A pension plan promises to pay a defined benefit for the length of an employee’s retirement. Depending on your financial circumstances, you may consider taking a lump sum instead of a lifetime monthly payment. Let’s take a closer look at how to invest a lump sum pension payout to align with your financial goals.
A financial advisor can help you create a financial plan for your retirement needs and goals.
Why Take a Lump Sum Pension Payout?
Employees often consider taking a lump sum pension payout for three common reasons:
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Flexibility: You have access to the cash you may need to make big purchases in retirement.
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Less risk for spouses: If one spouse dies, the pension may stop. Unfortunately, that would put the surviving spouse in a bad spot if the household relied on that income.
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Investment strategy: You have more control over the investments when you take the lump sum. And that’s what we’ll talk about next.
How to Invest a Lump Sum Pension Payout
If you’ve taken a lump sum pension, here are two common investment options to consider:
Immediate annuities
When you take a lump sum pension payout, one investment option is to roll the funds into an IRA. Once in the IRA, you can use some of the funds to purchase an immediate annuity, which is an investment vehicle that offers regular payments to investors for a specified period of time. In some cases, annuities will offer regular payments for the lifetime of the investor.
This is a popular option for those looking to invest a lump sum pension payout because annuities can offer regular payments as a steady stream of income. And immediate annuities can also offer payments right away.
When considering this option, however, make sure to plan for both fixed expenses like housing payments and utilities, as well as variable expenses like buying a new car. While an annuity can provide an additional source of income, you will still need to balance short-term spending needs with your long-term cash flow options.
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Build an investment portfolio
An alternative to buying an annuity with your lump sum pension payout is to build an investment portfolio that produces an income for you. Essentially, an investment portfolio is a collection of securities designed to support your financial goals. If you are a retiree then the goal of your investment portfolio will likely be to produce enough income to pay for your retirement needs.
Here are three steps to consider when building an investment portfolio for your retirement:
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Roll your lump sum pension payout into an IRA. Once in the IRA, you can invest the funds as you see fit. With this option you can still buy an annuity. But you can also choose other investments.
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Determine your ideal asset allocation. The right asset allocation varies dramatically based on your risk tolerance. Though as a retiree, you’ll likely have a lower risk tolerance. Our asset allocation calculator can help you determine where you stand.
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Buy assets. With a plan in place, the only thing left to do is actually purchase the assets you think are the right fit for your portfolio.
Bottom Line
If you are taking a lump sum pension payout, there are many ways to invest the funds. Although many retirees will choose to purchase an immediate annuity, that’s not the right move for everyone. As you explore your options for how to invest a lump sum pension payout, consider working with a financial advisor to make sure your plan will work for your financial future.
Investing Tips
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A financial advisor can help you make smart choices with your nest egg. Finding a financial doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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If you have more questions about retirement, SmartAsset’s guide offers you different calculators to determine how much money you will need in retirement, as well as insightful articles and interactive maps.
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