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Mar 6 2009 12:00AM


I am preparing to retire and have a defined pension plan with my employer. Can I receive my pension in a lump sum? Where should I invest it?


According to FPA member Steve Swicegood, CFP®, of Skelton & Swicegood, your defined pension plan may or may not allow for a lump-sum distribution.  You should ask your human resources department for an updated Retirement Plan Benefit Estimate.  Your estimate should show any lump-sum options as well as various monthly pay-out options.
The questions you need to ask are numerous, but here's a list of several important ones:

  1. What is the payout ratio of any selected monthly benefit in relationship to the lump-sum payment?
  2. Do I need to take a monthly pension benefit in order to continue receiving any other company-paid retirement benefits (health insurance, dental, etc.)?
  3. Does the plan provide any cost-of-living adjustments?
  4. Do I (or my spouse and I) need a guaranteed lifetime retirement income?
  5. Is the retirement plan itself properly funded and healthy enough to honor its obligations?
  6. If I elect a lump-sum payout, how soon will I need to begin monthly withdrawals?
  7. Am I confident in my ability to manage a large sum of money that must potentially last for my lifetime?
  8. Have I sat down with my spouse/family/significant other and prepared a retirement spending plan?

Again, there are many more questions to be asked, but this is a good start.
As to where to invest, that is probably the last question to ask. After you have explored all of the potential questions about your plan options, constructed a reasonable, well-thought out spending plan and addressed other issues such as extended company benefits, whether you may continue to work in some capacity, your potential life expectancy, etc., you will then have a good basis on which to decide whether a monthly pension benefit or a lump-sum payout is best for you.  Should you elect a lump-sum payout, these same questions should help you construct a portfolio that may have a reasonable chance of fulfilling your needs.
There are significant ramifications to the questions you pose.  For your sake, it is imperative that you get it right the first time, as there are likely no chances at any "do-overs".  FPA can help connect you with qualified financial planners in your area via FPA PlannerSearch®.  My very best recommendation is that you take the time to interview several planners in your area before you make your final retirement plan decision.

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