Lump Sum Money

Youre lucky to have the choice. Most traditional pensions provide for monthly checks only, though thats changing.

More companies are offering lump sums at retirement, and Ford and GM recently gave 140,000 retirees and beneficiaries who are already collecting checks the option of sticking with those or taking all the cash now.

At first glance, a lump sum may appear to be a no-brainer. After all, a few hundred thousand dollars in hand seems more valuable than a few thousand bucks a month. But the right choice depends largely on your situation, including how confident you are about investing and what other retirement resources you have.

A guaranteed income for life is especially attractive if Social Security doesnt cover all your everyday expenses — or you desire the extra peace of mind monthly pension payments can provide.

Whats more, investing a lump sum to fund a retirement that could easily last 30 years or more requires skill and vigilance, and even then theres the chance that subpar returns could decimate the portfolio early on, leaving you with little else but Social Security.

As the chart to the left indicates, once you get 15 to 20 years into retirement, the chances that you can match a pensions steady payout with a relatively conservative diversified portfolio begin to drop precipitously.

A 65-year-old whos due a $2,500-a-month pension could instead collect and invest a $392,000 lump sum. But because portfolio withdrawals would have to be high to duplicate the pension, the retiree has just over a 50% chance of seeing the money last 20 years.

Keeping up is a bit easier for a retired couple who elect to receive a pension for as long as either is alive, since their monthly check is smaller to reflect their higher combined life expectancy.

And even though you face the risk that your company could default on its promise to pay, if that should happen, the Pension Benefit Guaranty Corp. would cover you, up to just under $56,000 a year for a 65-year-old.

No matter how good a deal the monthly checks may be, however, taking them may not be smart if youd be left with virtually no assets to fall back on during emergencies. In that case, you may want to opt for the lump sum.

Although investing is tough, if youre lucky and the markets do better than expected, you might be able to draw more from your portfolio than you would have gotten from the annuity.

Ideally, to combine the security of lifetime payments with the flexibility of a lump sum, youd direct your plan to split your benefit, giving you, say, half as an annuity and half in cash.

Unfortunately, even pensions that allow you to pick an annuity or lump sum usually restrict you to an either-or choice. Earlier this year the Treasury Department proposed regulations aimed at making it easier to split your benefit. But whether many companies will allow it is unclear.

For now, to get this combo youll have to take the lump sum and use part of the money to buy an immediate annuity. Trouble is, duplicating the pension payments may be even harder to pull off.

For starters, a pension can pay 10% or so more than the immediate annuity would — unlike pension plans, insurance companies must make a profit.

Insurers also effectively pay less to reflect the fact that only healthy people are likely to buy a lifetime annuity. Pensions do not make that adjustment. In addition, todays low interest rates translate to less generous annuity payouts.

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So, for example, if a single woman uses half of a $392,000 lump sum to buy an immediate annuity, the chances that her savings would last 20 years would drop to 34%.

The reason: Because her annuity payment would be less than half of her pension check, shed have to take bigger withdrawals to make up the difference.

Before making your call, you may want to have an adviser crunch the numbers. Even then, be careful, as an adviser stands to make a lot more money if you take the lump sum and let him invest it.

Remember, too, that most corporate pensions dont rise with inflation. Unless you have other assets you can tap to maintain your purchasing power, aim to set aside a portion of your pension checks or lump sum in the early years to provide a cushion later.