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Many retirees select lump sum But some annuities' features might be worth more in the long run

By Christine Dugas, USA TODAY

August 8, 2003

When Susie Cooke took an early retirement package from Verizon last year, she opted to receive her pension benefit in one lump sum rather than as a lifetime annuity.

''The basic reason was dollars and cents,'' says the Tampa resident, who consulted her financial adviser. ''I calculated that I'd have more money in the long run.''

Rodger Drueke, a former energy manager for a Michigan utility, retired 18 months ago and took a lump-sum payment, largely for the same reason.

John Niemeyer, a Vancouver, Wash., resident who retired from Hewlett-Packard last year, also took a lump sum, figuring he can do better by investing it himself.

These retirees are not unusual. Many pensions provide only an annuity payout. But when they offer a choice, retirees often select a lump sum, according to a government report released last month.

That is cause for concern, many retirement experts say. Workers are retiring earlier and living longer -- adding to the risk they will outlive their nest eggs. An annuity is intended to alleviate the financial uncertainty by providing a stream of income for as long as the retiree lives.

When given a lump sum, retirees have a tendency to be either too frugal or to use up a lot of the money in the early years for travel and big-ticket items, experts say. ''In my view, lump sums are a very scary proposition,'' says Alicia Munnell, director of the Center for Retirement Research at Boston College.

But there is no one-size-fits-all pension choice. Each person needs to evaluate his or her circumstances, skill and inclination to manage investments. Here are some things to consider if you're about to retire:

Lure of lump sums

It's hard to compare a lump-sum benefit with a monthly annuity payment. Say, for example, that a worker is eligible to get a lump sum worth $100,000 or an annuity of $1,000 a month at retirement. ''People are always tempted to take the lump sum even though the annuity may be worth much more,'' Munnell says.

To make a comparison, you have to estimate how much you could earn over time if you invest the money. As recent stock market volatility illustrates, it can be tough to predict returns.

You also can compare your pension annuity with what you could get if you took the lump sum and purchased a private annuity with it. Because the cost of the pension annuity might be subsidized by your employer, it can be a very attractive option, says Harold Evensky, a financial planner in Coral Gables, Fla.

Last fall, the IRS proposed regulations to require plans to provide more guidance for workers in comparing the relative value of different pension payout options.

It can be especially tricky for workers who are eligible for a subsidized early retirement package. In that situation, a worker typically gets a better pension annuity if he retires at age 55. But employers don't have to factor the subsidy into a lump-sum payment and, under current rules, they don't have to tell you.

''So if you take a lump sum, you could end up forfeiting the early retirement subsidy,'' says Karen Ferguson, director of the Pension Rights Center.

Payout pros and cons

Some experts say annuities are in theory the perfect payout option because they protect you and your spouse for as long as you live. ''If a husband cares about his wife, an annuity is a good way to protect her for life,'' says Teresa Ghilarducci, associate professor of economics at the University of Notre Dame.

In practice, there are some drawbacks. Most notably, they are not indexed for inflation in most cases.

Some workers -- those who are single, have a domestic partner, or who are likely to have a short life span because of serious illness -- might prefer a lump sum so they can leave the money to their children, partner or other heirs. ''I'm single, and with an annuity, if I die, none of my heirs would get anything,'' says recent retiree Niemeyer.

Retirees also sometimes take a lump sum because they don't like the idea of leaving their pension with their employer. But even if the company goes belly up, the pension benefits are insured by the Pension Benefit Guaranty Corp. Unless your pension benefit exceeds the maximum benefit guaranteed, which is about $44,000 a year this year, you shouldn't need to worry. The PBGC doesn't protect 401(k) plans, however.

There can be a delay in getting benefits from the PBGC, and disputes can arise about how much you are owed, some experts note. If you know that your company is on shaky ground, you might want to take a lump sum if given the option.

You can always take some or all of the lump sum and buy an annuity if you want the security of a lifetime stream of income. But you need to shop around and consider the financial strength of the company behind the annuity by checking with a rating firm, such as Moody's or Standard & Poor's.

Keep in mind that lump sums require retirees to be good managers in two ways. You must invest money wisely and accurately estimate how long you'll need the money to last. Neither one is necessarily easy.

''A person taking a lump sum has to be astute,'' says Mary Rinehart, a financial planner in Charlotte. ''They can earn more, but they are subject to more volatility.''

Often, unexpected expenditures such as an illness can use up your retirement savings. ''Then you've shot your lump sum, and you've got nothing but Social Security,'' says Jack VanDerhei, a business professor at Temple University.