When a firefighter or police officer gets close to leaving the job, as retirement approaches, ask your pension administrator which payment options your plan offers. Some plans offer a choice between lifetime monthly payments and a lump sum; others do not. It’s common for one spouse to want the lump sum to pay off the house while the other isn’t so sure.
Maybe neither of them, yet. This is one of the biggest money decisions most workers ever make, and it usually can’t be undone, so we’d slow down before picking.
A monthly annuity pays a set amount for as long as the retiree lives. Some options keep paying a spouse after the retiree is gone, usually for a smaller monthly amount. The big appeal is that you can’t outlive it. A lump sum gives full control. You can invest it, pay off a mortgage, or leave it to your kids. That control can work against you, though, and a lump sum can be depleted sooner than expected through withdrawals, investment losses, or both.
For married workers, we think the survivor question often matters most. If a spouse would depend on that income later, a joint and survivor option deserves a hard look. Health matters, since longer life expectancy tends to favor the annuity. So does what else the household will live on, like a spouse’s income, Social Security, or savings. And it’s worth asking how the plan itself is funded.
Taxes differ too. The taxable portion of a cash lump sum generally counts as income in the year received. An eligible direct rollover to a traditional IRA generally defers that tax; a rollover of pre-tax money to a Roth IRA is generally taxable. Monthly pension payments may be fully or partially taxable. Consult a tax professional before making an election. Many pensions don’t include cost-of-living raises, so a fixed check buys less each year.
For any pension lump sum vs. annuity choice, we’d ask the plan for both numbers in writing, then if both options are available, request written estimates. Compare income duration, survivor benefits, inflation adjustments, taxes, fees, and investment risk. Any assumed investment return is uncertain and does not guarantee income equivalent to the pension.
Tradespeople and first responders weighing a pension lump sum vs. annuity request an initial retirement-planning conversation with Blue Collar Dollar, a trade name of Talon, LLC. Talon currently waives its initial financial planning fee for eligible Blue Collar Dollar applicants. Adviser availability varies by state. Confirm the scope and fees of any ongoing services before proceeding.
This article is general education, not investment, tax, or legal advice.
