buckets up?
Tax considerations is something to think about too, although in most cases it’s not
changing one way or the other because it is pre -tax money.
So one key thing though, if we do take the lump sum, It does now open up the
option, the potential for doing Roth conversions on that money in the future, which
is something that a lot of people are talking about right now, is are my taxes
going to be higher in the future than they are today? And that points towards Roth
conversions. And also covering the spouse, do I need to cover the spouse with a
guaranteed income stream or not? Or are the assets that are left behind going to
take care of the spouse? So a handful of things to consider for sure. Raiden,
you were telling me that you have a client, or we’ve worked with a client that had
this exact scenario and you wanted to tell that story. – Yeah, I think we got, I
got two. I kind of want to tell both sides of the story. We have a lady who’s
been with us now for, I don’t know, about 12 years and she retired from the state
of North Carolina. And she was in this predicament of do I take the lump sum or
do I take the income? She had about five or so years left work. Uh, she had
changed jobs, but she had this pension. So what we showed her was is that if she
moved that pension to an external type pension, not inside the state of North
Carolina, and we let it defer for five years, it was going to increase the amount
of income she was going to get for by about 30%, meaning she was going to get 30
% more income. She had the now the activities of daily living or long -term care
benefit. And we increased her income by 30%. Now she’s been retired now for
somewhere around close to seven, eight years. And I’m going to tell you that she comes
in the office all the time and says, “I can’t believe it. Because she says, “I
just have had a fantastic retirement. I don’t have to worry about income.” Oh, by
the way, if she were to pass away, she still has a significant lump sum that would
go to her beneficiary. So it’s been a very positive experience. But in order for
her to make that decision, she had to do the analysis. A second one that just came
up, this one’s very recent. This is the opposite of the scenario. This was a very,
very good saver. He had done a lot of work in saving it, money in 401Ks, money
outside of 401Ks. He had a lot of rental properties, has a lot of rental
properties, has a business that still generates income. And so when he looked at the
lump sum versus the income, he goes, “I don’t need the income as a guaranteed
income. Why would I leave it in the pension and take that guaranteed income when I
don’t need that? I’m just going to save it anyway. Why don’t I move it out?” That
now has opportunity for us because it went to an IRA for us to do planning like
Roth conversions to get that money now that’s going to be coming out that would be
taxable into a tax -free status for his beneficiary. So we’re really doing this as a
beneficiary benefit, more than we’re doing it for their benefit. Cause they said,
look, we know at the end of the day, we’re going to leave money behind. And that’s
a very common scenario. So the pension, if I did the, if he did the pension, it
would not leave as much money behind. We could not do Roth conversions once we
start the pension. And so overall consideration, super happy. We took the lump sum,
put it in an IRA, and now we can do those conversions. Any final notes there,
Murs? I know I was just going to say, so bottom line, clearly, there is no one
size fits all type of answer here. I think in our opinion, everything starts with
the building out the retirement focused financial plan that helps us look at the
entire picture. Once we understand the entire picture, then we’re able to make
decisions on each and every little piece of the pie, like a pension or like a
social security decision or Um, and so that’s, that’s what I would say is that if
you, you know, if you’ve got questions or you have a pension and you need to make
a decision, uh, we are, we’re happy to, you know, help you think that through.