Individuals with certain types of pension plans may often choose between a lump sum distribution or monthly income for life. We talk with many people who initially favor the lump sum. But I think one reason for that is because the lump sum amount seems so much larger. Imagine you’re given the choice between $350,000 today or $2,000 per month for life. Naturally $350,000 sounds like a lot more! But we encourage people to put much more thought into these decisions. Now let’s consider potential advantages of the lump sum option.
- First, by choosing the lump sum, I may transfer the $350,000 into an IRA and then invest it. Many claim that if I invest well and during a period of time with favorable stock market returns, my $350,000 may possibly grow enough over time that it can support a higher level of spending than the $2,000 per month could have supported. Of course, there’s risk with that, but we hear this argument frequently.
- A second possible advantage is one’s ability to leave a financial legacy to children and grandchildren. Once again, if I can invest well and earn good returns on my money, I may be able to spend some of this money and leave a nice inheritance to my heirs whereas the $2,000 per month would likely end at my death or my wife’s death. No part of this $2,000 per month is typically available as an inheritance.
- Another potential benefit of the lump sum is its flexibility and availability. Choosing the $350,000 gives me a large balance of cash. I can use in case of a financial need – perhaps a car purchase, a new roof If I instead choose the $2,000 monthly lifetime income, I would typically have to give up the $350,000 balance It’s no longer available.
Now, this is not meant to be an exhaustive list of considerations. Instead use this information as a starting point to think about your specific situation, your family, your goals and your emotional ties to this money. Don’t make a snap decision you may later regret. Be wise in your planning.
Ontario Teachers’ Pension Plan
In today’s episode, we’re taking a look at OTPP, the Ontario teachers’ pension Plan. This plan was formed in 1989as a partnership between the Ontario Teachers’ Federation and the Ontario government. You’ll hear people talk about what great pension’s teachers have and it’s true. A big part of the reason for that is the success of the 140 billion dollars plus Ontario Teachers’ Pension Plan.
You pay into the plan and the Ontario government matches your contributions on behalf of the school board you work for. It’s called a defined benefit plan because it promises you the security of a specified monthly benefit when you retire. You can figure out the amount using a formula based on your years of service and your best five years’ average salary.
The plan automatically covers all teachers who work in the publicly funded school system along with others who hold teaching certificates and work for designated employers. Because we have this one big plan you can move from one school board to another, from elementary to secondary, or between public and Catholic systems, and your pension just keeps going along with you. A very professional team runs the day to day operations of the plan and makes the investment decisions. But ultimate oversight lies with the nine-member Plan Board. The Ontario Teachers’ Federation and the Ontario Government each appoint four directors, and mutually appoint the Chair. It’s a system that’s worked for over 20 years and tens of thousands of teachers are enjoying a well-deserved secure retirement because of it. As a Plan member, you will too someday.