If you've got a pension in the offing for your retirement, you're not among the majority of workers today. Traditional pensions are referred to as "defined-benefit" plans, because the amount you'll receive is specified. Their more-prevalent counterparts today are "defined contribution" plans, such as 401(k)s, which feature specified contribution amounts. (For example, you might have 6% of your salary invested in your 401(k) plan, with your employer matching 25% of that amount.) With these latter plans, the amount you'll ultimately end up with is quite uncertain; it all depends on the investments you select and how they fare.
The big choice
But back to you pensioners. One big decision you'll likely face as you approach retirement is how to take that pension. A typical choice is taking it either as a big, one-time lump sum, or receiving monthly payments for the rest of your life. The latter option holds much appeal for a lot of people. It keeps you from blowing the lump sum on number 22 at a roulette wheel. It also keeps you from having to manage the money effectively. And it means you don't have to try to figure out how much you can withdraw on a regular basis to live on while leaving enough to last you for many more years.
But these days, many experts recommend forgoing all the convenience of monthly payments and instead opting for the lump sum. The reason? Well, look at how unstable many pension plans are.
Companies in trouble
As my colleague Chuck Saletta noted, "Companies such as Lucent Technologies
Take your lumps
According to Consumer Reports Money Adviser, the PBGC says that more than 1,100 companies are close to turning over their pension obligations to the PBGC, "with $354 billion in underfundings." Yikes. In such an environment, it can make sense for many people to take the lump sum while they can, since their monthly pension payments may not be too reliable. There is an upside, though: The lump sum can grow if it's invested intelligently, whereas monthly payments typically don't increase over time, even to account for inflation. In addition, you often can't pass them along to your children and grandchildren -- whereas that's something you can do with the remains of your lump sum.
If you're a defined-benefit plan holder, you may face another decision -- whether to switch your plan to a "cash-balance pension plan." These plans are growing in popularity, but they may not serve you too well. The employer reserves sums of money for employees and guarantees the rate at which the money will grow. When the workers retire or otherwise separate from the firm, they then take a lump-sum payment.
So what's wrong with these plans? According to a recent Associated Press article, "Many companies, including IBM and AT&T
Proponents of the plans like them for their portability and security.
Assess your situation
Everyone's situation is different. So to determine what your best course of action is, take some time to read and think more on the topic.
Let us help you do that. Our Rule Your Retirement newsletter offers a lot of guidance to help you set yourself up for a comfy and enjoyable retirement, and it gives you specific investment recommendations, too. Try it for free, and see for yourself -- it's easy to read. You can devour it in a single sitting.
And finally, if thinking about retirement issues makes your head hurt and you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable (and inexpensive) service that features customized independent advice from a variety of objective financial experts. You can try it for free, too.
Learn more in these articles:
- Chris Mallon: The Perils of Pensions
- Robert Brokamp: Can You Count on Your Pension?
- Chuck Saletta: Race Against Time
Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, and Card & Board Games. She owns shares of no company mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.