Issue link: https://www.e-digitaleditions.com/i/1138357
FINANCIAL STRATEGIES GROUP 26 Obviously, none of us know how long we are going to live but you can make an educated guess. Consider your personal health and the longevity of your family members. If you are in good health and have had several family members live into their late 80s or 90s, monthly benefits start to look more attractive. If, on the other hand, you are in poor health and/or have had few family members live into their 80s or 90s, the lump sum option may be better. If you are considering a spousal option for your pension it is very important that you consider these factors for your spouse also. Consideration #2 Risk Tolerance – Risk tolerance is a person's willingness to accept risk for the possibility of higher investment returns. A person who is risk averse is more likely to accept a lower rate of return for greater certainty of future outcomes. In other words, a risk-averse person prefers safe and stable investments even if it means slow growth. A risk seeker, on the other hand, is somebody who is willing to accept uncertain returns (volatility) for the hopes of higher investment returns. Most people are not 100% risk-averse or 100% risk-seeking. Most are somewhere in between. The more risk-averse you are, the more likely it is that monthly income rather than the lump sum makes sense for you. Conversely, the more of a risk-seeker you are, the more likely it is that a lump sum makes sense for you. The reason your risk tolerance is important when determining if a lump sum is right for you is twofold. First, a risk-averse person likes certainty and a monthly income from a pension plan that is covered by the pension benefit guarantee corporation (PBGC) is predictable and guaranteed (This guarantee is subject to the claims-paying ability of the pension plan and the PBGC. See below under "other considerations" for more info.). Second, the more risk a person is willing to take the higher the rate of return they have the potential to receive over the long run. Of course, a high rate of return means more growth on the lump sum. Consideration #3 Need for income – If you are in need of income, monthly payments may make sense for you. On the other hand, if you are not in need of income for several years, the lump sum may make sense for you. A big reason for this is the more time you have to let your money grow before you need to access it, the more risk you can take. As we discussed above, higher risk = potentially higher returns.