Retiring sounds like the dream for many busy professionals. But once they reach their twilight years, they realize they have to make a very important decision — do they take a lump sum payout or regular annuity payments?

The perfect option depends on a myriad of factors, including the presence of other income sources, comfort level regarding investment risks, and even health. Cory Grandel says that understanding the various implications help retirees make the best decision for themselves and their partners.

Lump Sum Payout

Lump sums vary based on the interest rates at the time of withdrawal. During periods of high interest rates, lump sums are smaller than when interest rates are low.

Many people choose this option when their spouses are considerably younger than them or they want to decide for themselves how to invest their money.

It also offers an opportunity to control assets — something imperative for those concerned about underfunded plans or the likelihood of their employers being acquired. After all, pension payouts can dramatically reduce when companies are bought out or taken over by someone new.

While these are all definite benefits, taking a lump sum payout is not without its foibles.

Perhaps the major disadvantage is the prospect of running out of money. As life expectancies are rising, so are the costs of living, meaning many retirees face the issue off outliving their savings, particularly if they aren’t disciplined enough to stick to a budget.

The Consumer Financial Protection Bureau conducted a study which showed that those who cash out their pensions are significantly less likely to maintain the same financial stability levels after just five years.

Annuity (Periodic) Payments

Annuity, otherwise known as stream payout, is considered the traditional way for retirees to receive their pension. This option gives those in their twilight years a check every month for the rest of their lives or a pre-agreed fixed period.

Employers calculate the monthly figure based on a person’s age at retirement, their salary, and their number of worked years. This value is then supplied to employees before they actually start retirement.

Unlike lump sums, annuity pension payments make it very difficult for people to outlive their savings. Since they know the same amount will hit their bank accounts regularly, budgeting for expenses continues as it did during their careers.

But it isn’t all sunshine and rainbows with this pension-receiving method either.

Inflation can destroy the purchasing power of many annuity payments as time ticks on. Thus, retirees must carefully analyze the present and long-term financial condition of the organization making the regular payments.

The Best Option Depends on Personal Circumstances

Some people prefer lump-sum pension payouts, whereas others believe annuity payments work better for them. Regardless, retirees should use the money wisely, constantly upholding the fact that cash will need to see them through the entirety of their twilight years.

Anybody who isn’t sure which payment type suits them should meet with a financial advisor to discover the best strategy for their situation.

People often have dreams of living a carefree, work-free life once retirement comes. And that shouldn’t be far from the truth. But since humans are living longer, saving for retirement is only half the battle. Cory Grandel says that those wanting financial security throughout their twilight years also must be savvy about withdrawing their saved cash.

According to the World Health Organization, one in six people will be at least 60 years old by 2030. When 2050 rolls around, the number will double. With the ageing population comes the increased need for smart retirement distribution strategies to ensure individuals don’t live longer than their money.

The 4% Rule

William Bengen, esteemed financial advisor, originated the 4% Rule, which many soon-to-be retirees use as the foundation of their pension withdrawals. Statistically speaking, it reduces the likelihood of running out of cash.

Using this rule, retirees withdraw 4% of their portfolio in the first retirement year. After that, the yearly withdrawal is increased by the rate of inflation. As such, the 4% only applies to the initial withdrawal. All subsequent takings are based off national inflation.

For over two decades, this strategy has been a cornerstone of withdrawals. However, the changing economy could dictate a smaller percentage to begin with. As Dr. Pfau, professor of retirement income, states, a 4% withdrawal rate during high stock market valuations and low interest rates could decrease the probability of savings lasting 30 years.

The Total Return Approach

Limiting withdrawals to income is protective, but it isn’t necessarily practical for all retirees. Account principals must be touched by some. So, a total return approach might be useful.

This takes everything into account — dividends, growth, principal, and interest — to form the basis of systematic withdrawals. These withdrawals are then utilized to create a reliable paycheck every month.

These distributions could equal each month’s percentage, but the money’s source will likely change. Financial advisors can help individuals figure out which funds to use based on performance before rebalancing portfolios accordingly.

The Bucket Strategy

As the name suggests, the bucket strategy separates money into three pots (i.e., buckets) like so:

• Bucket One — Here, individuals hold money they require within the next six to 12 months. It’s maintained in a liquid account like a high-yield saver.
• Bucket Two — This bucket contains the cash needed throughout the next seven to 36 months in CDs with higher yields and shorter-term bond funds.
• Bucket Three — The final account holds assets that individuals won’t need for at least two years, letting individuals put at least some of them into higher-return assets like stocks.

When bucket one empties, money is poured from the second or third bucket, depending on performance advance. Ensuring short-term financial needs are sorted provides opportunities to let assets in later pots flourish.

While one of the most involved strategies, retirees are insulated from market fluctuations. Not to mention that having the foreseeable 12 to 36 months of expenses safe and sound offers exceptional comfort and peace of mind.