When considering an early retirement, you may face the challenge of having enough income during the period after retiring and before your Social Security checks start to arrive. A lump sum payout of your pension benefits or a level income annuity type of payout are two options your employer may offer as ways to get your pension benefits for an early retirement.
Level Retirement Income Options
The level income option offered by employer retirement plans adjusts your monthly pension check for the period before and after you start receiving Social Security. The objective is to keep your income level throughout your retirement years. As a simple example, you are scheduled to receive $1,000 a month in Social Security a few years after you retire, and your pension plan entitles you to receive $1,500 per month. With a level income option, your pension checks will be $2,500 per month until you start to receive Social Security, and then they will drop to $1,500. This way, your total income stays level at $2,500.
Living Off a Lump Sum
If you take a lump sum as your retirement plan payout, you become responsible for managing the money to earn an income and protect the principal amount. The lump sum gives you the flexibility to decide how much you want to draw from the retirement savings during the period before and after your Social Security checks start. If you can find investments that pay enough income to cover your income needs, some or all of the principal amount of your retirement payout would be available as an inheritance for your heirs.
Carrying the Risk
The level income pension payout option guarantees you an income for all of your years of retirement. With the lump sum, there is a risk that the money will not last as long as you do. Choosing between the two options also depends on the size of the lump sum payout compared to the amount of income you would receive with the payments option. You may need to put in some in-depth research into investment returns compared to your income requirements to determine which plan makes the most financial sense.
Consider Other Retirement Assets
The choice of which pension plan option to take will also be affected by any other assets you have available to help pay expenses in retirement. If you have an IRA and other investment accounts, getting a monthly check from your pension provides stability, and your other investments can cover one-time big expenses or provide additional income in your later retirement years. If you have little in the way of other savings, a lump sum could allow you to set aside a portion as an emergency fund and then use the rest of the money to set up a regular income stream.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.