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# Should I take my retirement benefits in a lump sum or monthly payment?

| MoneyRates.com Senior Financial Analyst, CFA

Q: I have an opportunity to take early retirement, and I have the choice between taking a lump sum from my employer or a series of monthly payments. Which would you recommend?

A: This is a tough question, because it depends partly on the specific numbers involved, and partly on the circumstances beyond those numbers. What follows is a discussion of three major questions you should consider in making this decision.

## How much would the monthly payments be worth over time?

Comparing a lump sum to a stream of future payments is never an exact science, but you can get some sense of how they stack up if you are willing to set up a spreadsheet to do some calculations.

Here are some steps to those calculations:

### 1. Start with estimated life expectancy

Based on your life expectancy, calculate how much your monthly payments are likely to add up to over time.

### 2. Calculate rate of return

Using a conservative rate of return (and these days that would be about 2 or 3 percent), project how much you would earn by investing the lump sum amount over that same period of time.

Note: Assume that you have to spend an amount equivalent to the monthly payments, so steadily subtract that from the amount you have available for investment. These subtractions should still be considered in the long-term value of the lump sum, but subtracting them steadily accounts for the fact that they would stop earning a return once the money is spent.

### 3. Compare the two totals

When you do this, you will get some indication of how the economic value of the lump sum stacks up to the stream of payments.

Again though, this is not an exact science. This kind of comparison depends heavily on assumptions about your lifespan and the rate of return you can earn. However, it is a good starting point to see if the advantage is heavily weighted towards either the lump sum or the stream of monthly payments.

To make saving for retirement easier, consider using a retirement savings calculator to determine how your current savings will grow.

## How secure are your employer's finances?

If you take the lump sum, you don't have to worry about what happens to your employer in the future. If you sign up to get monthly payments for the rest of your life, you are depending on that employer being able to continue to make those payments.

The ability to make such payments depends partly on how well-funded the retirement plan is currently, and how reliable the employer's revenue stream will be going forward.

## Do you care more about stable payments or control over your finances?

Some people would rather take control out of the employer's hands by having a lump sum to invest for themselves. Others prefer not to have that responsibility, and would rather just receive a predictable monthly amount. Your preference should be a factor in how you choose to receive your retirement benefits.

As you can see, there is no universal answer to whether a lump sum is better than a stream of monthly payments. The right answer depends on case-by-case circumstances. Considering the issues above will help you make an informed decision about your situation.

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