Pension or Lump Sum: Which Should You Choose?
Traditional pensions, which promise lifetime income payments in retirement, have become less common in the private sector, with only about 10% of workers currently participating in a traditional pension plan. However, pensions are still widely offered in federal, state and local government employment, and 61% of workers expect a pension to be a major or minor source of retirement income.1
About half of pension plan participants can choose to take their money in a lump sum when they retire.2 In addition, companies may offer pension buyouts to vested former employees who are working elsewhere, and even to retirees who are already receiving pension payments.
Only 29% of women said they would be able to cover their basic necessities if they found themselves out of work for an extended period, compared with 55% of men. And more than half of millenials and Gen Xers and 35% of baby boomers said they would likely use their retirement funds for something other than retirement, with most noting it would be for an unexpected expense or medical bill.1
Although tapping your retirement savings can help you get through a crisis, it can hinder your ability to afford a comfortable retirement. Having a plan to guard your financial wellness throughout your working years can help you avoid putting your retirement at risk.
What Is Financial Wellness?
The Consumer Financial Protection Bureau (CFPB) defines financial well-being as:2
- Having control over day-to-day and month-to-month finances. In order to achieve this, your expenses need to be lower than your income.
- Maintaining the capacity to absorb a financial shock. This typically refers to having adequate emergency savings and insurance.
- Being on track to meet financial goals, meaning you have either a formal or informal plan to meet your goals and you are actively pursuing them.
- Having the financial freedom to make choices that allow you to enjoy life, such as a splurge vacation.
The CFPB has identified several key factors that contribute to an individual’s ability to achieve financial well-being. Among them are (1) having the skills needed to find, process, and use relevant financial information when it’s needed; and (2) exhibiting day-to-day financial behaviors and saving habits.
Assistance Is Available
Many employers have begun offering financial wellness benefits over the past decade. These programs have evolved from a focus on basic retirement readiness to those addressing broader financial challenges such as health-case costs, general finance and budgeting, and credit/debt management.3
If you have access to work-based financial wellness benefits, be sure to take time and explore all that is offered. The education and services can provide valuable information and help you build the skills to make sound decisions in challenging circumstances.
In addition, a financial professional can become a trusted coach throughout your life. A qualified financial professional can provide an objective third-party view during tough times, while helping you anticipate and manage challenges and risks and, most important, stay on course toward a comfortable retirement.
1) PxC, May 2020
2) Consumer Financial Protection Bureau, January 2015
3) Employee Benefit Research Institute, October 2020