A dilemma for employees with pensions: retire soon to lock in a lump sum, or remain on the job and risk reductions to payouts if interest rates continue to rise
Retiring early to grab a higher lump sum may make sense for people who had planned to leave their jobs soon and are financially and emotionally prepared, advisers say.What factors are most important to weigh when considering the prospect of retiring sooner than planned? Join the conversation below.
“A lot of people see their lump sum and think, ‘Wow, I’m rich,’ but that’s the extent of their thinking,” said Mr. Vernon.The first step is to find out how much you’d receive with each option. Many retirees feel more secure having an income that doesn’t fluctuate with the markets. Because pensions protect retirees from running out of money, they can make sense for those who expect to live long lives.
Assuming the client or his spouse live to age 85, they’d need to earn an average of 2.4% a year on the lump sum to equal the cumulative income they’d receive from the pension, Mr. Tegtmeyer said. If either lives to 95, the lump sum would have to earn closer to 4% a year to keep up with the pension, he said.
If he were to work another year, he’d earn his $70,000 salary. But his lump sum is likely to fall by as much as 20%, or $108,000, and he would also see some of a $30,000 early retirement incentive reduced based on the new interest rates.
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