Retirement Decisions: Lump Sums vs. Income Streams

Americans love getting big checks.  The instant gratification of dramatically increasing one’s liquid net worth is far more desirable for most people than the comfortable but far less exciting feeling of getting a check every month for the rest of their life.  Ironically, taking the lump sum option is most often the wrong decision.  People mistakenly believe they can better manage funds on their own than leaving it in the hands of experienced pension managers and insurance companies.  It’s not so hard to understand why people make this choice – if you were 65 and deciding between $500,000 or $3,000/month for life, I think many people would take the lump sum.  Why?  You can buy a house with $500,000, or pay for a college education, or buy a boat, or take many incredible vacations.  However, $3,000 per month doesn’t allow for any of those large and highly gratifying purchases.  That last point is exactly why we want to pass on the $500,000 and take the long-term income stream instead.

Many financial planners understand that one of the biggest issue facing people in their 50′s and 60′s today is that many of them will live into their 90′s.  Combine that with the dwindling number of people who receive pensions, only about 17% of people according to the August edition of Financial Advisor magazine, and you are left with a situation in which people badly need more guaranteed income sources.  Yes, Social Security and Medicare exist to make sure most Americans have at least enough money for food, shelter, and basic healthcare, but Social Security hardly provides enough money for most people to maintain even a fraction of their pre-retirement lifestyle.

There are many financial products available today which can take a lump sum of money and convert it to a lifetime income stream.  Some of those products will defer the start date of the income stream in exchange for higher payouts.  Others will start the payout immediately but the annual amount may be lower.   Typically, the longer the investor defers taking that income stream, the higher the annual payout will be.  Normalized (higher) interest rates would also increase the annual payouts because insurance companies typically invest a large portion of their deposits in long-dated bonds.  While many investors wince at the idea of giving back a lump sum of money in exchange for future income, this is really what they need and it’s not ultimately all that different from drawing down a portfolio of stocks and bonds.  In fact, it’s probably less stressful because you don’t worry so much about year-to-year volatility and picking just the right mix of stocks and bonds.

Those of you with pensions are less concerned about the need for more guaranteed income sources because you already have the pension plus social security.  This applies to many public workers and a very limited number of private sector employees who still have a pension in their workplace.

There are a points I want you to take away from this article.  The first is that personal savings are increasingly important.  Regardless of whether you ultimately choose to draw down from a portfolio of stocks and bonds or to purchase some sort of income replacement product, you’ll need to save a decent chunk of money to do either of these.  For those of you that already have the lump sum, I want to emphasize that effectively managing a portfolio on your own is difficult and requires considerable restraint and investment flexibility.  Give serious consideration to insurance products which take on that management risk and guarantee your income payments for the rest of your life.

As always, feel free to contact me with any questions or comments.

Russell Bailyn


Wealth Manager
Premier Wealth Advisors, LLC
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@pfawealth.com

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

“For general informational purposes only. This information is not intended to be a substitute for specific professional or financial advice. Please note that individual situations can vary.”

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