Your Money: March

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Annuity or Lump Sum? Pondering Pensions

By Patricia Kutza

By 2010, according to California Department of Finance population projections, at least 25 percent of the state’s population will retire or at least be contemplating the prospect. Those vested in private defined-benefit pension plans will be asking the burning question: Shall I cash out with a lump-sum distribution or opt for the monthly annuity provided by my employer?
     “Most people still choose the traditional pension annuity because they feel it is the easiest decision to make,” says Hugh Phillips, Napa-based certified financial specialist of the Hanson McClain Retirement Network, headquartered in Sacramento. “They like receiving a known quantity every month. They also prefer to have their employer manage their pensions rather than manage it themselves.”
     However the perception of pensions being a guaranteed entitlement has been hurt by such companies as United Airlines and its highly publicized 2005 pension-plan default. “I’ve seen historically risk-adverse clients react to this news by cashing out their pensions,” Phillips says. Cashing out is a choice that companies actually favor, Phillips explains. “Every retiree who cashes out is one less person they need to track to deliver a monthly annuity. Multiply that person by thousands and it equates to a dramatic reduction in overhead costs,” he says.
     Monthly pension payouts don’t adjust for cost-of-living increases. That’s reason enough for some retirees to cash out, says Phillips. But not a good enough reason to do so without prior careful planning, says Carol Van Bruggen, certified financial planner for Sacramento-based Foord, Van Bruggen, Ebersole and Pajak. “Understanding any age restrictions and tax consequences for withdrawing these funds is critical to any sound financial strategy,” Van Bruggen explains.
     Investing a lump sum so that it lasts your lifetime necessitates developing a mentality that is not unduly influenced by your environment, Phillips adds. “Whether you hire a financial planner or manage it yourself, you need to set objectives and commit to them even when the flavor-of-the-month investment product entices you. It’s smart to start planning at least three years in advance of your projected retirement.” Ask lots of questions about investment strategies. “If you choose to hire a planner, find someone you can trust to tell you what you need to hear, not what you want to hear,” he says.
Continued...

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