Financial Literacy

Let's compare taking a lump sum distribution and rolling it over to a traditional IRA from which you receive a monthly annuity, versus receiving a monthly annuity from your employer. If you desire a fixed monthly income over a specified number of years, your choice of lump-sum versus employer annuity may depend on a comparison of the after-tax monthly income that could be achieved. For example, compare your company's annuity payment with the annuity payment you could generate if you managed your own money by rolling over your qualified plan money to a traditional IRA. The choice between the two alternatives is based on the rate of return that can be obtained from each, since that is the major variable that can cause a difference between their results.

Example:

Janet can retire and receive monthly annuity payments from her employer of $1,625, or she can take a lump-sum distribution of $200,000. If she rolled the money into a traditional IRA earning 6% and paid herself a monthly payment for 25 years, Janet could receive benefits of $1,289 monthly. Under these circumstances, receiving the employer's benefit is preferable. But if Janet thought she could make 10% on the money and had a 15-year life expectancy, she could pay herself $2,149 monthly, a better payout than her employer.

IMPORTANT NOTE: Be very careful with the lump-sum versus employer annuity analysis not to use more optimistic rates of return than you can actually earn on the money you are managing.